Sustainability is a term used in many different contexts. However, it is anything but a newly developed concept and the importance becomes increasingly present with the manifestation of climate change in extreme weather events and other pressing issues like resource depletion. Considering the lack of a consistent definition, the question of how sustainability will manifest itself and how it will impact businesses is difficult to predict.
August 10, 2021
In the current situation, it is also challenging to differentiate between what kind of mandatory regulations will be established and what will be the expectations from stakeholders like investors, suppliers, and customers. How sustainability will be implemented and assessed in the corporate context is, therefore, a pressing issue we need to tackle.
To understand why sustainability is important for everyone and will be highly relevant in every segment, we first need to clarify the different present terms that are used in the sustainability context. The three most important terms in this context are (Corporate) Sustainability, CSR, and ESG.
The definition mostly referred to in general is the definition of the Brundtland Commission, from 1987, where sustainable development is described as meeting the needs of present generations without compromising those of future generations.
Today the common understanding of sustainability includes three dimensions that have to be considered together, also called the “Triple Bottom Line”. It extends the definition of sustainability to the long-term maintenance of systems according to ecological/environmental, economic, and social considerations. Those three dimensions are also often referred to as the 3P´s: profit, people, and planet.
Economic development has its focus on the economic value provided by organizations to the surrounding system and the ability to permanently supply humanity with goods and services and therefore secure its capability to support future generations.
Social development includes the adequate provision of social services like education, health and equity and also distributive justice, and political accountability and participation.
Environmental protection involves a broad span of considerations like the avoidance of excessive use of resources and the reduction of emissions and waste to prevent permanent deterioration. It incorporates all variables influencing the viability of our natural resources and systems.
One of the commonly used terms in the corporate context is Corporate Social Responsibility. CSR is about the responsibility of businesses to integrate social and environmental aspects into their business activities and even though it has its origin in the social component, today it also addresses ecological aspects.
The ESG concept has been mainly discussed in the financial sector, where for example the ESG performance of firms is considered to be part of the investment process. With its trisection, it has similarity to the “Triple Bottom Line” and is occasionally used as a synonym to sustainability in other sectors.
Overall it is difficult to separate the different concepts, and the debates today can no longer be clearly distinguished between CSR, ESG, and (Corporate) Sustainability.
The terms are often used interchangeably. But all in all, Sustainability is a holistic approach that can be considered as the overall concept that incorporates these terms.
If we set the complexity aside and look at the very core of what sustainability means it becomes clear that it is about the preservation of human life on earth. This overarching goal of sustainability is more and more recognized and the necessity to preserve our livelihood and therefore the conditions necessary for our existence drive individuals, as well as businesses, investors, and regulators to push this essential development.
More and more companies are announcing and acting on sustainability goals. As climate change and therefore emission reductions are one of the most pressing issues, Audi recently declared that from 2026 onwards they will stop producing cars with combustion engines and other companies like Daimler are rapidly following this push forward to only produce electric vehicles in the future. With the shift of consumer demand to more environmentally friendly, biological, and alternative products, Aldi is reacting to increasing consumer demand for animal-friendly husbandry with an adjustment towards only more animal-friendly meat offerings in the future.
Additionally, sustainable performance is increasingly rewarded as for example Bosch has decided to recognize the commitment to sustainability among its suppliers and included an honor in this category in the international Bosch Supplier Awards. Along with companies pushing sustainable development, new regulations are established and old ones tightened. After a constitutional complaint of climate protectors including Fridays for Future in Germany, the federal constitutional court had ruled the government’s climate protection measures as insufficient. The Climate Protection Law had to be tightened after that complaint.
Also in Germany, a new supply chain law is coming up, and even though it is controversially debated, it will include more sustainability requirements for companies regarding their suppliers. Further, the European Commission recently published a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the already existing reporting requirements of the Non-Financial Reporting Directive (NFRD). Within this proposal, the European Parliament also considered that the information published by companies pursuant to the NFRD should be subject to a mandatory audit.
To have sustainable development within business practice a huge span of factors have to be considered from resource management, emission control, and recycling to work health and safety, risk management, and good labor practice to mention only some. Even though there are already important guidelines, principles, standards, and initiatives like the ISO standards, the global reporting initiative (GRI), SASB standards, 17 sustainable development goals or management instruments like the EU Eco-Management and Audit Scheme (EMAS), there is no universal standard method yet to tackle sustainability. This makes it a challenging topic on the one hand but offers also great strength and opportunity on the other hand, namely to be able to consider the special needs of every entity, the different geographic boundaries, and also the special needs of different projects or policies within sustainability.
However, high investments will be necessary. The European Environment Agency talks about an estimation of about EUR 1 trillion worth of investments that are needed, annually, from 2021 onwards, to meet the EU’s 2030 climate and energy targets. For achieving the global Sustainable Development Goals the United Nations has estimated that it would require about USD 5-7 trillion worth of investments. The EU is realizing this necessity to direct investments towards sustainable projects and activities, and also that a common language is needed to help define which economic activities should be invested in. The common classification system for sustainable economic activities, or “EU taxonomy” the EU is working on, is, therefore, an important step. The EU also recently released the EU Taxonomy Compass, a tool to facilitate the use of this taxonomy.
Overall, there is a development towards a high increase in sustainable investments and promoting sustainable finance. The Global Sustainable Investment Alliance (GSIA) emphasized in its Global Sustainable Investment Review 2020 the continuing prevalence of sustainable investment across the global investment industry and global investment managers like BlackRock are focusing increasingly on sustainability and integrating ESG.
Given all those reasons, sustainability is and will be a top-management priority. There are different options for how this process can materialize. There is already the international ISO standard that can be certified regarding different topics such as environmental management systems. New standards are developing and a standard by the TIC council or the European government could be another possibility. On the other hand, self-assessment questionnaires (SAQs) are already used and could be expanded.
Overall, it is questionable whether simple certificates will suffice or whether more detailed insights will be necessary because companies might be held liable e.g. if their suppliers do not comply with certain standards. Thus, similar to pharma where supplier quality is key selected 2nd and 3rd party audits might become an obvious solution.
Audits might also be a way of supporting the transformation by not only assessing the current situation but also disclosing opportunities since sustainability is a process, not a state. While audits provide huge potential to give real insights because they are truly independent and on-site, they are also expensive to execute due to travel costs, the necessary time to audit the facility, and writing a sound audit report including all findings.
Qualifyze can help you with the advantage of performing audits and sharing them with multiple customers. As a result, costs are distributed among multiple parties, therefore audit costs can be reduced which makes the audits an affordable solution for every company. Moreover, if the supplier audit data could be shared across multiple clients, it can be a substantial contribution in achieving supplier transparency on sustainability compliance without having to add a significant financial burden resulting from individual audits.
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