CSR: Corporate Social Responsibility PDF

What is sustainability? Sustainability is the ability to exist constantly. However, the modern use of the term "sustainability" is broad and difficult to define precisely. CSR and CSV Corporate Social Responsibility (CSR): This is about a business taking responsibility for its impact o...

What is sustainability? Sustainability is the ability to exist constantly. However, the modern use of the term "sustainability" is broad and difficult to define precisely. CSR and CSV Corporate Social Responsibility (CSR): This is about a business taking responsibility for its impact on society and the environment. CSR initiatives can involve things like charitable giving, volunteering, or adopting sustainable practices. Essentially, it's about a company using its resources to address social and environmental issues. CSR programs focus primarily on reputation and have only a limited link with the business, which makes it difficult to justify and maintain them in the long term. Creating Shared Value (CSV): This concept goes beyond just responsibility. It's about aligning a company's business goals with creating positive social and environmental impact. In other words, CSV focuses on finding ways to make money while also solving social or environmental problems. The creation of shared value (CSV) is functional to the profitability and competitive position of the company. Leverage the company's specific resources and specific expertise to create economic value through the creation of social value. The first reflections on CSR are characterized by: A limited confidence in the self-regulation of economic system, The recognition of social pressure as a social force capable of urging the establishment of an ethics of economic life. History of CSR 1950s The first academic studies have their origins from the 1950s. Bowen (author of Social Responsibilities of the New Businessman, 1953) propose to increase the response of b business management to social interests, by: 1. Changing the composition of the boards of directors, facilitating the incorporation of 1  the points of view of other interested parties in addition to the shareholders. 2. A greater representation of the social point of view in management, especially considering that this body is much effective in the decisions of a company than the Board of Directors itself. 3. The social audit, carried out by external independent experts who evaluate the company's policies in aspects such as prices, salaries, research and development, advertising, public, human or community relations, etc. 4. Development of business codes, which contain good business practices worthy of imitation and which initiate the drafting of ethical codes, with more specific and concrete content related to each organization. 1960s During the 60s the concept of Corporate Social Responsibility was beginning to be affirmed and contributions on this topic increased. The social responsibility must be considered a priority over the economic result. Social responsibility is defined as the set of businessman’s decisions and actions taken for reasons at least partially beyond the firm’s direct economic or technical interests. According to K. Davis, essentially, if businesses didn't regulate themselves, unions and governments might impose stricter rules on them. In W.C. Frederick’s opinion, the economy’s means of production should be employed in such a way that production and distribution should enhance total socio-economic welfare. Social responsibility in the final analysis implies a public posture toward society’s economic and human resources and a willingness to see that those resources are used for broad social ends and not simply for the narrowly circumscribed interests of private persons and firms. David and Blomstrom affirm that social responsibility is a person’s obligation to consider the effects of his decisions and actions on the whole social system. Businessmen [sic] apply social responsibility when they consider the needs and interest of others who may be affected by business actions. In doing so, they look beyond their firm’s narrow economic and technical interests. Walton highlights the link between company and society; the new concept of social responsibility recognizes the intimacy of the relationships between the corporation and society and realizes that such relationships must be kept in mind by top managers as the corporation and the related groups pursue their respective goals. 1970s, the new role of CSR M. Heald marks the importance of the historical moment in which the company operates in and of the community-oriented programs. H. Johnson identified 4 ways to decline CSR: 1. “Conventional wisdom”: A socially responsible firm is one whose managerial staff balances a multiplicity of interests. Instead of striving only for larger profits for its stockholders, a responsible enterprise also takes into account employees, suppliers, dealers, local communities and the nation. 2. “Long-run profit maximization”: Social responsibility states that businesses carry out social programs to add profits to their organization. 