13th January 2023
As the UN shifts its focus from incentivising businesses to making them more accountable for their social and environmental impact, Kathleen Enright explains how business thinking needs to evolve, especially around the concept of corporate value.
It’s what you don’t say that really matters
In sustainability, demonstrating accountability used to amount to simply publishing a corporate report or being audited – but this is no longer enough. Businesses have become masters at focusing attention on all the things they are doing well – and understandably so. But what about all the things they’re not tackling as well. Either things they are not aware of as they aren’t asking the right questions or having the right conversations with stakeholders or areas they know they need to address and make progress on but haven’t yet figured out how.
As business accountability evolves, companies will need to be reporting on all things that pose a potential risk. That includes being transparent on the issues and areas that they are not yet making progress on. But with risk comes opportunity.
In the UK and across the world, we continue to see mounting pressure from society to introduce more legislation, to set legally binding frameworks and country-level incentives such as tax and procurement standards. Already, the EU’sCorporate Sustainability Reporting Directive (CSRD), which came into effect in October 2022, is proving a game changer by mandating that large companies have to publish information on environmental and social impacts.
As seen in the rise of double (or integrated) materiality, there seems to be a timely shift from competing global frameworks to alignment and convergence. The challenge for increased accountability is not the absence of globally recognised frameworks (eg the Natural Capital Protocol) – it is in the multitude of frameworks with which to align and prioritise as well as individuals and businesses refining a standard version to make it their own. But these shared frameworks are vital for driving more transparency through the reporting exercise and enabling more informed decisions by all stakeholders. We’ve seen a particularly strong voice from the investment community who are pushing for a more transparent and holistic view of risk and impact.
Greenwashing is spreading
First coined in the 1980s to describe false or exaggerated corporate environmental claims, we need to broaden the definition of greenwashing to encompass lack of disclosure on embedded risk. It has to be seen as something far more complex, wider and deeper than just a marketing and PR issue. Greenwashing is not just about what you say, it’s also about what you don’t say, which can result in the creation of a false picture for external audiences.
Regulators are homing in on the non-disclosure of embedded risk – and businesses are going to be made accountable. Companies should therefore be engaging with their entire value chain – operations, supply chain, finance and legal functions – to ensure that they are ensuring total transparency in their reporting.
Without meaningful change in their business models, corporates risk facing serious legal and financial consequences. Policies imposing fiscal penalties on those deemed not to be doing enough are certainly not beyond the realms of possibility. In this new era of accountably, could greenwashing, specifically a misunderstanding of what this really means, pose a real threat to a business or will the opportunity arise for businesses to look at how to understand and report the concept of value.
A Reassessment of Value
Businesses’ traditional understanding of value lies in profit, but the blinkered pursuit of profit today is securing our path to fundamental problems in the future. Around 85% of the world’s population is already being affected by human-driven climate change and is estimated that it could push more than 120 million more people into poverty by 2030. Resource depletion will mean costs will continue to rise and those who can’t compete will falter – businesses and people.
Ultimately, the fiscal value we place on things does not reflect their actual value to the business, society and the world. A fundamental rethinking of the concept of value is required.
But how do you change deep-rooted economic models and CEO mindsets that focus on year-on-year profit, rather than towards longer term sustainability goals? The shift that is needed will require fundamental changes in everything from how we view products and raw materials to business models and routes to market. We’ve already seen Nature secure its first seat at the boardroom table. Will Society be next? Looking just at your own direct operations rather than along the value chain will limit the opportunities for these changes and will erode future growth and value.
Double materiality has emerged as a means for European regulators to reconcile the need for investors to have greater information on ESG issues and the question of whether such factors are deemed financially material. Double materiality comes from a recognition that a company’s impact on the world beyond finance can be material, and therefore worth disclosing, for reasons other than the effect on a firm’s bottom line. It’s being viewed a key driver in delivering greater accountability and may also act as a catalyst for a new understanding of corporate value.
Beyond the Fiscal
What initiatives like double materiality point to is that business needs to move beyond the fiscal as the only measure of value. You can see this shift in thinking echoed in the pandemic when business and wider society were forced to rethink what real value they were actually creating.
Think, for example, about the seven million designated key workers who kept the country running during the COVID-19 pandemic. Key work is needed to meet society’s basic needs for survival. From food to health to energy, money and justice, basic needs cannot be fulfilled without key workers, yet they occupy, by and large, low wage jobs, and they were also at greater risk of contracting COVID due to the nature of their roles. Many people began to question the received wisdom which says that a low wage equates with low value work.
What we’re looking at is a reframing of the concept of value, towards a greater understanding and accounting for all value such as natural capital and factoring in true cost. And while there are early-stage frameworks in place to do this, businesses need to start moving towards it now because, as citizens, we are going to have to start paying for things that Nature has previously done for free. With the help of tools like double materiality, businesses need to consider what creates and constitutes value, and how should they be framing that discussion. Because if they wait for legislation to force their hand, they will be way behind the curve and potentially put the business at risk.