Sustainability Report: What Is It?
The sustainability report, also known as a non-financial report or ESG report, is a document that organizations publish to disclose their performance in terms of environmental, social, and economic sustainability. This type of report goes beyond traditional financial statements, offering a broader and more comprehensive view of the organization’s activities and impacts. Here are some key elements that must be included in a sustainability report:
- Environment: Information on the organization’s environmental practices, such as the use of natural resources, waste management, greenhouse gas emissions, and initiatives to reduce environmental impact.
- Society: Details on social policies and practices, including working conditions, diversity and inclusion, employee health and safety, and corporate social responsibility (CSR) initiatives. It also covers how the organization contributes to the economic development of local communities, for example through job creation and support for local small businesses.
- Governance: Description of governance structures and business management practices, including internal control mechanisms and transparency policies.
The main goal of a sustainability report is to provide greater transparency to stakeholders, including investors, customers, employees, regulators, and the broader community. This type of reporting can also help organizations identify areas for improvement and develop more sustainable long-term strategies.
When Should It Be Prepared?
The sustainability report is often prepared in accordance with international standards, such as those set by the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Sustainability Standards Board (IFRS/ISSB with standards IFRS S1 and S2.), or the European ESRS standards. These standards help ensure the information is comparable and reliable.
Theh Corporate Sustainability Reporting Directive (CSRD) which came into force on January 5, 2023, is the European Union directive that modernizes, strengthens, and expands the rules regarding social and environmental information that companies must report. A broader set of large companies, as well as listed Small and Medium Enterprises (SMEs), will now be required to report on sustainability. Additionally, non-EU companies generating more than €150 million in the EU market must also comply.
Companies subject to the CSRD will have to report according to the European Sustainability Reporting Standards (ESRS), developed by EFRAG (European Financial Reporting Advisory Group), an independent body representing various stakeholders. The first set of ESRS was published in the Official Journal of the European Union on December 22, 2023, as a delegated regulation (available here). These standards apply to all companies within the scope of the directive, regardless of their sector. The CSRD also requires assurance over the reported sustainability information and will provide a digital taxonomy for the required disclosures.
Why Should It Be Prepared?
The sustainability report is important for several reasons, going beyond the regulatory obligations established by the CSRD. Here are the main motivations for preparing one:
- Transparency and Trust: A sustainability report increases operational transparency, building stakeholder trust. This includes investors, clients, employees, and the community, who can better evaluate the organization’s commitment to sustainability.
- Competitive Advantage: Companies that show a strong commitment to sustainability can differentiate themselves from competitors, attract investors focused on ESG practices, and improve their market reputation.
- Client Requirements in the Industrial Supply Chain: Companies within industrial value chains are increasingly being asked to provide their sustainability reports by clients downstream in the chain—clients who, due to their size or industry, are subject to CSRD requirements and need to assess their suppliers’ sustainability.
- Talent Attraction and Retention: Employees—especially younger generations—are increasingly interested in working for companies with a genuine sustainability commitment. A sustainability report can help attract and retain top talent.
- Continuous Improvement: Creating a sustainability report requires a deep analysis of business practices, often revealing areas for improvement. This process can drive innovation and the adoption of more sustainable practices.
- Risk Reduction: A sustainability report helps identify and manage ESG-related risks. This reduces the organization’s exposure to negative events and increases long-term resilience.
- Access to Financing: Investors and financial institutions are increasingly considering ESG factors in investment decisions. A sustainability report can facilitate access to financing and reduce its costs.
- Community Relations: A sustainability report can strengthen relationships with the local community and other stakeholders by demonstrating the company’s commitment to social and environmental well-being.
- Proactive Compliance: Even if a company is not currently subject to specific regulatory requirements, preparing a sustainability report helps anticipate future obligations, reducing the risk of non-compliance.
- Contribution to the Sustainable Development Goals (SDGs): Companies can align their sustainability strategies with the United Nations SDGs, contributing to a positive global impact.
Conclusion
In summary, the sustainability report is not just a matter of regulatory compliance—it’s a powerful strategic tool that can bring long-term benefits to the organization and all its stakeholders.
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