3. “Utility maximization”: 2  A socially responsible entrepreneur or manager is one who has a utility function of the second type, such that he is interested not only in his own well-being but also in that of the other members of the enterprise and that of his fellow citizens 4. “Lexicographic view of social responsibility”: The goals of the enterprise, like those of the consumer, are ranked in order of importance and that targets are assessed for each goal. These target levels are shaped by a variety of factors, but the most important are the firm’s past experience with these goals and the past performance of similar business enterprises: individuals and organizations generally want to do at least as well as others in similar circumstances. In the text Social Responsibilities of Business Corporations, it has been stated that “Business is being asked to assume broader responsibilities to society than ever before and to serve a wider range of human values. Business enterprises, in effect, are being asked to contribute more to the quality of American life than just supplying quantities of goods and services. Inasmuch as business exists to serve society, its future will depend on the quality of management’s response to the changing expectations of the public”. The Committee for Economic Development (CED) is a nonpartisan group of business leaders that conducts research to influence economic policy for a more prosperous America; and it has developed a model of organizations: The neoclassical theory includes the concept that anything that compromises the efficiency of the company in achieving the profit represents an unnecessary cost. Neoclassical economics is a broad theory that views the market, specifically supply and demand, as the driving force behind the production, pricing, and consumption of goods and services. It emerged in the early 1900s as a response to classical economics. 3 CSR is present in Friedman's view, but it is considered a cost rather than a strategic investment; “it is the State that must assume specific responsibilities towards the community (environmental and social aspects) and not the companies”. According to Friedman (shareholder view): managers as agents who have the fiduciary obligation, recognized by law, should operate exclusively in the interest of the shareholders, having a primary responsibility towards them. David thinks that social responsibility begins where the law ends. A firm is not being socially responsible if it merely complies with the minimum requirements of the law, because this is what any good citizen would do. 1980s The consideration of all the company stakeholders and their requests/needs begins. According to Dalton and Cosier, social responsibility has 4 faces and each of them represents an organization strategy: According to Freeman (stakeholder view), the stakeholder theory provides valuable support in identifying the group of interests with whom the company must engage in responsible behavior. It does not illustrate socially responsible behaviors and the reasons for implementing them. The focus is always on maximizing profit for the company and its stakeholders. It does not indicate priority in achieving the objectives. By stakeholders it is meant: “any group or individual who may have an influence or be influenced by the achievement of an organization's goals”. In 1987, the World Commission on Environment and Development (WCED), which had been set up in 1983, published a report entitled «Our common future». The document came to be known as the «Brundtland Report» after the Commission's chairwoman, Gro Harlem Brundtland. It developed guiding principles for sustainable development as it is generally understood. The Brundtland Report stated that critical global environmental problems were primarily the result of the enormous poverty of the South and the non-sustainable patterns of consumption and production in the North. It called for a strategy that united development and the environment – described by the now-common term «sustainable development». «Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.» In 1989, the report was debated in the UN General Assembly, which decided to organize a UN Conference on Environment and Development. 1990s The Pyramid of Corporate Social Responsibility, developed by Archie Carroll in 1979, is a framework that outlines four key areas of responsibility that businesses should consider. It's 4 a foundational concept in CSR (Corporate Social Responsibility). Here's a breakdown of the pyramid and its significance: The Four Levels are : 1. Economic Responsibility: This is the base of the pyramid and represents the most fundamental responsibility - a business needs to be profitable to survive and create jobs. 2. Legal Responsibility: Businesses must comply with all applicable laws and regulations set by the government. 3. Ethical Responsibility: This goes beyond just legal obligations. It involves operating with ethical principles like fairness, honesty, and environmental sustainability, even if not explicitly mandated by law. 4. Philanthropic Responsibility: This is the top level, representing voluntary actions that improve society's well-being. It can include charitable giving, community engagement, or social programs. End of the 90s - early 2000 In these years, the codes of conduct of institutions such as the EU, OECD, ILO are defined. CSR is spread by non-governmental strategies. In a market where uncertainty and complexity grow, imitation mechanisms of other successful organizations are beginning to be created. It is felt a sense of regulatory pressure from academic and professional associations. Porter and Kramer describe the COMPANY / SOCIETY interdependence relationship as follows : ▪ Companies withdraw resources (economic, social, environmental) from the competitive system to carry out their business; ▪ At the end of the production process, the same companies return value (economic, social and environmental) to the competitive system; ▪ The process starts again with a new withdrawal: if the company has given the competitive context greater added value than the one it has taken, it will be the company itself to enjoy it by reintroducing these new resources into its production system. 