ESG knowledge within a company – no longer just “nice to have”

What used to be recommended is now becoming mandatory. The topic of sustainability in business is entering a new phase – one 80% of EU businesses admit they have no idea about.

Florian Hoos is a Professor of Sustainability and ESG Accounting at Switzerland’s International Institute for Management Development (IMD) who several times a year teaches high-level managers at BMI Executive Institute in Vilnius. He says changes the European Union approved last year will soon bring changes that are still hard to measure but will be dramatic.

Especially for those who thus far have ignored sustainability factors in their business strategy. They now face not just ‘soft power’ factors – like competitive pressures, evolving consumer habits, and labour market preferences – but also radically stricter enforcement by regulators. 

Interesting times are ahead.

To begin on a more philosophical note, you start meetings with businesspeople talking about your daughter who is two years old. I have a daughter who’s three. So, for three years now, I’ve been thinking not only about my own future but hers as well. And the type of change we’re going to discuss today will have a big influence on our own and our children’s future.

The world with my daughter in it differs vastly from the world before I had her. My motivation for getting up and going to work in the morning is different. Now I’m more careful about what I do and what I say to whom. But that’s me. More important is the question, which I often ask myself, about what skills my daughter will need in the future for a healthy and secure life. That’s something I think about both in consulting companies and when I wake up at night.

A lot of things can keep you awake at night. The outlook for the environment is quite sombre. The data doesn’t offer any good news. I don’t want to be a pessimist, but it’s not easy to imagine a future that is healthy and secure.

I still truly believe we have room for radical innovations to change current trends. So I remain optimistic, keeping a realistic view of the environment. I understand why the statistics might give you a bad feeling. For instance, even if we all immediately start making extra recommended efforts like giving up meat or plastic, that will not save us. It’s great to do such things, but that won’t produce any tangible change. The solution lies in radical change.

On the topic of ESG, businesses’ behaviour has certainly changed to some extent. But how much of that is hypocrisy and how much involves efforts dictated by the situation and companies themselves showing leadership? If banks were less strict in assessing companies for ESG criteria, or if regulators were less strict, how many companies would fall back?

This question has multiple aspects. One thing I’m sure of is that nothing is more sustainable than businesses and the people who work there showing what is possible. The examples of companies like bKash and Infarm offer hope that business is capable of radically improving even the worst outlook. Such companies demonstrate that everything is possible. And even more importantly, their example also inspires others. Yes, there are traditional, conservative, resistant elements in business. But alongside them, others who know now to create the changes we all need are gaining in power.

We also definitely need a discussion about how much and which resources are needed for people to be able to live a healthy life. Because of the climate, the world is overheating and people are going through the very same syndrome. It’s not that we are consuming more, quickly depleting resources, and not getting things under control. I am convinced that we need a broad-based, intense debate about the true nature of a healthy and high-quality life. What’s needed, what is sufficient to achieve that? Here, again, we need more inspiring examples to help show the reality. Then, when we enjoy a healthy body, the joy of life, with a family and a place to live, there will be no sense in wasting more and more.

But it’s hard to believe that will convince sceptics. If some traditional businesses don’t currently see value in investing in sustainability, which they consider a cost, what arguments could change their minds?

Here the factor of competitiveness should take centre stage. So, if a company’s activities focus on agriculture, it should realise that it will come up against fast-growing sustainable farming entities like Infarm.

So far, there is no sign that changing regulatory attitudes and consumer habits will allow traditional companies to survive. They’ll have to change or fail. That is one aspect. Another one, which should also be taken seriously, concerns the views of the new generation. Huge amounts are being invested in educating the current generation. It’s a generation with different values and attitudes to the environment. One day they will be the decision-makers and they will accelerate change from below.

Finally, a third aspect concerns regulation. If the behaviour of decision-makers in this area continues to steadily toughen, conservative companies will also find it impossible to meet the goals they set. As behaviour gets tougher, sanctions will get tougher too. A good current example is the car market, where the regulatory environment is already so intense that, within the next decade, we’ll be saying goodbye to the internal combustion engine forever.

