Share

The “business case”: how the benefits of mandatory corporate sustainability reporting actually outweigh the costs (Part I)

 

While the European Union studies the new draft Directive on Corporate Sustainability Reports and the associated sustainability standards, Shocking new data shows that proposed legislation saves businesses more money than they cost. In this article, Divided in two parts, we analyze the “business case” of the companies in the exercise of search for sustainability and the presentation of reports in this regard. In the first part, we present the new evidence , which show that not only the additional costs of the new legislation are “not significant” for the companies, but in reality they will mean an average saving of up to 41.700 euros per company every year, by expediting requests for sustainability information to the company from other sources. In the second part, discusses why existing standard cost models have exaggerated the cost of business sustainability, they have underestimated their benefits, and we present more extensive evidence, which are now considered overwhelming, demonstrating the relationship between better business sustainability performance and higher financial performance. This not only provides a strong argument for the passage of new EU legislation, rather, it concludes that a “inflection point” for which the “business case”.

…………………………………………………………………………………………………………………………………………………………

by Richard Howitt, strategic advisor on business sustainability, Senior Advisor to Frank Bold, former MEP and former Director General of the IIRC.

The nnew project of the Corporate Sustainability Information Directive (CSRD) The EU aims to quadruple the number of companies across Europe compared to those affected by existing rules, and it will be an instrument fundamental for them to take advantage of business opportunities arising from the EU sustainable financing strategy and the Green Deal.

However, it will be the evidence that accompanies the publication of the bill that may be decisive for the idea that good information on sustainability is also good business is finally installed in the business community.

What is the new evidence?

Tanto la Impact Assessment of the European Commission on the Non-Financial Information Directive as the iResearch by the Center for European Political Studies (CEPS) on the previous Non-Financial Information Directive (NFRD) they are categorical, by showing that the obligation to report on sustainability is affordable for companies and, in fact, leads to a reduction in costs in the medium and long term.

It is shown that the average recurring cost of 30.897 euros that compliance with this legislation means for the company is “insignificant” in relation to the overall costs of the company and, in any case, is proportional to the size of the companies, under the scope of the Directive.

The additional or incremental cost is calculated to be only the 0,005% of the average turnover during the first year, and that will be reduced even more in the following years, once the system has been established. Also, studies show that, in any case, half of this cost would have had to be incurred, in what is described as the calculation “business as usual”.

Since independent verification of sustainability reports is a new aspect of the CSRD Directive , It is interesting to know that three quarters of the companies that already request verification under the NFRD Directive - extended in France, Belgium, Italy and Spain- do not pay any additional cost to their current auditors for doing so. and for those who do pay, the average cost is only 5.000 euros.

Likewise, it is considered that other aspects of the new CSRD proposal also reduce costs..

The proposal that companies publish information on sustainability in the management report, instead of doing it separately, generates an average saving of 15.000 euros for the company, compared to publishing a separate sustainability report.

The definition of “double materiality” from the EU (impact for the company and for stakeholders) has already been adopted by the 40 % of the companies, which enshrines the concept of the impact of sustainability in the management of business risks, and paves the way for this interpretation to be adopted in other jurisdictions.

For anyone still skeptical about the accuracy of these results, There is additional evidence that the predictions made about the costs of the NFRD at the time it was agreed in 2014, have proven to be really inside, and at the lower end, of the Impact Assessment of the European Commission at that time.

These new conclusions are corroborated by previous studies showing that predictions about the additional cost of mandatory sustainability reports have often been exaggerated.. For example, It was found that the introduction of social and environmental accounting in the Danish Financial Statements Act generated a recurring cost for companies of only between 871 and 4.383 euros, according to ex-post studies.

Data in Spain (CEPS 2021)

Approaching the reality of companies in Spain, according to the CEPS study, average administrative costs would amount to 95.000 euros the first year, And to 80.000 euros the following.

Average incremental costs amount to 24.000 euros the first year and 18.000 euros the following . Administrative costs only represent the 0,0033% of turnover in the first year and 0,0029% The next years. This would be the second lowest share after the Netherlands

The additional costs only represent the 0,0009% of turnover in the first year and the 0,0006% in the following years, which represents the second lowest percentage after the Netherlands.

The average costs of the verification audit amount 60.000 euros. In Spain, the guarantee of the non-financial declaration is mandatory by the national transposition of the NFRD.

Sustainability reports save costs

What will be even more appealing to cost-conscious CFOs of companies across Europe, is the bold claim that in time, CSRD will really save costs.

This is attributed to having greater clarity regarding the sustainability information required of the company, and ease of obtaining relevant data from business partners and the supply chaino. According to the current proposal , CSRD will also help streamline the number of additional requests for sustainability information from external actors, including investors, ESG rating agencies and other stakeholders

The benefits of sustainability reporting have expanded thanks to the rapid rise in environmental concerns, social and governance (ASG) by investors. Also, the EU sustainability financing strategy aims to channel, through a combination of legal requirements, incentives and benchmarks, the staggering number of 850.000 million euros to support sustainable activities. [See the detailed calendar of the EU legislation in this regard].

In fact, the explosion of the demand for information on sustainability by different actors is shown as the true and inevitable future cost for companies, unless a widely accepted set of standards is established, that allows the “convergence” of the current panorama “fragmented” of information requests.