5 According to the Institute of Social and Ethical AccountAbility, “Sustainability is the capability of an organization (or society) to continue its activities indefinitely, having taken due account of their impact on natural, social and human capital”. Sustainability according to ISO 26000, is the “responsibility of an organization for the impacts of its decisions and activities on society and the environment, through transparent and ethical behavior that: Contributes to sustainable development, including health and the welfare of society; Takes into account the expectations of stakeholders; Is in compliance with applicable law and consistent with international norms of behavior; Is integrated throughout the organization and practiced in its relationships. What is expressed by the European commission CSR is the responsibility of enterprises for their impacts on society. Respect for applicable legislation, and for collective agreements between social partners, is a prerequisite for meeting that responsibility. To fully meet their corporate social responsibility, enterprises should have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders, with the aim of: Maximizing the creation of shared value for their owners/shareholders and for their other stakeholders and society at large; Identifying, preventing and mitigating their possible adverse impacts. * The complexity of that process will depend on factors such as the size of the enterprise and the nature of its operations. For most small and medium-sized enterprises, especially microenterprises, the CSR process is likely to remain informal and intuitive. To maximize the creation of shared value, enterprises are encouraged to adopt a long-term, strategic approach to CSR, and to explore the opportunities for developing innovative products, services and business models that contribute to societal wellbeing and lead to higher quality and more productive jobs. CSR at least covers human rights, labor and employment practices (such as training, diversity, gender equality and employee health and well-being), environmental issues (such as biodiversity, climate change, resource efficiency, life-cycle assessment and pollution prevention), and combating bribery and corruption. Community involvement and development, the integration of disabled persons, and consumer interests, including privacy, are also part of the CSR agenda. The promotion of social and environmental responsibility through the supply-chain, and the disclosure of non-financial information, are recognised as important cross-cutting issues. The Commission has adopted a communication on EU policies and volunteering in which it acknowledges employee volunteering as an expression of CSR. In addition, the Commission promotes the three principles of good tax governance – namely transparency, exchange of information and fair tax competition – in relations between states. Enterprises are encouraged, where appropriate, also to work towards the implementation of these principles. 6 Definition of sustainability The definition of sustainability can vary: The concept of sustainability has varied over time; e. g. during the Industrial Revolution the reduction of the standard working day from 14 to 10 working hours is to be considered as socially responsible behavior. Today, working more than 8 hours in major countries would be unacceptable, unless overtime is paid. The sustainability varies according to the context. E. g. In the USA CSR is rooted in a system of incentives for companies In Europe it is more a matter of organizational responsibility. Sustainability can be explicit or implicit: Explicit because it remains at the company's choice, rather than reflecting rules put in place by governmental authority or other types of institutions. The explicit CS is the result of a voluntary and strategic decision of the company. Implicit because it consists of values and rules of conduct that companies must comply with, or that society hopes they will respect, with reference to social issues. Implicit sustainability is not a voluntary decision by companies, but rather as a reaction (or as a reflection) to the institutional environment in which the company operates. The economic result is not the only element that determines the success or failure of business strategies. The "Bottom Line" is the last line of the Income Statement, in which the operating result is reported, that is, the profit or loss relating to the year. Bottom line refers to the net income, which is the final figure on the income statement. It's calculated by subtracting total expenses from total revenue. Sustainability requires focusing on a "triple" Bottom Line: the combined set of; 1. Economic, 2. Environmental, 3. Social Results to demonstrate whether value creation is sustainable in the long term. Greenwashing It is unethical practice where companies mislead consumers by claiming to be environmentally friendly or sustainable. Greenwashing can have a bad impact on: 1. The company. It causes the loss of the consumer trust, which takes to: - Decline in sales: Consumers are less likely to buy products and services from companies that they do not trust. - Increase in customer churn: Customers who lose trust in a company are more likely to switch to a competitor. 