'Sustainability reporting should not become a checklist'

Organizations need to think more about the long-term benefits and necessities.
Castle in the sun
Type: Research
Publication date: 4/5/2024

Does regulation on sustainability reporting actually lead to more sustainability? This question was central to Professor René Orij's inaugural lecture on April 5th. "Organizations need to think more about the long-term benefits and necessities."

René Orij worked as a banker until he began to ponder the societal relevance of his job. He decided to take a different approach and spent two years in rural Vietnam, focusing on microfinance. His interest in sustainable business and reporting was further fueled there. Orij is now a professor of sustainability reporting at Nyenrode Business University. "This place aligns perfectly with the research I enjoy doing."

Consideration

Sustainability reporting involves reporting on an organization's performance in environmental, social policy, and governance (ESG) areas. The underlying idea of mandatory non-financial reporting is for companies to strive to operate in a climate-friendly and socially ethical manner. In his lecture, Orij delves into the question of whether regulations for sustainability reporting actually contribute to greater sustainability. "Starting in 2024, there will be a new European directive in force for large listed companies: the Corporate Sustainability Reporting Directive (CSRD). Companies will have to assess to what extent their sustainability ambitions are truly focused on sustainability, or mainly on profit."

Double Materiality

A key principle of the CSRD is double materiality. Double materiality determines which sustainability aspects are relevant to a company and therefore must be reported in the sustainability report. "Materiality is double when two questions are asked," explains Orij. "The first is how the company and its investors can be affected, this is called financial materiality. This often concerns the short term because it is about profit and loss. The second question is what impact a company has on the environment and society, and then you are mainly talking about long-term effects. This sets the CSRD apart from the International Sustainability Standards Board (ISSB), which only looks at the financial aspect of sustainability." According to Orij, too much focus on financial materiality increases the risk of greenwashing. Double materiality, on the other hand, means that companies must not only target their reporting at financial users, such as banks and shareholders, but also at other stakeholders who are affected by the company's activities. "Think of a company like Tata Steel that must make sustainability information transparent for local residents."

Long-Term Strategy

"Just as in a financial statement, assets and liabilities must balance, so too must the financial side and the impact on the environment and society. I sometimes say that the chimney must keep smoking, but we must also consider what happens to that smoke. Companies must strike a balance between what is beneficial for the company and shareholders on one hand, and what is necessary for the environment and society on the other," explains Orij. Although the introduction of the CSRD is the right path according to Orij, it sometimes poses challenges: "The difficulty with sustainability reporting is that we only see what companies want us to see. Because it is a comprehensive directive, there is a question of whether it is feasible. We must prevent companies from seeing the directive as a checklist. To address this, it is important to embed sustainability in the organization's mission and strategy. Only then can an organization truly be sustainable in the long term."