From compliance to impact – leading beyond sustainability reporting

New reporting standards in the EU and at international level have become a milestone for integrating sustainability into corporate leadership. While recently published global IFRS standards are a step towards an international coordination on sustainable finance, further work needs to be done to cover corporate inside-out impact and deliver on critical thresholds. In the EU, the new Corporate Sustainability Reporting Directive already obliges large companies to progressively report on their sustainability impact.

The International Sustainability Standard Board has published its “inaugural standards” IFRS S1 and IFRS S2 that cover voluntary rules on how to communicate about “sustainability-related” risks and opportunities affecting the financial performance of companies. Within a context of a complex and non-transparent global landscape around sustainability accounting and reporting, the new standards were hoped to bring coherence to the field. The standards are explicitly aimed at making sustainability-related information “comparable, verifiable, timely and understandable” for investors and other users of financial information.

With the increased role of green investments, regulatory pressure and customer expectations, new standards can be supportive of leaders that want to step up on corporate sustainability. The standards define leadership responsibilities regarding skills, policies, role descriptions and mandates related to sustainability. Companies are required to report on the role of managers in the governance processes, as well as controls and procedures used to monitor, manage, and oversee sustainability-related risks and opportunities.

The new standards follow an investor perspective that covers how financial performance will be impacted by sustainability trends in the short- medium- to long-term. This “outside-in” perspective is called a “single materiality” approach. A one-sided materiality is not reflecting the idea of sustainable development. By contrast, the European Union has adopted the Corporate Sustainability Reporting Directive (CSRD) with an explicit science-based “double materiality” approach that includes both how a company is affected by sustainability issues like climate change and how it is affecting these trends.

The CSRD covers reporting requirements about environmental matters (in line with the EU taxonomy), social and employment matters, anti-corruption measures and diversity on company boards. The rules are expected to apply to around 50 000 companies in the EU. To be covered, companies must fulfil two out of three of the following conditions: having more than 250 employees, a turnover of over €40 million and over €20m total assets. By 1 January 2024, the rules will apply for companies already reporting in line with NFRD. By, 1 January 2025, also large companies that are not currently subject to NFRD will be required to report.

In the discussions about sustainability reporting, some scholars have also highlighted the need to overcome the so-called “Sustainability Context Gap”. This notion refers to overcoming an incremental – rather than transformative – logic that has predominated sustainability efforts over the past two decades (i.e. performance compared to other companies or relative to unit of production instead of thresholds like the local ecological boundaries or the global 1,5°C warming target). The Global Reporting Initiative (GRI)’s Sustainability Context Principle (“triple materiality”), established in 2002, calls for assessing “the performance of the organization in the context of the limits and demands placed on economic, environmental, or social resources at a macro-level.” With the United Nations Sustainability Performance Indicators, practical guidance on how to measure, account and report on contact-based sustainability have been published against that background.

To ensure the future-fitness of organisations, CEC European Managers has been highlighting the importance of sustainable leadership as the underlooked dimension of the transition to sustainable business models and a sustainable economy. Specifically, the model incorporates impact-orientation and systems thinking to account to the context of organisations. Resilience to future challenges will require leaders able to create fertile conditions at the workplace for an organisation to thrive in its economic, social and environmental ecosystem.