Opinion by Mihaela Croitoru, Sustainability, Climate Risk and ESG Advisor |CEO Sustainability Lens SRL

The transition to sustainable business models and economies is increasingly recognized as a critical imperative for corporate governance. As the impacts of climate change become more pronounced, the role of company boards in managing sustainability is growing in importance. This article explores why sustainability reporting matters, why companies are prioritizing sustainability, and the concrete steps boards can take to lead this transition effectively.

Why Sustainability Reporting Matters

Sustainability reporting transcends mere regulatory compliance. Climate change, described as the defining issue of our time, poses significant risks to the environment, human health, economies, social justice, global security, and the well-being of future generations. The devastating floods in Germany and Belgium in 2021, and the fires and droughts in Greece, Spain, and Pakistan in 2023, highlight the urgent need for coordinated action to reduce greenhouse gas emissions and adapt to climate impacts. Jim Skea, the new head of the Intergovernmental Panel on Climate Change (IPCC), emphasized that the world is in “unknown territory.”

Sustainability reporting is crucial because it fosters transparency and accountability, driving companies to take concrete actions toward mitigating these risks. The collective efforts of individuals, companies, and countries, though seemingly small on their own, can collectively move the needle on global risk reduction. Thus, boards play a vital role in leading these efforts, ensuring that businesses not only comply with regulations but also contribute meaningfully to sustainability.

Why Companies Are Talking About Sustainability

The increasing focus on sustainability among companies is driven by both regulatory pressures, like the CSRD Directive, and intrinsic motivations to protect the planet. New regulations are compelling businesses to start their sustainability journeys, but many companies also recognize the broader need to save the planet as part of their mission. However, the complexity of rules, like new sustainability reporting standards ESRS, geopolitical issues, and time pressures often push companies toward minimal compliance rather than comprehensive sustainability efforts.

Companies need to go beyond compliance and avoid the risk of greenwashing—where they might meet regulatory requirements without making substantive changes to their business models. For instance, senior citizens in Switzerland won a court case against the government for failing to meet sustainability targets. On the 9^th of April 2024, in Strasbourg, France, the European Court of Human Rights ruled that Switzerland violated its citizens’ rights by not adequately addressing climate change, setting a precedent for future climate lawsuits. The decision favored over 2,000 Swiss women, KlimaSeniorinnen, who claimed their government’s inaction endangered them, particularly during heatwaves. Court President Siofra O’Leary highlighted Switzerland’s failure to meet its emission targets and set a national carbon budget. These is illustrating the growing legal pressures on businesses to act.

The Market Response and Board Actions

The market response to sustainability challenges has evolved significantly. Historically, sustainability reporting was voluntary and varied widely among companies. Today, regulations are creating a level playing field, compelling all companies to report on a consistent basis. This shift has increased the involvement of auditors and heightened board interest in ensuring that sustainability targets are not just set but substantiated and achievable.

Boards now recognize that they cannot simply set targets without concrete action plans. These plans, named in the CSRD directive climate transition plans, must be integrated into business strategies, allocating the necessary resources and aligning the entire organization towards sustainability goals. For example, banks that committed to net-zero targets at COP26 are now grappling with how to achieve these ambitious goals, highlighting the need for realistic and well-supported transition plans.

Financing and the Role of Banks

Banks and financial institutions play a crucial role in the sustainability transition. They face risks from environmental impacts on their portfolios and regulatory pressures, but also see significant business opportunities. Supporting companies in their transition to sustainable practices and financing new, sustainable businesses are key areas where banks can contribute.

Banks must balance these opportunities with the need to protect their reputations and meet investor expectations. Effective risk management and strategic support for clients’ sustainability transitions are essential. The financial sector’s involvement is akin to water’s role in industrial processes—pervasive and vital across all sectors.

Concrete Steps for Boards

To lead the sustainability transition, boards should:

1. Integrate Sustainability into Strategy: Boards must ensure that sustainability is a core part of business strategy, not just a compliance issue. This involves setting substantiated targets and developing comprehensive climate transition plans.
2. Allocate Resources: Adequate resources must be allocated to achieve sustainability goals, including investment in new technologies and processes.
3. Ensure Transparency and Accountability: Boards should promote transparency in sustainability reporting and be prepared to disclose setbacks and adjust plans as necessary.
4. Engage Stakeholders: Boards should engage with all stakeholders, including employees, investors, and customers, to foster a collective effort toward sustainability.
5. Monitor Progress: Continuous monitoring and reporting on progress towards sustainability goals are essential. This includes adapting strategies based on performance and emerging risks.

Conclusion

The role of corporate boards in managing sustainability is paramount in the current climate. As stewards of strategy and governance, boards must lead the way in embedding sustainability into the core of business operations. By doing so, they not only ensure compliance but also drive long-term value creation, contributing to a resilient and sustainable future.

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