Investing in sustainability efforts to remain competitive

Sustainability is one of the key factors in the decision-making processes of different stakeholders, from customers' purchasing decisions, suppliers' procurement and production considerations, to governments' legislative requirements. Investors have also increasingly prioritized sustainability in their decisions

By Daphne Lui

Published: Feb 9, 2024 11:04:38 AM IST

Updated: Feb 9, 2024 11:20:20 AM IST

The expression of environmentalism in politics may have begun in the 1960s through the establishment of activist non-governmental organizations and environmentalist political parties, but issues about climate change and environmental considerations became a prominent global concern in the 1990s - with the Earth Summit in Rio de Janeiro in 1992 and the adoption of Kyoto Protocol in 1997. By the 21st century, sustainability has diffused into the business language and sustainable development has become part of corporate strategies.

Sustainability is one of the key factors in the decision-making processes of different stakeholders, from customers’ purchasing decisions, suppliers’ procurement and production considerations, to governments’ legislative requirements. Investors have also increasingly prioritized sustainability in their decisions.

For example, in his 2020 letter to CEOs, Larry Fink, BlackRock’s chief executive, highlighted that “Climate Risk is Investment Risk” and announced that the fund manager would put sustainability at the center of its investment approach. As the world puts the spotlight on corporate sustainability, companies are under pressure to improve their public image on the sustainability front and attract environmentally conscious consumers and investors.

However, in recent years, companies have faced criticism for engaging in misleading strategies, known as greenwashing, to portray a more environmentally responsible image than they truly embody.

For example, the United Nations highlighted that “an increasing number of companies had pledged to reduce their greenhouse gas emissions to net zero since the adoption of the Paris Agreement in 2015, but those claims are often based on questionable plans, including emissions offsetting and ‘insetting’, rather than actual emission cuts.” Other greenwashing strategies include exaggerating claims about environmental benefits or selectively presenting data to showcase favorable information about their environmental impact.

This phenomenon poses a significant challenge in the realm of corporate sustainability and hampers trust between companies and their stakeholders. Greenwashing also undermines many companies’ genuine efforts toward sustainability and resources are diverted toward superficial changes rather than investing in environmental improvements.

Further complicating the situation, anti-ESG sentiments have emerged, and sustainability efforts sometimes faced resistance or skepticism, and many have questioned the feasibility, economic viability, or even the necessity of adopting environmentally friendly practices. These could further jeopardize sustainability development.

As stakeholders demand sustainability information from companies, consistent and comparable measurement and credible disclosure on related risks and opportunities become essential for the information to be useful. Third-party certifications from reputable organizations may be necessary to offer validation of their sustainability claims. Rapid developments have taken place in this arena.

IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-Related Disclosures, issued by IFRS Foundation’s International Sustainability Standards Board (ISSB), aimed at providing consistent and comparable disclosures on risks and opportunities related to sustainability and climate, became effective for periods beginning on or after 1 January 2024. The standards integrate certain existing standards (among others, those of the Sustainability Accounting Standards Board, Task Force on Climate-Related Financial Disclosures, and Climate Disclosure Standards Board) to address longstanding reporting challenges. While the ISSB acknowledges the crucial role of external assurance in building trust and confidence, it does not currently require external assurance. The International Organization of Securities Commissions has endorsed the standards and has called its 130 member jurisdictions to consider ways to implement them. According to the IFRS Foundation, as of early December 2023, organizations from 64 jurisdictions have committed to advancing the adoption or use of the two ISSB standards.

Also read: How can companies better meet their sustainability goals?

In Europe, large companies were already required to adopt some form of ESG reporting following local legislation as required by the EU Non-Financial Reporting Directive (NFRD). The Corporate Sustainability Reporting Directive (CSRD), having come into force in January 2023 to replace NFRD, casts a wider net to capture more companies gradually over time, including non-EU companies that do business in Europe, to provide mandatory annual sustainability reporting. Specific requirements on how and what information and metrics companies need to report to comply with the CSRD are outlined in the European Sustainability Reporting Standards (ESRS), applicable from 1 January 2024. The CSRD and ESRS bring sustainable reporting on par with financial reporting, requiring limited assurance and eventually reasonable assurance by an independent third party on the report.

In Singapore, sustainability reporting for listed companies was voluntary from 2011 until 2016, when the Singapore Stock Exchange switched to a mandatory approach on a “comply or explain” basis. External assurance was encouraged but not required. In July 2023, Singapore launched a public consultation to advance sustainability reporting requirements by extending the requirements to large private companies, aligning climate reporting requirements with the ISSB standards, and mandating external assurance requirements.

Both ISSB and CSRD/ESRS are relevant for firms globally as many jurisdictions are considering adopting or implementing the requirements of the two ISSB standards and, despite being EU regulations, CSRD/ESRS will apply to a group of non-EU firms that have business operations in the EU. The ESG focus in Asia has traditionally been placed on regulations and less so on promoting sustainable investment. With the rapid growth of ESG regulations and sustainability reporting requirements globally, companies need to focus more on investing in sustainability for the long run to remain competitive and relevant.

Daphne Lui Associate Professor of Accounting and Associate Academic Director of the Global BBA program at ESSEC Asia Pacific