The importance of investing in the environment and corporate governance in the private sector is getting into swing
Non-financial reporting is becoming an increasingly important tool. It not only shows the impact of a company on the environment and the social setting but also presents other important indicators that investors, employees and business partners are interested in. Nevertheless, it is difficult for companies to assess the business value of their social impact. We have, therefore, identified six areas where this influence is most visible. In addition, we have prepared three basic strategies to help companies transform towards sustainability. Last but not least, we have addressed the importance of ESG (Environment, Social, Government) and the reasons why companies in Central Europe still do not invest much in this area.
Take a look at other topics that we address in our EnviLaw newsletter #3:
Non-financial reporting and its importance
Non-financial reporting is becoming an increasingly important tool that enables companies to provide information on how the company is managed, what the company’s long-term goals are, what risks it faces and what its impact on the environment and the social setting is. The increased demand for non-financial information is mainly due to two factors. The first is the requirement to clarify the process of creating value for a given company and obtain comprehensive information. The second is the environmental impact of the company and information on how the company approaches the transition to a low-carbon economy.
The process of preparing a non-financial report is very demanding and involves several phases. In order not to be used purely for PR or “greenwashing”, the non-financial report is to be prepared on the basis of comprehensive standards and frameworks. That is why an amendment to Directive 2014/95/EU on the disclosure of non-financial information is currently considered – non-financial reporting has many areas that need to be amended and improved. However, it is clear that its importance will continue to grow.
What is the business value of your company’s social impact?
Companies can better understand the business value of their social impact through improved data measurement and analysis techniques. This helps companies better assess risks, allocate resources, forecast growth related to activities in this area and then make strategic decisions in this context.
In Deloitte’s Global Human Capital Trends Survey for 2020, for the first time, company leaders and directors have identified the social impact as the factor that has the greatest impact on the company’s annual results. Nonetheless, it was challenging for them to adequately assess the business value of their efforts in relation to social impact. Therefore, we have identified six main areas in which efforts to achieve social impacts can increase the company’s business value:
- Brand differentiation. Social impact is proving to be a factor that influences consumer decision-making and allows companies to charge premium prices, which leads to increased revenues.
- Attractiveness for talented employees and their retention.
- Innovation. Efforts to improve health or the ecological and social footprint of products can drive innovation, which will encourage higher income from new products and new markets.
- Operating effectiveness. Reducing footprint in packaging, water consumption, material consumption and waste production can result in significant cost savings.
- Risk reduction. Failure to effectively address environmental and social risks can cause serious financial and operational problems. Social impact efforts can have significant mitigating consequences, resulting in the elimination of costs or revenue loss and higher valuation.
- Access to capital and market valuation. Efforts to have a social impact on businesses are positively linked to market valuation and capital costs.
Subsequently, by adapting existing business indicators, the company should measure the business value of these areas in ways that are comparable and consistent with other considerations of the company. This in turn allows the company to assess risks more accurately, assign costs and forecast growth related to activities in the area of social impact.
Sustainable transformation is approaching the breaking point
By combining the activities of different sectors – communities, consumers, employees, regulators, corporations, and most recently financial institutions – the transformation towards sustainability reaches the breaking point. Therefore, companies are under increasing pressure and must take the necessary steps. Many companies will have to transform their business models in a sustainable way to find new opportunities and growth pathways for their future business. Practical examples show how corporations are transforming towards greater sustainability.
Thus, we have identified three basic business strategies that allow companies to turn sustainability risks into opportunities:
- Look ahead. Understand the new growth opportunities sustainability provides.
- Look inside. Find ways to re-set your processes to help accelerate the transformation towards greater sustainability.
- Look around. Take advantage of the surrounding business systems to create a competitive advantage.
Companies that have adopted ESG principles are doing better in a crisis
As a result of the coronavirus pandemic, markets are becoming more volatile. This puts pressure on companies and investors to diversify their risks and ensure the resilience of their activities. This is likely to increase demand for ESG-focused investments (environment, social, corporate governance). The following key findings emerged from the Deloitte Central Europe Private Equity Confidence Survey:
- More than 60% of respondents believe that implementing an ESG strategy can lead to a higher return on investment.
- The majority of respondents (66%) state that ESG-related matters are important, but cannot work on their own. Approximately a third of all respondents (30%) considered those matters to be very important and value factors.
- Only 4% of all respondents consider ESG to be insignificant.
- Around 60% of respondents consider ESG factors to be something that affects the company’s value.
Interestingly, only a third of respondents consider ESG-related matters to be very important and value factors. However, research shows that companies that use ESG principles work much better in times of financial downturn and economic instability. It is, therefore, likely that investors and companies are not yet aware of the importance of a strong ESG strategy and the integration of related factors and risks into their accounting records. As a result, for the time being, the benefits that a sustainability-oriented approach can bring remain largely underused in our region.