Sustainability strategy and non-financial reporting

Why create a sustainable development strategy?

A sustainability strategy is a tool that supplements a company's business strategy with ESG issues, i.e. environmental, social and corporate governance. Companies reporting non-financial information have data on their performance in these areas. A sustainability strategy will talk about what to do with this data, how this data should change and how we want to use it in the context of the company's business. It should be noted that such a strategy is not a CSR strategy. A sustainability strategy is an endeavor deeply embedded in the essence of the company's operations, it provides an additional perspective to see our business in the context of global challenges such as climate, economic and social challenges.

How will this benefit shareholders and stakeholders?

The benefit in the long term is the survival and preservation of life on the planet, although it is clear that in the short term, the most important thing for investors is profit. Well-chosen indicators and strategy goals should show shareholders that management recognizes and appropriately addresses development potentials and risks in both the short and long term, making the company better at taking advantage of opportunities and more resilient to threats. Properly selected key performance indicators allow the company's progress to be monitored year-on-year, which supports investment decisions.

Is the European Commission planning regulatory action that will make it mandatory to have a sustainability strategy?

The European Commission is taking an integrated approach. Sustainability issues are built into the documents that the EC is currently preparing. The buzzword sustainability strategy does not appear in them, but in many places the EC refers to business strategy, which should incorporate climate issues, for example. This can be seen well in the EC's Climate Guidelines and the recommendations of the Task Force on Climate-related Financial Disclosures. These recommendations provide a set of guidelines on what companies should write about in their financial reports (!) on the impact of climate change on the company's strategy, financial plans and business model.

However, there is no obligation to develop a sustainable development strategy.

What should the process of preparing a company's sustainability strategy look like?

Creating such a strategy is, in general, similar to creating a business strategy. We should define the main goals, specific objectives, how to achieve them and key metrics, and then implement them and monitor implementation. Many companies have not yet prepared such a strategy, or if they have, they have often been CSR strategies, which in many cases do not address issues relevant to the company's business operations.

The baseline analysis needs to look at the company's business strategy and the non-financial data collected. It would be a good idea to conduct a materiality study that identifies the key non-financial issues for the company's business. It's also a good idea to look at the activities of competitors to see what goals they are setting for themselves and in what time frame, what issues they are addressing, what policies they have. In addition, you need to consider the regulatory environment. What is new about regulatory issues is the global context, as everyone needs to get involved to overcome the climate crisis, environmental and social challenges. The activities of organizations such as the UN, the EU will therefore influence the wording and nature of such a strategy.

How do you know if a sustainability strategy is tailored to a company and that it is well prepared?

First, it is worth paying close attention to the materiality test mentioned earlier. If a company is engaged in energy-intensive activities, and it does not report emissions and does not collect energy consumption data, but boasts about its charitable activities, one can immediately see the gap between the image created and the actual problems that may affect the company. It is necessary to look at the impact that the company's business activities have and are subject to in relation to its environment - communities, the environment, the region's economy. If the impact perspective does not appear in the strategy, it means that it is not well prepared. Relevance is an issue specific to each business, it is impossible to apply a universal scheme here. It's worth conducting a materiality study once every few years, not least to set goals in the strategy in areas that are important to the business. Secondly, the strategy should set goals to be achieved within a certain timeframe. Some goals are easy to define and measure and quick to implement, in which case they can be set in the short term up to 2 years. Other goals, on the other hand, require earlier preparation, gathering of knowledge, data, estimation of costs, making necessary modifications; their achievement depends on many other factors that must occur beforehand; then their implementation may be possible in a 4- to 5-year perspective. Third, the goals must be measurable, and this is what the development of appropriate metrics and indicators for their achievement serves.

Can the UN Sustainable Development Goals help companies create their own goals?

The United Nations in 2015 created the Sustainable Development Goals (SDGs), which we should co-create. The 17 UN Sustainable Development Goals (SDGs) are global goals. Each is accompanied by specific tasks that describe more precisely how to achieve these goals. All of the SDGs fit into the issues of 3 areas: social, environmental and economic, and intersect internally. For example, Goal 11 on sustainable cities overlaps with goals on energy consumption, water, equality, decent work. Of course, it is not possible for a single company to achieve all these goals, it is necessary to select from them the key ones for each company, depending on the nature of its business.

What closed-loop and value chain regulations are there in the European Union arena?

The European Union has adopted two regulatory packages moving toward a circular economy. The first of these packages was introduced in 2015 with the announcement of the Circular Economy Action Plan and addressed five priority sectors where changes would accelerate the transition to a circular economy. The changes and new regulations addressed plastics, food waste, critical raw materials, construction and demolition waste, biomass and semi-finished products.

2018 saw the introduction of a new waste package, consisting of 6 directives and 4 reports, which sets targets spread out to 2030, including recycling of municipal waste and reducing landfill, recycling of plastic, metal, wood, glass, paper and cardboard packaging materials, banning the use of plastics in single-use products, limiting the use of plastic containers, reducing the use of virgin raw materials for plastics and replacing with recycled plastics. However, the most severe change for companies will be the introduction of extended producer responsibility from 2021, meaning that the polluter pays. The increase in fees for businesses will be a significant financial burden, so it is already worth considering how to reduce the amount of waste resulting from our company's operations. However, this is not the end of the expected changes. In December 2019, the new European Commission announced the European Green Deal, a strategy for the development of the European Union. One of its main objectives is to accelerate the transition to a closed-loop economy. In the following months of 2020, the Commission plans to present a series of draft regulations and directives that will intensify this process.

Is the selection of targets a concrete commitment? Do you need to report and monitor whether the target was actually supported?

The Sustainable Development Goals are used for communication and education. It is an image issue and a declaration of adherence to community action to improve the environmental, economic and social situation. If we want to be seen as a responsible company, we need to choose goals and achieve them and communicate about it.

Who in a listed company should adopt a sustainability strategy?

The board of directors is responsible for adopting the strategy. Implementation should be done through the staff, and the adoption itself should be done in accordance with the company's rules.

What if the company has adopted a strategy, but perceives that in practice it does not match the nature of our company?

One would have to look at where the mistake was made. Maybe the strategy was not created with the participation of the employees and was boycotted by them, perhaps goals inappropriate to the company's business were chosen, or the business environment has drastically changed. To avoid some of the mistakes, when developing the first strategy it is good to set up a preparatory period for setting more precise goals. For example, if we don't have detailed data on energy consumption and don't know what the cost of implementing energy-efficient solutions will be, let's first introduce into the strategy an objective to gather this knowledge. Only with such a solid foundation will we be able to declare reduction targets in the next strategy. Let's remember that we are drawing up a sustainability strategy with a 3 to 5-year time horizon, and we will be reviewing the implementation of the previous strategy before we start creating a new one. This is a good time to make improvements.