7  - Regulatory scrutiny: Companies that are caught greenwashing may face regulatory scrutiny and fines. It increases the risk of being sued. Misleading environmental claims can end up getting company sued for the damages caused by them. Litigation is expensive, time-consuming, and resource-intensive. The process being public could generate adverse media coverage. It causes financials losses ( Loss of marketing and advertising costs; Legal costs; Loss of revenue; Penalties and damages; Increased difficulty attracting investors and partners; Higher cost of insurance). It causes damage to reputation: negative reputation can make attracting new customers, investors and partners more difficult. 2. The society. Misleading consumers about the environmental impact of products and services Hinders progress towards sustainability. Creates a sense of complacency. Distract consumers from supporting eco-friendly alternatives More than half of global consumers would change their consumption habits to reduce their environmental impact. Therefore, companies have a financial incentive to be more environmentally responsible. Many of them spend more time and money on marketing themselves as sustainable rather than minimizing their environmental impact. As a solution to eliminating their emissions, they turn to carbon offsets, supporting projects such as reforestation. Less than 5% of carbon offsets actually remove CO2 from the atmosphere. So, planting trees is only a tiny part of the solution. Companies are easily getting away by either carbon offsetting or misleading eco-labels and packaging, uncertified product compositions and vague recyclability claims. Governments are trying to take action on companies engaged in greenwashing. It's the ethical responsibility of everyone to spot, report and stop greenwashing to build a desirable future. The greenwashing palette is made of the following colors: Flora greens, Ocean blues, Earthy beige. 8 French Climate and resilience law French Climate and Resilience Law, approved on 1st January 2023, was the first law to be established as mandatory to indicate the climate impact of products in advertisements. As companies will have to label the environmental impact for customers, they will also need to include this information in advertisements. This law prohibits advertisers from declaring in an advertisement that a product or service is biodegradable or environmentally friendly without publishing the report on greenhouse gas emissions. Transgressing can be costly with a fine up to 100k€. Following the French example, the EU Commission developed further European directives as an integrated framework. European new law (17/01/2024) banned greenwashing and misleading product information. Companies can no longer market their goods using unfounded claims about their environmental impact and durability. The Greenwashing Directive aims to contribute to the EU's green transition by empowering consumers to make informed purchases using reliable sustainability information about products and traders. The Greenwashing Directive covers all sustainability claims that relate to a product, a brand, a company, or a service made in a business-to-consumer (“B2C”) context. Under the Directive, sustainability claims cover both environmental or “green” claims and so-called “social characteristic” claims. Thus, in addition to “greenwashing,” “bluewashing” issues also fall within the scope of the Greenwashing Directive. The Greenwashing Directive introduces a definition of “environmental claim” that is very broad. In particular, it states that it covers any message or representation which is not mandatory under Union law or national law, including text, pictorial, graphic or symbolic representation, in any form, including labels, brand names, company names or product names, in the context of a commercial communication; if it states or implies that a product, product category, brand or trader has: A positive impact on the environment; No impact on the environment; Is less damaging to the environment than other products, brands or traders, respectively; Has improved its impact over time, Recital 3 provides guidance on how to define claims on “social characteristics” as it states that these should be considered to have “a broad meaning including […]: - Social aspects, - Impacts, - Performance. The recital explains that the social characteristics of a product, company or service can among others relate to: 9  The quality and fairness of working conditions of the involved workforce (e.g., “no forced labor”, “fair wages”); The respect for human rights (e.g., “no child labor”, “ethically sourced”); Equal treatment and opportunities for all (e.g., “woman-owned”, Pride-related claims, DEI commitments); Contributions to social initiatives (e.g., donation campaigns); or Ethical commitments (e.g., animal welfare). The reference to animal welfare as a “social characteristic” claim is interesting, as this type of claims are already