Seven-step roadmap for CEOs and CFOs who are embarking on sustainability reporting journeys.
Hari Venkata (Sr. Customer Solutions Manager ISV), John Roberts (Sr. Customer Solutions Manager DNB)
The Security and Exchange Commission’s (SEC) new rule on Sustainability reporting requires listed companies to disclose detailed information on greenhouse gas (GHG) emissions, climate-related risks that are reasonably likely to have a material impact on their business, and transition plans to achieve net-zero targets. If passed with an effective date in December 2022, these new climate reporting requirements would be phased in from fiscal year 2023 to fiscal year 2027.
European Council and European parliament have recently (June 2022) agreed on enhanced sustainability reporting—Corporate Sustainability Reporting Directive (CSRD). CSRD will require all large companies (European companies with more than 250 employees and more than €40M turnover and/or more than €20M in total assets and all listed companies in Europe) to certify their sustainability reporting and improve accessibility to information. CSRD regulation will be phased in from 2024 (with reporting for financial year 2023).
Given the fast approaching sustainability reporting timelines, companies across the world need to prepare to formulate their sustainability risk management strategies and execution plans. Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) as stewards of corporate strategy and governance, capital allocation, financial reporting, investor relations, regulatory compliances, risk management, and value creation have a significant role to play in sustainability initiatives reporting.
This blog presents a seven-step roadmap for CEOs and CFOs to provide high level guidance on how to prepare for the new sustainability reporting requirements in the US, Europe, and other parts of the world.
Step 1: Engage with the Company’s Board of Directors on the implications of the new Sustainability reporting regulations. A company’s board is best positioned to formulate a company’s sustainability strategy that is consistent with business strategy while focused on delivering economic value to shareholders. Sustainability strategy needs to take into account the entire value chain—Suppliers, Customers, Employees, Investors, and other Stakeholders. A company’s board needs to align the strategic goals of sustainability with the overall company vision and strategy by working with the CEO, CFO, and the executive leadership team.
Step 2: Define the sustainability operating model of the company. For the rank and file to fully adopt and implement sustainability strategies set by executive leadership, companies may consider a Sustainability Business Office (SBO) to establish the operating model (people, process, and technology) for translating high level sustainable goals to time bound initiatives and projects with tangible business outcomes. A company may choose to create a Chief Sustainability Officer (CSO) role who will work with CEO, CFO, and other top executives in implementing the company’s sustainability strategy.
A CSO may define the blueprint for a company’s sustainability journey, considering the company’s business focus, industry metrics, opportunities for value creation, competitive landscape, geography, and overall digital transformation journey.
Step 3: Establishing a reliable climate related reporting and disclosure framework. Listed companies will need to establish a framework for identifying, collecting, analyzing, and reporting information about climate related risks and climate related financial statement metrics to SEC/other country specific regulators. The new climate related disclosure rules would require a company to disclose information about its direct GHG emissions (Scope 1), indirect emissions from purchased electricity or other forms of energy (Scope 2), and GHG emissions from upstream and downstream activities in its value chain (Scope 3). The CFO has a key role to play here in working with the Board, Audit Committee, CEO, CSO, and other CXOs in developing this framework.
Step 4: Define the Board and Audit Committee governance model. Since the new sustainability reporting will need to be part of the company’s annual shareholder report (10-K in US) there are high stakes involved in detailed and accurate sustainability reporting. A company’s board needs to monitor the progress, risks, and challenges around its sustainability journey. Given the time sensitive nature of upcoming sustainability reporting regulations, executive level dashboards with critical Key Performance Indicators (KPIs) need to be part of the toolkit for effective Board oversight. Boards need to take pre-emptive corrective action if they feel that their sustainability journey is on a risky path.
Step 5: Define Sustainability targets and metrics. To meet the goals of the Paris Climate agreement countries and public and private organizations/companies need to commit to reduce greenhouse gas (GHG) emissions by half by 2030—and drop to net zero by 2050. Companies may set sustainability (for example: three, five, 10, and 15 year) targets by aligning with global initiatives such as Science Based Targets initiative (SBTi). SBTi helps by independently assessing corporate emission reduction targets to ensure that they are in line with climate science. Sustainability reporting standards such as GHG Protocol can provide guidance, tooling, and training on defining and measuring sustainability metrics. As an example, Amazon is on a path to power its operations with 100% renewable energy by 2025—five years ahead of their original 2030 commitment. DoorDash’s 2021 Environmental, Social, and Governance Report is a good example of reporting on carbon accounting metrics for Scope 1 and Scope 2 GHG emissions.
Step 6: Enabling Technologies: To meet the global climate challenge, the world needs rapid innovation in climate and digital technologies, and adoption of renewal energy sources across all industries. Chief Technology Officers (CTOs) and Chief Information Officers (CIOs) can accelerate adoption of sustainable IT such as cloud technologies that can address the dual challenges of digital and sustainable transformation. For example, AWS has added a new Sustainability Pillar to the existing AWS Well-Architected framework to help organizations learn, measure, and improve their workloads using environmental best practices for cloud computing. ISV Splunk has developed a Sustainability Toolkit (based on the Splunk platform) which enables organizations to gain deep insights into their carbon footprint and take the necessary actions towards their carbon neutrality goals.
Step 7: Value Creation: As companies embark on the sustainability transformation journey, they may discover new business transformation opportunities. A few companies may even rethink their business models leading to new value creation opportunities. CXOs need to collaborate as a leadership team to monitor their rapidly changing market landscape and look out for new value streams.
This blog outlined a seven-step guide for CEOs/CFOs to plan their environmental sustainability reporting. As an example, please refer to Amazon’s Sustainability Report for 2021