This element of “informational fatigue” among companies coincides with the significant shift in favor of ESG standardization in the investment community, and the fact that ESG data is going to be a prerequisite for accessing sustainable finance, and to public funds that support the transformation of sustainability.

Impact assessment, for the first time at European level, put a number to this question, suggesting that the reduction in requests for information will mean an average saving for companies between 24.200 and 41.700 euros per year.

The initiative to develop European sustainability information standards to accompany legislation, it is also seen as something favorable to him 50% of companies among which they already choose information standards (existing voluntarily) with which to make your sustainability reports.

Also, It has been shown that the cost of a company reporting according to a single framework rather than several (three or more), supposes a saving of 45.000 euros, which cuts the cost of sustainability reports themselves by almost half, for these companies that already reported with this level of complexity.

It's more, the mandatory element included in the proposal, about which companies and business associations would have been cautious in previous years, It is also shown that it will only assume around the 40% of cost – compared to the 60% which in any case would be generated following the voluntary model.

Standards have been confirmed to offer companies greater clarity and certainty about the information they must communicate, reducing the time and resources required to understand how best to comply with EU law.

Improvement of the competitiveness of companies

The public consultation carried out by the European Commission on the CSRD shows that the 80% of companies that prepare sustainability reports support the establishment of common standards, and the 71% of them also support the proposal that sustainability reports be verified against these common standards.

A recent document from the German Research Platform on Sustainable Finance fbe clear in your call to include small and medium-sized enterprises (SMEs) in the CSRD, in order to avoid large gaps in the data to be provided in key sectors (like agriculture, where he 70% of companies would not yet be required to report). They argue that this would avoid the uncertainty generated for smaller companies in developing their own reports and provide better information to larger companies., guaranteeing equal conditions in access to financing opportunities.

The European Commission Communication on DSRC describes the draft legislation as a way to promote the “sustainable competitiveness” for companies and, by influencing world evolution, this is said to translate into a competitive advantage for European companies as a whole.

What all this confirms is that the benefits of mandatory corporate sustainability reporting and associated standards are not simply described as a benefit for people and the planet., but it also arises without qualms in economic terms regarding the creation of value for the company itself.

CEPS report lists it as achieving better access to capital; increased stakeholder and employee engagement at all levels; improving the brand image among customers; obtaining greater approval from investors and non-financial rating agencies; and inclusion in the ASG stock market indices.

There is widespread recognition that corporate sustainability reporting is leading to better risk management by integrating sustainability with financial risks. No less than two-thirds of the companies surveyed supported that this form of reporting was providing benefits to their business..

In the second part of the article that will be published soon, We will show that the evidence for CSRD's business benefits is supported by other, broader findings, from both companies and academia, which show that the mandatory nature of corporate sustainability reports means that companies have better access to capital and a lower cost of it; growth opportunities up to six times those of conventional business investment and that sustainability reporting pays for itself up to four times its cost. The shift towards sustainable finance is shown as an imperative both for companies that have not done sustainability reports before, as for those who have.

Profits accrue across Europe and across all companies

New evidence has been demonstrated in separate investigations across Europe.

The introduction of sustainability accounting requirements in Denmark has been viewed positively, even by companies that were forced by the legal requirement to report for the first time.

In eastern europe, where there may be less recognition of the value of sustainability reporting -although this is changing rapidly-, there is a new Romania investigation showing that the quality of sustainability reports leads to better business growth.

The fact that companies have generally accepted these results is illustrated by a poll of the German Banking Association made this year to 136 small and medium businesses, both listed and unlisted.

Half of the medium-sized companies – the “Middle class” – They say CSRD will benefit their business. Unlike previous years, where smaller companies would be expected to seek an exemption from such legislation, Three quarters of companies welcomed the fact that the EU wants to expand the scope of sustainability reporting requirements to also include their companies.

“When it comes to sustainability, medium-sized companies in Brussels are giving a “praise in advance” to the regulations on more transparency”, según Janine von Wolfersdorff, responsible for the study.

Match Point

In summary, The Impact Assessment developed by the European Commission shows that a detailed and credible trade-off has been made between effectiveness and cost, and that the CSRD proposal represents the best option not only for Europe as a whole, but for each company individually.

In the past, These considerations would have been directed primarily at policy makers, who could be the most convinced after this evidence that the new legislation will achieve its purpose.

Consequently, We are faced with the enormous opportunity that the EU Parliament and Council have in their hands in their final negotiations on the new regulatory framework to make a historic breakthrough on mandatory reporting standards in the EU a reality this autumn , demonstrating a level of ambition at the height of a modern conception of sustainability.

What is equally clear besides, is that the new evidence has also had an equally persuasive impact directly on business opinion, and this is demonstrated by the broad support of companies for the new legislative proposal.

For individual companies, the balance of the equation has already changed.

SOURCES:

  1. Impact of the legal requirement for reporting on CSR in the Danish Financial Statements Act, Danish Commerce and Companies Agency, 2010.
  2. Is Sustainability Reporting a Business Strategy for Firm’s Growth? Empirical Study on the Romanian Capital Market, Mihai Carp, Leontina Păvăloaia, Mihai-Bogdan Afrăsinei and Iuliana Eugenia Georgescu, Sustainability Journal, January 2019.
  3. German companies back Brussels climate mitigation policy, Association of German Banks (Association of German Banks) and the Official Monetary and Financial Institutions Forum (OMFIFA), June 17 2021.