The (business) case for sustainability has hardly ever been as strong as today. As companies are struggling with raw material shortages, pressure from investors and key accounts (who amongst others ask for credible and ambitious net zero strategies) and last but not least upcoming policy on transparency and reporting, – CEOs have to act decisively. Can you turn obligations and compliance into a competitive advantage?
The time is now to act on sustainability, in order to keep up with the growing pressures from stakeholders and proposed or planned regulations.
The time a company had the choice if sustainability was a priority, what activities to consider as sustainable and how to report them to the stakeholders is soon to be over. It will be an unpleasant awakening to say the least for those companies that did not anticipate for it.
Last year, the European Commission adopted a proposal for a Corporate Sustainable Reporting Directive (CSRD) which sets common European sustainability reporting rules. Going further than the existing Non-Financial Reporting Directive (NFRD), the proposal extends the scope to all large companies (following the European definition) and all companies listed on regulated markets. By 2024, the companies under scope need to disclose sustainability related information in the annual report, following mandatory EU reporting standards (that are still under development but are gradually becoming clearer) and subject to mandatory limited assurance.
To facilitate reporting – and to protect private investors from greenwashing, help companies to become more climate-friendly and reorient capital flows towards a more sustainable economy – the European Commission has created a classification system for sustainable activities, the so-called EU Taxonomy. Sustainable business activities need to substantially contribute to at least one of 6 environmental objectives (see below), while not having a negative impact on the others.
It is expected that from 2024, all companies within the scope of the CSRD, need to indicate what share of their turnover, CAPEX and OPEX is dedicated to activities considered sustainable under the EU Taxonomy framework. For large listed companies falling under the current NFRD, this is already the case.
The two regulatory initiatives described above are just an indication of a policy trend that will continue to raise the bar for companies with regards to sustainability. We can easily add the Corporate Sustainability Due Diligence (CSDD) proposal to this list, which is currently being discussed at a EU-level. This initiative complements the current NFRD and the future CSRD by proposing to add a substantive corporate duty for some companies to identify and where necessary prevent, eliminate or reduce negative impacts of their activities on human rights and the environment.
Policymakers are clearly putting building blocks in place that will shape how companies can and will contribute to global challenges. How can you start organizing to take advantage of it?
Organizing for sustainability excellence: where to start
The policymaker is leading from the front, urging companies to disclose, be transparent and communicate performance. More and more companies are looking to turn obligation into opportunity; and develop sustainability strategies that make them meet stakeholder expectations, manage risk and capture business opportunities. Will this be done overnight? It does not seem so. Only 2% of sustainability programs meet or exceed expectations – as a comparison: companies get lean transformations right 20% of the time. Why is it so hard to organize for sustainability success?
We see three ways in which organizations can set themselves up to succeed.
Use materiality as a strategy steering process rather than a reporting formality
Of course your materiality process will prioritize topics that matter most to the organization, or the ones through which it can differentiate in the market. Materiality should not limit itself to the occasional materiality survey that employees fill in – or on a limited number of interviews with senior leadership. Materiality is the process in which you define topics that influence the ability of the company to create long-term value, both for the company itself as for critical stakeholders. It is the opportunity to enter into a broad(er) strategic exercise and chart policy trends, market risks, technological developments – and link them to key material topics. If you are looking for a starting point on what could be material topics for your company or industry, we suggest starting off with the SASB Materiality Finder.
Next to that we see a lot of organizations stop when the materiality matrix has been developed – which clearly is a missed opportunity. There is value in linking material topics to the maturity of the company in managing them – in order to identify short-term priorities and link clear action plans to topics deemed ‘high-priority material’.
Design an appropriate governance structure that fits the organization – and allocate the right responsibilities to a central team
When talking about sustainability governance, the most frequently asked question is where to put the overall responsibility and accountability: within the CTO, CMO or another executive role? There is no one-size fits all answer on where to put the end responsibility, nor which ‘organizational structure’ to use. All in all, the only universal principle to adhere to is to make sure the model of your choice fits with how the organization is used to organize itself: does the company tend to centralize responsibilities, or give freedom to business units?
One of the crucial design choices to make is what responsibilities you consolidate in a central team, and what matters you leave for business units, functional groups or plant locations. What tasks are logically clustered within a transversal sustainability office?
- Transversal topics that might need alignment across teams (like overall decarbonization) can be coordinated by a central team. But then they should also be given the decision rights to steer the topic. Centralizing responsibilities could be relevant for topics that affect multiple functions or that have a material impact on the overall organization.
- We also see a lot of organizations give central teams the mandate to kickstart new sustainability ideas and integrate sustainability initiatives across the company. When focusing on circular economy as a material topic for example, more and more companies are setting up business units to source secondary resources more effectively, in a few organizations these units were started off from a sustainability department, and after growing were handed over to the business.
- Of course, central teams can pick up a huge role in performance management. They can hold others accountable by setting central objectives, tracking progress and maintaining a corporate-wide view on performance on sustainability topics (like sustainable product development)
Let sustainability initiatives emerge through process and system redesign – rather than one off sprints or disparate action plans
A lot of organizations try to inject energy into the organization by creating special functions, organizing break-out sessions or developing all kinds of roadmaps. This makes sustainable decision making (whether to design the product in a specific way or do a certain investment) very time and person-dependent. What if companies could organize so a sustainable decision does not depend on how one of the key decision makers gets out of bed? We prefer hardwiring sustainability decision making through clear systems and processes that steer behaviour. Some examples:
- Broad awareness and capability building: AXA Group is increasing the climate literacy of all its employees across the board – to make sure climate-friendly decision are proposed and taken in all levels of the organization
- Sustainable portfolio management: Materials company Solvay manages the sustainability performance of its product portfolio through clear targets and checks built in the product development process
- Performance management: the single most effective measure for sustainability success, cite a lot of sources including European food player Vandemooortele, is linking executive compensation to sustainability goals.
The policymaker and ambitious downstream customers are raising the stakes on great sustainability management. Luckily for CEOs and sustainability managers, technological developments (with respect to novel raw materials, low-carbon processes and many more) are scaling up rapidly – and more knowledge and insights becomes available on how to manage a sustainability program for excellence.
Webinar Organizing for sustainability excellence in terms of governance, performance management, culture and roadmapping
May 10th, 2022
Do you want to exchange thoughts?
Don’t hesitate to contact the authors of this blogpost.
- Sustainalytics: Explaining the EU-taxonomy
- European Commission: Why do we need an EU taxonomy?
- McKinsey: Organizing for sustainability success: Where, and how, leaders can start
- Bain: Achieving Breakthrough results in sustainability
- Global Reporting Initiative: Materiality and boundaries
- Sustainability Accounting Standards Board: Materiality Finder
- AXA Group: Making AXA’s employees pioneers to fight climate change