On that note, it’s worth mentioning the increasingly strict reporting requirements at the EU level. A new directive envisages a shift from recommendations to requirements for business.

According to the official data, the Corporate Sustainability Reporting Directive will directly affect about 50,000 companies across the EU, mostly publicly listed companies and large corporations. Those firms are obliged to report a lot of information about what’s happening over the entire supply chain. Well, first they will request additional information from the smaller companies they work with. So this new directive will affect not just the big companies, but also everybody around them in the supply chain.

Overall, I see the directive as a game changer because nobody can escape this regulation. Sustainability is becoming a mandatory aspect of doing business. We’ll see how this changes the business environment over the next 5 years, but it is already clear that it will force many companies to start reflecting on their ESG, collect data, and report it. And those that are unable to do so will suffer a competitive disadvantage.

Different international studies that are being published show that 75-93% of businesses in the EU are not just not ready for that change, but have not idea even where to begin.

Now we have a transition period, with about 5-7 years still until the requirements come fully into effect. I think that’s plenty of time for companies to wake up. For those who haven’t done any sustainability reporting until now, 2024 will be fateful. They’ll have just 3 years left to get ready for the full set of requirements, which is unavoidable. But there are some bigger companies that are already now ready for the change and are making even tougher demands on themselves. They will put pressure on smaller companies. Again, it’s a matter of competitive advantage or disadvantage depending on whether you’re ready to report or not.

Still, if most are not ready, they have to start somewhere.

I would partner with the more advanced, model companies. There are not hard to find. They know how to report and are happy to share their knowledge simply because we are all sitting in the same boat. Businesses will depend on their partners’ success, so the best approach is to look several some steps ahead and help those that will you need to be ready in the future. Another way, of course, is to hire consultants, but that will prove to be rather more expensive.

Another element probably worth mentioning here is how a decade or so ago social responsibility issues were the job of the communications or marketing manager. Now, major corporations have teams with expertise in this specific area, usually led by a Chief Sustainability Officer (CSO). Looking to the future, properly defining and delegating these responsibilities within an organisation is no doubt critical too.

To date, companies have handled sustainability-related matters in very different ways. Some put this function directly under the CEO’s authority, others find space for it in other C-level positions. Still others see a need to strengthen this layer and recruit people who have the necessary expertise and can help to bring about a transformation. But far more importantly, careful analysis of the data shows that a top-down approach cannot achieve the same goals as a bottom-up one. So, whether or not a company has a CSO is not so important. Much more important is having someone in place who can lead a transformation. It could be the CEO, or a separate department, or a person specifically dedicated to that.

But there is also another side to this change. In certain sectors, competences in sustainability dramatically increase employability. For example, in Germany there companies are now required to have sustainability expertise embedded in their boards. As a result, shareholders have recently been looking rather desperately for strong people with the right skills. Over time, it will become increasingly difficult to build a solid career without skills and knowledge in this field. That doesn’t mean that engineering or management skills are losing value. Just that knowledge of sustainability will become vital in many areas over the next 5-10 years.

To finish, let’s run through some areas where you most clearly see change coming. Let’s start with business goals in general. What decisions should a company head with a strategic outlook make today?

For many industries, emissions are the key component, and will remain so for the foreseeable future. Many regulatory decisions are being made with the aim of reducing emissions. This is a key business KPI. So the first thing I would do tomorrow is look at how I can make my business climate neutral.

Another aspect is people.

Again, it varies by industry, but if people are one of the main tools and competitive factors, then the focus should be on models that promote the type of distinctiveness that helps attract talent. The potential is probably greatest here. Few companies today have reached a level of development where the people who work for them live healthier and safer lives.

And a third area, to wrap up, is accounting.

I don’t think the accounting profession has ever been as important and promising as it is today. We are moving deliberately towards an environment where it is essential to accurately measure and calculate a company’s footprint. Without numbers, without incorporating them into the overall accounting system, it’s all just empty talk. Nothing more. And that is an accountant’s bread and butter – to evaluate and measure business performance.

Author: Tadas Valančius

Download Brochures