7th February 2024
A recent conversation put the multiple threats faced by one business in plain sight. One experienced senior executive explained how their supply chain (heavily reliant on agriculture) was now hitting several risks. Policy makers were beginning to signal future support for alternative crops (to support more home-grown food), sub-standard quality of crops (for essential ingredients) was on the horizon due to over-used soils, costs of farming inputs continue to rise, many of the farmers were reaching retirement age and re-thinking the use of their land and other more general land-use changes were afoot. Once recognised in such explicit terms, it rapidly becomes clear on where to prioritise risk management.
The current widespread protests in Europe also illustrate the fragility of agricultural supply chains. Farmers continue to endure rising production costs. They are not necessarily against higher environmental standards per se, but they are against their over-complexity and cheap imports that bypass such standards. Environmental groups have even joined forces with farmers in France to prevent environmental protections becoming the enemy and to support a just transition to green agriculture.
Stories of this nature are becoming more common across all sectors and value chains. They are not a surprise for many in the sustainability community who have for many years recognised the need to manage both impacts and dependencies. However, it is more recent that such risks are surfacing more widely into the domain of investors and other stakeholders.
The recognition of these kinds of pressures is now entering the mainstream – helped along by the imminent requirements around double materiality and disclosure rules from the European Union’s Corporate Sustainability Reporting Directive (CSRD). Companies will need to be more transparent in identifying, quantifying and managing external risks.
It may seem a burden in the short term, but this means that these assessments of multiple threats will be much more out in the open giving yet more reasons for pre-competitive collaborative action between businesses. This brings significant opportunities for managing such risks. In addition, investors will be more driven by how businesses are responding and managing threats – adding further momentum to collective resilience building.
The managing and reporting of inside-out carbon, water, waste, chemicals and other impacts will no longer be enough. The outside-in impacts will also need a more formalised plan of action with full disclosure.
The European Commission advises on the CSRD Directive:
EU law requires all large companies and all listed companies to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment.
This helps investors, civil society organisations, consumers and other stakeholders to evaluate the sustainability performance of companies, as part of the European green deal.
This new directive modernises and strengthens the rules concerning the social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability.
The new rules will ensure that investors and other stakeholders have access to the information they need to assess the impact of companies on people and the environment and for investors to assess financial risks and opportunities arising from climate change and other sustainability issues. Finally, reporting costs will be reduced for companies over the medium to long term by harmonising the information to be provided.
The CSRD will require high priority critical impacts to be measured and managed in greater detail and look for the financial implications arising from them. It will start to put both ESG and financial performance on more of an equal footing.
Once navigated, inside-out and outside-in ESG-related risk management and valuations bring rewards to proactive companies. They will also provide shared benefits. The Directive’s harmonising goal will inevitably lead to a more knowledge sharing and a new wave of collective future-proofing – further relieving the burden on companies attempting to tackle challenges alone. ESG will essentially become a value creator.
The CSRD will be relevant to more than 75% of companies in the European Economic Area and non-EU organisations trading within the EU. It is due to be rolled out in 2026.
Businesses would do well to prepare early. They can begin to structure double-materiality assessments, update priorities and plans, improve data management, assess the financial implications, and make a start on the corresponding compliant disclosures. Salterbaxter continues to support companies across these areas and to evolve overall ESG and innovation strategies.