Sustainability Reporting and Impact Valuation
Upcoming EU requirements | Stakeholder needs | Reporting standards | How to quantify sustainability impact and risks along global supply chains
Dr. Richard Scholz, Head of WifOR Impact Analysis, and Katrin Ostwald, Strategy & Business Development WifOR Ireland, share expert insights into the new EU sustainability requirements for their fellow Guaranteed Irish members and how companies can better understand social and environmental sustainability impact and risks in their operations and along their supply chains.
What is happening and why?
Sustainability is now mainstream – it is an integral part of company strategies and objectives. On April 21, 2021, the EU Commission published new legislative proposals in the context of the EU Green Deal, including those on the Corporate Sustainability Reporting Directive (CSRD). Documentation of sustainability efforts in the form of non-financial reporting will become mandatory for many companies. The number of companies subject to reporting requirements will increase about 5-fold. The European Financial Reporting Advisory Group (EFRAG) is working on behalf of the EU Commission to determine the specific information that will have to be disclosed and, above all, externally verified going forward.
Laws have already been implemented in several European countries with more expected. EU CSRD and EU taxonomy for environmental aspects will be implemented under the EU Green Deal growth strategy. In addition, laws are requiring companies to comply with human rights due diligence encompassing not only their own operations but also the entire supply chain, graded according to the degree of influence. In May, the Department of Enterprise, Trade and Employment of Ireland launched a public consultation of the CSRD to seek views of stakeholders. The consultation is open until June 23, 2021.
What should businesses do?
To meet the upcoming requirements and stakeholder needs, companies may need to implement human rights and environmental due diligence that spans across their own operations and their direct suppliers. Companies also have an opportunity now to extend this due diligence to the analysis of social and environmental risks occurring throughout their business and value chain.
What are the challenges?
The main challenge is the lack of standardised reporting principles and understanding which societal and environmental impacts are material. Current forms of Environmental, Social, and Governance (“ESG”) reporting have a variety of restrictions and, as a result, focus primarily on inputs, outputs, and outcome metrics. Most stakeholders in this field emphasize the need for a holistic method to assess a company’s ESG performance contribution.
How can businesses measure social and environmental sustainability in their operations and supply chain?
Only measuring impacts will tell what matters most to stakeholders. Impact Analysis and Valuation is a holistic method that helps meet upcoming requirements, addresses stakeholder concerns and provides meaningful, actionable insights.
In a nutshell, Impact Analysis translates financial data into macroeconomic understanding. Company impacts can be compared across sectors, geographies, and to political targets such as the SDGs in all three dimensions of sustainability – social, environmental, and economic. Impacts are measured and hotspots identified for a company’s own operations as well as its global supply chain. Measuring ESG indicators is an important starting point and a long-term commitment to socially responsible investment standards.
Impact Valuation goes one step further and translates the effects of different indicators such as greenhouse gases and occupational accidents into monetary units. This lets companies measure their net societal value along the entire supply chain and provides an overview of the size and, thus, the materiality of externalities – it allows companies to focus resources on what really matters and bridge the gap between sustainability reporting and action and between non-experts and experts.
By integrating the results from Impact Valuation into decision-making processes, companies can incorporate the potential effects of the externalities examined into their corporate strategy and sustainability management programs while meeting the upcoming requirements.
Under the EU Green Deal and the Environmental Generally Accepted Accounting Principles (“E-GAAP”) project, the EU commissioned the Value Balancing Alliance (VBA), the Capitals Coalition, and the World Business Council for Sustainable Development (WBCSD) to develop a set of generally accepted accounting principles for the environmental dimension.
WifOR is advising the VBA on a global, standardised impact measurement method and three VBA members on the measurement of their group-wide impacts. The following case studies show how Novartis uses Impact Analysis and Valuation in its ESG reporting:
- Environmental Impact of Novartis Along Global Supply Chains
- Capitals Coalition | Case studies: Estimating Environmental Externalities | Social impact of wages | Social impact of medicines | Human rights impact valuation
- Novartis in Society ESG Report 2020 | Global impact results are on page 16
WifOR would be delighted to explain its Impact Analysis and Valuation methods to its fellow Guaranteed Irish members in more detail.
You might also be interested to see a snapshot of the economic and environmental impact of the Irish construction sector that WifOR estimated in connection with the launch of GuaranteedIrishHouse.ie