regulated for the cosmetics sector – but not other sectors such as the fashion industry or the food sector. It is likely that the claim “vegan” and similar claims will also be considered to be social characteristics claims. Concerning misleading advertising, A claim will be considered misleading if it: Contains false information; Contains correct information but it deceives or is likely to deceive the average consumer regarding, among others, the main characteristics of the product, such as its environmental or social characteristics; Advertises irrelevant benefits that do not result from any feature of the product or business. A comparative claim will be considered misleading if it is not accompanied by the information about (i) the method of comparison; (ii) the products compared; and (iii) the suppliers of those products. This may make it more difficult to make comparative environmental claims, which often are made without specifying the products compared (e.g., “more sustainable,” “better for the environment”). An environmental claim related to future environmental performance of a company or product (so-called “future claims” or “forwardlooking claims”) will be misleading if it does not include: (i) clear, objective, publicly available, and verifiable commitments set out in an implementation plan; and (ii) measurable and time-bound targets. In addition, the objectives and implementation plan should be verified by an independent third party and made available to consumers (e.g., through QR Codes or links). Concerning the prohibited practices, The Greenwashing Directive also includes a list of claims that are always “unfair,” and thus prohibited, whether misleading or not, namely: The display of “sustainability” labels that are not based on an independent, third-party certification scheme, or established by public authorities. Sustainability labels include any voluntary public or private trust mark that sets apart a product, process or business in reference to environmental or social aspects, or both. It may cover labels related to e.g., recyclability or re-use, but also labels related to e.g., forced labor, ethical sourcing and trading, or diversity and inclusion. Environmental claims that relate to an entire product or business when it actually concerns only a specific aspect of the product or specific activity of the company’s business. The use of so-called “generic” environmental claims (i.e., broad, unspecific claims that are not contained in a sustainability label) such as “green,” “environmentally-friendly,” unless these are based on recognized excellent environmental performance (e.g., under the EU Ecolabel Regulation, or under an officially recognized ISO 14024 ecolabeling scheme). The use of generic claims that 10  encompass environmental and social aspects, such as “sustainable,” “conscious,” or “responsible,” cannot be substantiated only on the basis of environmental aspects (i.e., to make these claims companies have to demonstrate that their product, service, or company has a recognized excellent environmental and social performance). In principle, this prohibition does not extend to social impact claims (e.g., “fair trade”, “ethically sourced”), but we cannot exclude that Member State authorities may consider generic social impact claims as misleading (e.g., due to lack of clarity). Green washing regulation in UK The main legislative document governing sustainable claims in the UK is the Green Claims Code. It states that: Claims must be truthful and accurate. Claims must be clear and unambiguous. Claims must not omit or hide important relevant information. Comparisons must be fair and meaningful. Claims must consider the full life cycle of the product or service. Claims must be substantiated. Green washing regulation in USA In the USA, the organization responsible for ensuring the sustainability claims are accurate is the Federal Trade Commission. Its green guidelines are the basis for the companies to follow while making green claims. The main points of these guidelines are: Supplementing qualifications and disclosures should be written, or cited in plain text and language next to the sustainability claim. An environmental marketing claim should specify whether it refers to the product, the product’s packaging, a service, or just to a portion of the product, package, or service. An environmental marketing claim should not overstate, directly or by implication, an environmental attribute or benefit. Comparative environmental marketing claims should be clear to avoid consumer confusion about the comparison. Greenhushing Greenhushing refers to a situation where a company withholds information about its environmental practices, even if they're taking some positive sustainability initiatives. Opposite to Greenwashing, which describes product services or activities that aren’t sustainable as sustainable, Greenhushing refers to the act of downplaying or suppressing a company’s genuine environmental efforts, for fear of backlash or criticism that their efforts do not go far enough. Greenhushing is not always a deliberate act with malicious intent. 