Interview: Prioritising sustainability reporting on board agendas and in corporate governance

You recently published a report about the relationship between corporate governance, investors and sustainability – what did you find?

Anthony Carey

We found that while businesses are undertaking a lot of work on sustainability, there is still a long way to go. By holding a series of roundtable events on engagement between directors and investors in France, Germany, Italy, Netherlands and the UK, we heard first-hand that many businesses still need to change their approach to sustainability from seeing it as a regulatory and compliance issue to one that places it at the heart of the business.

Investors, for their part, are increasingly interested in sustainability because it speaks to the long-term prospects of a business, but many have concerns because they are skeptical about whether some companies are currently communicating the full picture. For us at Mazars that is a step in the right direction as we want to encourage transparent reporting that reflects the reality and is not simply an add-on marketing exercise. 

Alexia Perversi

There was an interesting dynamic to the roundtables: boards and investors engaging on how they could work together to make sustainability a high priority, given the increased recognition that it has a huge impact on the value of a business. The conversation revealed both parties are challenging how sustainability reporting is done and seeking ways to do it more rigorously.

Why do businesses still not always take sustainability seriously?

Alexia Perversi

It stems from the fact that sustainability is primarily seen as a ‘non-financial’ factor. Right now, sustainability is too often viewed as a way to manage risk, not to increase value. Financial reporting does not fully cover social and environmental issues and, as a result, businesses can be left vulnerable to the negative financial consequences that they cause - supply chain scandals and environmental crises, for example.

It is important from a going concern and viability perspective to understand that what is valuable today might not be valuable tomorrow. Take energy sources or the ingredients in food or household items: changes in customer appetite and perception have rendered many existing business models unsustainable. Investors should hold boards more accountable and encourage them to look ahead and be committed to making the necessary changes, which will result in more sustainable business models. 

Anthony Carey

That long term vison is crucial and it’s where sustainability can get stuck. The future proofing of a business model often implies upfront investment, whilst on the other hand the resulting benefits - in financial terms - may only become visible later down the line. The reconciliation and rationalization of these aspects requires a shift in mindset as to how value is attributed to investments. The investor community is, generally, not yet in a position to fully or consistently reflect this in their valuation models.

It is also worth noting that to get the full benefit from an investment, with regard to financial and social benefits, it requires buy-in from the board to fully embed sustainability in the business.

How does sustainability reporting help with taking it seriously?

Alexia Perversi

High quality sustainability reporting is a way for companies to demonstrate how the business is acting behind the scenes as well as in front of the cameras. This communication should be prepared having a wider group of stakeholders in mind rather than the perhaps narrower focus of financial reporting. When defining what to include or not in a sustainability report, or in a section of the annual report, the public interest should always be considered, which implies a much higher level of responsibility.

The publication of a sustainability report is the end product of a whole ecosystem of processes and controls which should be present if the information contained in the report is to be balanced, consistent and reliable. The setting up and embedding of this ecosystem is fundamental if a business wants to put sustainability at its core.

What is the role of corporate governance in promoting more sustainable businesses and high quality reporting on sustainability?

Anthony Carey

Corporate governance is about creating a long-term, successful future for the business and ensuring it is properly accountable. It has a key role because a board should lead and direct the business in terms of determining the strategy and shaping the culture. You need those responsible for governance to be dedicated to sustainability if you want it to be afforded the necessary priority.

Consider remuneration as an example. If renumeration is based solely on short term earnings, then it’s not demonstrating support for a sustainable business approach. Workplace cultures are often defined as what gets rewarded and what people do when nobody is looking. If progression and bonuses do not consistently take into account sustainability commitments – in environmental, social and governance terms – then a business does not have the necessary, wholehearted focus on acting sustainably.

The board must demonstrate by example its commitment to sustainability by dedicating time at board meetings to discussing its current performance through the lens of sustainability and agreeing on its future journey. Depending on its organizational structure, it may also decide to appoint a chief sustainability officer or establish a board committee to ensure an ongoing focus on sustainability. Once leadership has ‘bought in’ then you can build mechanisms for improvement that deliver real value especially engagement with a wider group of stakeholders, including employees, customers, suppliers and communities impacted by the business to identify the main areas of concern. It is also vitally important for the board to have an effective two-way dialogue with investors on what they expect from it and the business more widely.

Are attitudes to sustainability reporting changing, and would global standards and more developed common frameworks help?

Alexia Perversi

The demand for corporate reporting that clearly shows the connection between sustainability topics and financial risk and opportunity has surged. At the end of 2019 the World Economic Forum updated its Davos Manifesto to say a company’s performance should “be measured not only on the return to shareholders but also on how it achieves its environmental, social and governance objectives.” That comes hand-in-hand with very public statements from global investment houses like BlackRock and State Street on what they expect going forward from the companies they invest in.

In response, businesses need an approach where all their stakeholders - employees, customers, suppliers, investors and the communities they operate in - are involved, playing the same game and moving in the same direction. This is key for long-term, sustainable growth.

 More importantly we are beginning to see progress on the development of common reporting standards that would provide comparable, consistent information that can be relied upon. At present, the European Commission, as part of the revisions to its Non-Financial Reporting Directive, is proposing the development of common European standards whilst leading sustainability and integrated reporting organizations such as the CDP, CDSB, GRI, IIRC and SASB are making headway with their own alignment discussions.

Anthony Carey

Attitudes are changing and in a number of countries reporting on certain aspects of sustainability is already mandatory. The market needs good reporting standards and external assurance on the information provided by businesses to ensure it is reliable. Countless businesses are founded on intangible assets – their brand, their people’s knowledge and commitment – which generally won’t appear in the financial statements if they have been built from within, rather than by acquisition, but absolutely underpin commercial potential. Global frameworks that capture the full picture of a business would encourage leaders do better on sustainability matters.

Alexia Perversi

We should not underestimate the challenges involved on the road to full sustainability. Some of the world’s largest companies are leading the way as they have the capital to invest in change. Smaller organizations may find it more difficult from a cost perspective but there is still evidence of private and family businesses going above and beyond and placing a high emphasis on sustainability.

This is where the future of business is heading: change is never straightforward and it’s time that old models of working are updated and renewed to address the impending risks from climate change, human rights violations and irretrievable damage to our environment.