As highlighted in a recently published report by German management consulting firm Horváth, while more than 95% of large European Union companies are technically compliant with the Corporate Sustainability Reporting Directive (CSRD), just 65% are applying sustainability reporting as a management instrument. The research identifies a huge gap between technical compliance and having ESG practices embedded in mainstream business processes.

CSRD compels companies to disclose on material issues—issues pertinent to stakeholders as well as to firm performance. They are categorized along two dimensions: financial materiality, wherein third-party influences are taken so one can monitor how they influence the firm, and impact materiality, wherein the firm's influence on the world and society at large is studied. The study states that though this is the norm, numerous companies do not define these material issues clearly and even fewer have measurable objectives to take care of them.

They revealed an average of 39 unique topics under impact, risk, and opportunity categories in their sustainability reports. Of those, 63% were adverse impacts, 25% were risks, and a meager 12% were opportunities. This indicates that firms are actually reporting adverse environmental and social impacts, but they are not even utilizing ESG strategies to their fullest potential as an innovation driver or for long-term value creation.

The most important areas covered through these reports are climate change (E1), utilization of resources and circular economy (E5), and labor problems (S1), where companies tend to establish detailed targets. Biodiversity (E4), impacts on local communities (S3), and consumer well-being (S4) are comparatively less prioritized. These problems are familiar to the majority of companies, yet none of them has specific targets or clear-cut programs to tackle them.

Another issue highlighted in the report is unequal coverage of emissions disclosures by industries. Energy, auto, and chemical industries with high emissions offer more detailed emission information. Finance, IT, and insurance firms offer comparatively lesser data. Greenhouse Gas Protocol is still the most popular framework for reporting on emissions.

More than half of the companies surveyed mention the United Nations Sustainable Development Goals (SDGs) in their ESG disclosures. This is especially prominent in finance, retail, and consumer goods industries, where transparency and accountability demands are high on the investor agenda.

Notwithstanding all such efforts, it is revealed in the report that very few companies are using sustainability reports to make strategic decisions in a wider context. Most of the reports are more orientated towards compliance than internal planning, governance, or shareholder communication. Integrating ESG into performance management, risk models, and internal control systems would make the difference in elevating the value of sustainability reporting, reports.

The research further provides recommendations regarding enhancing the reporting process. It recommends that the sustainability reports should ideally fall within 80 and 160 pages. It believes this size is ideal because it will be large enough to encompass all material topics required while not being too complex.

Artificial intelligence and automation are mentioned as being technologies that would likely be able to make reporting more efficient. With simplified data collection and analysis, these technologies can help enable greater integration of ESG into day-to-day operations and long-term strategy.

The results resonate with the increasing significance of ESG to investor relations and corporate governance. As the market has increasingly been defined by transparency and sustainability, those companies that use ESG reporting for something more than an obeisance obligation will be better placed to achieve competitive edge. Technical compliance with reporting is robust, but there is still ample scope to accelerate the rate of improvement in using ESG data for strategy and performance over the long term.

Source:Horváth study