Sustainability Reporting is a process undertaken by businesses to showcase their performance and impacts to stakeholders in economic, social, and environmental realms. It’s a complex topic, especially in light of recent regulatory developments, which are extending reporting obligations to an increasing number of companies. Let’s try to simplify this complexity by clarifying the basics.
According to the Global Reporting Initiative (GRI), through Sustainability Reporting, “an organization can better understand and manage its impacts on people and the planet. It can identify and reduce risks, seize new opportunities, and act to become a responsible and reliable organization in a more sustainable world”.
Regulatory Drive
The increasing focus on how businesses operate and their ability to generate impacts on society and the environment has led to significant regulatory developments. In Italy, a significant milestone in the recent past was the enactment of Legislative Decree 254/2016 – which transposes European Directive 2014/95/EU – requiring Public Interest Entities to disclose their environmental and social performance.
According to this provision, companies listed in Legislative Decree 39/2010 that are subject to specific forms of statutory audit (such as listed companies, banks, insurance companies, financial intermediaries, etc.) and have more than 500 employees and a total balance sheet exceeding €20 million or revenues of at least €40 million are required to prepare a non-financial statement – subject to verification by an authorized entity.
The Decree also allows other non-obliged entities, such as SMEs, to voluntarily and in a simplified form, submit a similar declaration.
Highly relevant and even more decisive is the approval of the Corporate Sustainability Reporting Directive No. 2022/2464 (CSRD). Published on December 16, 2022, in the Official Gazette, it represents a cornerstone of the EU Sustainable Finance Action Plan, itself part of the European Green Deal.
Waiting for its transposition into Italian legislation expected by June 2024, the Directive expands the range of companies that will be required to prepare a Sustainability Report to…
- large companies meeting two of the following conditions: more than 250 employees, turnover exceeding €50 million, total assets exceeding €25 million (mandatory from the fiscal year 2025)
- listed SMEs (mandatory from the fiscal year 2026 with the option to abstain until 2028).
- Companies from non-EU countries generating net revenues in the EU exceeding €150 million and operating with a subsidiary or a controlled company on our continent (mandatory from the fiscal year 2028)
In addition to widening the scope of companies involved, the Directive introduces specific requirements to integrate non-financial information into the financial reporting process and, importantly, a new set of standards and guidelines developed by EFRAG (European Financial Reporting Advisory Group). The new European Sustainability Reporting Standards (ESRS) place greater emphasis on integrating sustainability aspects and analyzing climate change risk within corporate governance and policies, requiring companies to shift not only in collecting and sharing sustainability information, but towards a forward-looking business management model.
The ESRS standards are designed to be interoperable with the GRI Standards and consistent with the recommendations of the Task Force on Climate-Related Financial Disclosures of the Financial Stability Board, and will reflect the reporting obligations under the EU Green Taxonomy and the Corporate Sustainability Due Diligence Directive (CSDDD). However, the GRI (Global Reporting Initiative) standard still remains the primary reference for sustainability reporting in its latest version, the GRI Universal Standard 2021.
Agenda 2030 and UN Global Compact
A necessary note should be made regarding the New York Agreement of 2015, which led to the United Nations General Assembly’s definition of the 2030 Agenda for Sustainable Development, encompassing 17 Sustainable Development Goals (SDGs) within a comprehensive action plan.
The Agenda 2030 serves as a universally valid reference, committing all countries to implement actions and initiatives for improvement—each according to its own capacities — to achieve the SDGs by 2030.
The 17 Sustainable Development Goals have also been incorporated within the UN Global Compact, the largest international corporate sustainability initiative, which also serves as a catalyst for future changes to be supported within the private sector to achieve the SDGs by 2030.
Implications for the Fashion Industry
As we have seen, not only the market but also lawmakers are strongly pushing for transparency and reporting of environmental and social impact data. Increasingly, companies will be called upon to provide evidence not only of their financial results through financial statements, but also of how they have achieved them in terms of social responsibility and environmental stewardship.
“In order to report their sustainability performance, companies need to adopt procedures and measurement tools for the relevant KPIs,” explains Francesca Rulli, creator of the 4sustainability framework for the sustainable transition of the fashion & luxury industry. “It is also necessary to implement structured impact reduction projects as a concrete expression of their commitment. For companies in the fashion supply chain, these projects are those identified as priorities by the major global sector coalitions: social responsibility and organizational well-being, reduction of water and energy consumption and atmospheric emissions, circularity, substitution of raw materials with less impactful alternatives, traceability, sustainable chemistry… Based on these dimensions, we have built the 4sustainability system, so that companies in the sector can activate structured projects to be reported through sustainability reporting. With the gradual involvement of their supply chains in the same exercise, production systems will become increasingly transparent, impacts will be reduced, and with them, reputational and image risks.”