11 THE STAKEHOLDER ANALYSIS An evolving definition of stakeholders Stakeholder theory was born in the 1960s and evolves according to new theories that see an ever greater inclusion of stakeholders in the value creation process. The stakeholders are defined as: Those groups without whose support the organization would cease to exist, those groups who are vital for an organization. (by the Stanford Research Institute). Groups who affect and/or could be affected by an organization’s activities, products or services and associated. (by Freeman). Stakeholders are those individuals, groups of individuals and/or organizations that affect and/or could be affected by an organization’s activities, products or services and associated performance. (by AA1000 accountability principles). Guidelines The AA1000 Accountability Principles (AA1000AP) is a framework developed by AccountAbility that helps organizations be more accountable, responsible, and sustainable. It's not a strict set of rules, but rather a set of principles that guide organizations through a process. The AccountAbility Principles are meant to guide not only the internal operations of an organisation, but also the management of its value chain, including its suppliers, business partners and customers The AA1000 AccountAbility Stakeholder Engagement Standard (2015) is the most widely applied global stakeholder engagement standard, supporting organizations to assess, design, implement and communicate an integrated approach to stakeholder engagement. 12 Stakeholder management There are 2 models of management: 1. A defensive attitude aimed at buffering the needs of stakeholders. It is short-term stakeholder management 2. A proactive attitude focused on the prevention of problems through inclusive and participatory processes in synergy with its stakeholders. It is long-term stakeholder engagement. An important part of managing the needs of stakeholders is understanding that different stakeholder groups can sometimes have conflicting interests. Purpose and scope in relation to the stakeholders management The purpose for stakeholder engagement shall be defined. The purpose shall be connected to the overall strategy and operations of the organization. Stakeholder management must have a purpose. It is essential to first think about why the organization is engaging and what needs to be achieved. No stakeholder engagement should be initiated without defining a purpose. During the engagement, the purpose should be reviewed and adjusted based on the input received from stakeholders. The purpose to analyze could be related to: 1. The strategy and operations. Stakeholder engagement takes to. Develop or improve strategy. Help identifying and addressing operational issues. 2. The ongoing activities or projects. The purpose should ensure that the organization has a good understanding of stakeholder views or to foster positive stakeholder relationships, or it may be associated with a specific project or need, such as to inform a materiality-determination process Stakeholders’ mapping Stakeholder mapping is a process of identifying the people or groups who are impacted by or can influence a project, product, or organization [!what is stakeholder mapping]. It's essentially creating a visual representation of these stakeholders to understand their interests and influence. Here are some of the benefits of stakeholder mapping: Helps identify all relevant stakeholders, including those you might have overlooked. Provides a clear understanding of each stakeholder's interests and goals. Helps you prioritize stakeholders based on their influence and interest. Informs the development of a stakeholder engagement plan. This process is made of 2 phases: 1. Phase 1: Identification The stakeholder identification process results in the construction of a "tree" in which it is possible to identify some "main" branches (first level stakeholders) and different "branching" levels (second and third level stakeholders). 2. Phase 2: Prioritization (assessment of the relevance of the stakeholders). To prioritize stakeholders in terms of relevance for the company, it is possible to refer to two aspects that characterize the relationship between the company and stakeholders: 13  Influence. So we are considering groups and individuals who can have impact on the organization’s or a stakeholder’s strategic or operational decision-making. These groups are important for the company as it is able to influence the organization's objectives, activities,and results. Dependency. So we are considering groups or individuals who are directly or indirectly dependent on the organization’s activities, products or services and associated performance, or on whom the organization is dependent in order to operate. The companies are important for the stakeholder, because of how much the stakeholder is affected by the organization's activities. 14 Identifying and preparing for engagement risks The owners of the engagement shall formally identify, assess and address engagement risks. They shall establish a robust framework for risk assessment that is coherent with the risk management approach of the organization. Types of stakeholders Stakeholders can be: Internal. Internal stakeholders are those within an organization who have a key interest in the organization's decisions (such as employees and shareholders). External. External stakeholders are ones who are outside of the organization (such as customers, suppliers and the whole community). Engaging with both internal and external stakeholders creates two-way communication that brings benefits to both companies and to each stakeholder group. THE MATERIALITY ASSESSMENT The principles The Accountability Principles are meant to guide not only the internal operations of an organization, but also the management of its value chain, including its suppliers, business partners and customers. 