The nervousness of companies was clearly noticeable in the run-up to the new CO regulations. Many companies found it difficult to report on the risks of their business activities in accordance with the legal requirements, instead of just highlighting positive, image-enhancing measures and successes around sustainability. Following the publication of reports on the past financial year, there is often a balance between relief at having (successfully) completed the reporting and uncertainty as to how to do it more calmly and with a reliably correct result next time. Together with our customers and clients, we have distilled a few tips to better prepare for the future.
The sustainability reports for 2023 in the areas of non-financial reporting, conflict minerals and child labor (Art. 964a ff. CO) are a milestone for many large and medium-sized Swiss companies. Specifically, the companies concerned must report on the following issues: environment, in particular the CO2-targets, employees, social issues, respect for human rights, combating corruption and, where applicable, due diligence on conflict minerals and child labor.
Beyond Swiss legislation, however, an increasingly critical public, pressure from investors, rating agencies and international peer pressure are also ensuring that a lot is happening. For many Swiss companies, it is also important to be compatible with the dynamic regulatory requirements of the EU. CSRD and ESRS, CSDDD, the EU Deforestation Regulation and the EU Forced Labor Regulation are the most important keywords in this context. In Switzerland, TCFD climate reporting, including transition plans, will also be mandatory from this year.
What should companies think about to master current and future challenges?
The same “true and fair view”-rule applies as in financial reporting: work in an audit-proof manner
Viewing non-financial reporting as less binding or “soft” in terms of reliability and audit requirements is counterproductive. Qualitative and quantitative information should be collected, processed, checked and released in a clear, comprehensible process. Only then are reliable statements possible that can withstand the critical gaze of external experts such as lawyers and auditors.
Our customers and clients often ask for software solutions to systematize the necessary processes. However, software-led procedures only make sense once the governance of sustainability, the content, processes, responsibilities and competencies in the company are well developed, tested and established and the software can then map and support these structures in the next step. Priority should be given to a structure that provides a strong foundation in terms of content: the subject areas that are required by law “to understand the course of business, the business results, the situation of the company and the impact of its activities on these matters” must be systematically collected and developed and include the concepts and due diligence, the measures, material risks and the performance indicators.
Often lacking: the courage to call a spade a spade
Talking publicly and in detail about the nonfinancial risks of one’s own business has not yet been part of the usual corporate culture. Especially when it becomes concrete and, for example, the consequences of possible interruptions of operations, accidents or operational failures must be explained at various levels, the necessary experience in corporate management, risk and compliance management as well as corporate communication is almost always lacking. The tone of reporting then tends to be restrained. However, the transparency required by law is not achieved. The first step towards optimizing this is better, closer dovetailing between top management, corporate communications, sustainability management and the control functions (risk, compliance, controlling).
The completion of the first non-financial report does not automatically mean that a company has its non-financial and ESG issues under control and can now consider them a routine task. Given that the scope of non-financial reporting requirements will increase rapidly, a reactive and siloed approach is neither effective nor efficient. Companies must manage to develop internally and, as a rule, with external specialist support, in such a way that they build up solid capabilities and the necessary performance in terms of ESG. This is the only way they will be able to successfully meet the massive demands of the future.
Prerequisite: Ensure competencies all the way to the top
In the long term, credible and legally compliant sustainability reporting will be a key positive competitive differentiator and, as a brand building element, an important “asset”, to use the language of balance sheets. ESG issues are increasingly becoming “hard” factors in competition and require what all hard corporate parameters require: high competence and high performance.
This applies right up to the top. Responsibility for the newly introduced nonfinancial reporting and due diligence on conflict minerals and child labor lies with all members of the Board of Directors, who are directly responsible for its implementation in accordance with the law. ESG expertise within the Board of Directors is essential to ensure the strategic management and monitoring of this area. To close any gaps, the involvement of external experts to advise the Board of Directors, further training for the entire Board of Directors on non-financial topics and the appointment of ESG specialists to the Board of Directors are necessary measures. Such expanded competencies help companies to position themselves successfully in a dynamic environment and to remain innovative and successful in the future.
This article was published in The Reporting Times by the Center for Corporate Reporting.
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