Sustainability Report
The European Union, governments, international communities, and citizens themselves are increasingly demanding that businesses conduct their operations in a more ethical and socially and environmentally responsible manner. Above all, they demand to be informed about the associated performances.
Timely, periodic, and transparent communication of initiatives and commitments by companies has thus become one of the major requests from stakeholders, to which companies have found themselves having to respond by increasingly focusing on the preparation of the so-called Sustainability Report.
The Sustainability Report, as a product of the reporting process, is the document through which a company accounts for its environmental, social, and economic sustainability initiatives and performances. It is the document, in other words, through which the company communicates its actions to protect the environment, the approach it adopts towards its workers, its relationship with the territory and the community…, the way it generates value and distributes it to its stakeholders.
Thanks to the information contained in Sustainability Reports prepared through reporting standards, both internal and external stakeholders are able to form an opinion and make conscious decisions.
The Sustainability Report is not only an accounting document that shows the results achieved by the company during a given financial year. It is also a tool that relates economic and financial performance to the declared objectives in the social and environmental fields. Furthermore, it provides the management methods for the sustainability aspects most relevant to the company itself and its stakeholders, in terms of values, principles, policies, and management systems, casting a forward-looking perspective on commitments and future objectives towards sustainable development.
Phases of the Reporting Process
To ensure that the Sustainability Report achieves its goals, it is necessary for the reporting process to be precise and accurate. The main phases of Sustainability Reporting can be outlined as follows.
Definition of sustainability commitment
The reporting process can be completed and effective if the entire company – or a large portion of it – is engaged in its preparation. The starting point for the commitment lies with the company’s management, which commits to pursuing a sustainability reporting project with the aim of communicating its performance and developing a sustainability strategy.
The commitment of the organization’s leadership is a crucial step to be shared with all resources, ensuring that the Sustainability Report does not become a mere exercise dictated by momentary needs, but rather represents the beginning of a broader journey towards a sustainable business model.
Materiality Analysis: identifying the most relevant themes
The second step involves determining the most relevant sustainability themes for the company and its stakeholders, those that will be addressed in the Sustainability Report.
Required by major sustainability standards, materiality analysis is a tool that enables the identification of impacts and aspects most significant to one’s business strategy and prioritizes them to build a coherent path toward integrating sustainability into the business model.
The analysis process involves the engagement of the organization and its stakeholders to establish their various needs and expectations. Various methods such as direct interviews, questionnaires, focus groups, and others can be employed for this purpose.
With the new CSRD Directive, the concept of double materiality has also been introduced, which considers both the assessment of impacts and sustainability themes generated by the company towards its stakeholders (the “inside-out” perspective) and the assessment of the economic-financial impact of various sustainability themes on the company’s business (the “outside-in” perspective).
KPI’s definition
Once the material topics are identified, the next step is to identify the Key Performance Indicators (KPIs), which are indicators capable of measuring the economic, social, and environmental performance of the company. The company must define a set of indicators capable of providing a range of information about the trend of its performance and the impacts generated. This definition must occur according to the main reference standards, such as the GRI standards or the new European ESRS standards, if the company is subject to the obligation under the CSRD Directive.
Data collection
Once the KPIs are defined, the actual data collection takes place among the various functions of the organization, followed by their internal verification and validation according to a process to be built with the responsible functions.
Definition of objectives and improvement plan
Once the information is collected, the data undergoes analysis, leading the company to identify areas with the greatest need for intervention and to define the objectives that will comprise its improvement plan. These objectives serve as the reference against which the company will measure its progress for the following year.
For the reporting process to be sustainable itself, it must presuppose the company’s proven ability to build a robust and replicable data collection and analysis process over time, as well as to adopt a correct approach to continuous improvement.
A good Sustainability Report can only result from a good reporting process; otherwise, the risk is to create only a short-term communication tool that can also backfire. The risk to always keep in mind is indeed greenwashing, a more or less conscious form of communication that effectively spreads an image of the producer or the product/service as better than the actual one in terms of its environmental impact.
