As the urgency of doing business in an environmentally and socially sustainable way increases, so does the need to understand how well companies are performing. On one hand, we need transparent and comprehensive sustainability reporting to deliver an honest account of companies’ impacts and performance. On the other hand, sustainability ratings, assessments and certifications have become important tools in evaluating and synthesizing this information for customers, investors, and other stakeholders.
Over the recent years, this landscape has evolved rapidly and grown more diverse, drawing much needed attention to sustainability matters and further incentivizing change. However, we have come to a point where it’s getting difficult to see the forest from the trees. Companies are navigating a thicket that is made of meeting the mandatory regulatory requirements, adhering to voluntary frameworks that have become the norm, adopting reporting recommendations that cover a specific area of sustainability, as well as filling in separate sustainability rating questionnaires.
Do the many frameworks, ratings and certifications still serve their ultimate purpose as tools for informed decision making? I anticipate and hope that we are, also in this regard, now moving from an almost cacophonic excess to meaningful optimization. Here is why:
Increasing demand for comprehensive sustainability reporting
It is clear that the amount and depth of sustainability reporting will only keep increasing. The latest example of this is the EU taxonomy for sustainable activities which is profoundly changing the way companies define and report on the sustainability of their business. Far from perfect, but it forces companies to look at their operations from an angle that might spur new strategic business considerations.
On a European level, legislative initiatives such as the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDD) will bring increasing requirements for companies’ sustainability work and reporting. Also, in the United States, the Securities and Exchange Commission (SEC) has proposed a rule for companies to report more comprehensively on the climate-related impacts on their business, including climate-related risks and their financial impacts. If they haven’t already done so, now is the time for companies to extend their understanding further into their supply chains, further in time, and further into the unknown to analyze the potential sustainability impacts, risks, and opportunities over decade-long time horizons.
As a result of these new requirements, the foundations for reliable and science-based sustainability information will become even more solid. Advanced reporting also means the expansion of sustainability themes across functions and businesses, bridging finance, product development, sales, sustainability, and other teams. Inevitably, companies will need a whole new arsenal of capabilities and resources to respond to these new requirements. But let’s be mindful that the increasing requirements and workload is not the conclusion. Ultimately, companies now have an excellent opportunity to use this new information as a catalyst for accelerated business transformation.
Clarity through the converging reporting landscape
In spite of the increasing amount of sustainability data, I believe that we’re at the same time headed for smarter reporting. We’re already witnessing the welcomed collaboration and convergence of the reporting frameworks. For example, the widely used Global Reporting Initiative (GRI) is involved in creating the European Sustainability Reporting Standards that will form the core of European sustainability reporting and are now under public consultation. On a global scale, the International Financial Reporting Standards (IFRS) Foundation has set up its own International Sustainability Standards Board (ISSB) to bring about global standards for sustainability reporting. The work of the ISSB builds on two existing frameworks: industry-based Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD).
While we’re still in the development phase that involves uncertainty and certainly more workload, I try to keep in mind that we will hopefully be rewarded in the end with a more standardized reporting landscape that is easier to navigate.
Towards smart sustainability ratings and informed conclusions
As the quality, format and availability of companies’ sustainability information improves, I’m also hoping to see a more uniform and consolidated landscape of sustainability ratings, assessments, and certifications. Our current state can be confusing and exhausting with varying methodologies, non-existent correlations, erroneous conclusions, and misleading communications. Nevertheless, we absolutely need ways to filter and synthesize vast amounts of information – now more than ever as we must accelerate sustainability work in every domain.
Today, sustainability ratings are prepared for several commercial and non-commercial uses, with different emphases and varying levels of detail. Many indices and assessments are prepared for the purposes of the financial sector, such as the MSCI ESG Rating Index that evaluates companies’ resilience to ESG risks, and the Dow Jones Sustainability Indices (DJSI) that benchmarks companies’ environmental and social reporting. There are also independent assessments of companies’ sustainability performance, such as the Global 100 Most Sustainable Corporations by Corporate Knights. Additionally, some ratings focus on a certain area of sustainability, such as the CDP which is most known for its comprehensive assessment of companies’ climate work.
These examples show that different sustainability assessments have different objectives, focus areas and evaluation methodologies. At times, it might be difficult to draw conclusions based on a company’s performance in a single sustainability rating. However, there are many established players providing reliable insights in the field and interesting emerging attempts at crunching meaningful analysis of companies’ sustainability performance. When I look ahead, I see even more clarity to all stakeholders, smart use of everyone’s resources and ultimately, more successful decision-making based on relevant and timely information. When we get to this point, we can also start breaking traditional industry boundaries and focus on solutions that deliver actual impact.
Because ‘what gets measured gets managed’ tends to hold true, I believe that a more unified and cross-industry evaluation will result in a more open-minded, curious, and ambitious approach in managing companies’ sustainability performance. When we’ll master measuring not just performance, but also impact, we’ll take yet another step forward. We at Neste fully support and are committed to championing this development. I believe it is a vital component in speeding up the sustainable transformation of businesses and societies.