15 Principle of materiality The concept of "materiality" is traditionally applied in financial reports, in particular in the auditing and accounting process. In financial terms, "materiality" is defined according to international auditing standards (ISA). H ow to assess materiality 16 Materiality in the Context of an Audit Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that: Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements; Judgments about materiality are made in light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered. 17 Since 2012 SAM has been rewarding companies that: Publish a materiality matrix Indicate the processes and tools used to determine materiality. Measure the impact of sustainability actions on business performance. SAM is the official U.S. government system for entities who want to do business with the federal government. It allows companies to register, update information, and search for government contracts and grants. Why is financial materiality important for SASB? SASB stands for the Sustainability Accounting Standards Board. It's a non-profit organization that develops industry-specific standards for companies to disclose information about sustainability practices that can affect their financial performance. SASB standards focus on financial material issues because SASB’s mission is to help businesses around the world report on the sustainability topics that matter the most to their investors. Although there is much environmental, social, governance (ESG) and sustainability information disclosed publicly, often it can be difficult to identify and assess which information is most useful for making financially-related decisions. SASB identifies financially material issues, which are the issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors. Ultimately, companies decide what is financially material and what information should be disclosed, taking legal requirements into account. The SASB materiality tap is an interactive tool that identifies and compares disclosure topics (these topics refer to specific pieces of information companies or organizations are required or encouraged to reveal) across different industries and sectors. SASB identifies sustainability issues that are likely to affect the financial condition or operating performance of companies within an industry. SASB identifies 26 sustainability-related issues, or General Issues Categories, which encompass a range of disclosure topics and their associated metrics that vary by industry. 18 19 The GRI standards The GRI Standards, developed by the Global Reporting Initiative (GRI), are essentially frameworks for organizations to report on their sustainability performance. They provide a standardized way for companies to communicate their impact on the environment, society, and governance (ESG) issues. The report shall cover topics that: Reflect the reporting organization’s significant economic, environmental and social impacts, or Substantively influence the assessments and decisions of stakeholders. 20 Corporate Sustainability Reporting Directive The Corporate Sustainability Reporting Directive (CSRD) is a European Union regulation that requires companies to report on their social and environmental impact. It came into effect on January 5, 2023. Companies are to report on: Environmental protection, Social responsibility and treatment of employees, Respect for human rights, Anti-corruption and bribery, Diversity on company boards (in terms of age, gender, educational and professional background), Business model and strategy incorporating sustainability matters and the impact of 1.5° temperatures in line with Paris agreements, Targets and progress made to achieve those targets, Roles and responsibilities of management, Company’s sustainability of management, Company’s sustainability policy including due diligence, Adverse impacts connected with the value chain, Description of principal risks related to sustainability matters, Reporting in line with sustainable Finance Disclosure Regulation (SFDR) and the Eu Taxonomy Regulation. Companies will need to provide: Qualitative and quantitative information, Both forward-looking and retrospective information. Information that covers short, medium and long-term time horizons. In the reporting directive there are guidelines related to: 1. Content. This category analyzes how priority material issues are managed and disclosed in the report. 2. Strategy. Disclosure on strategic approaches to sustainability clearly articulates how an organization addresses the full range of material ESG impacts, which in turn create risks and opportunities for the organization. The strategic approach should have clear links to the overall vision and mission of the company and support the delivery of sustainable outcomes through targeted action plans. Some key recommendations are: - Explain an overarching vision and strategic approach to sustainability that clearly incorporates all material issues and integrates sustainability into corporate strategy. - Discuss the connection between sustainability and financial performance. - Describe how strategy will be executed via action plans, objectives and integration into business functions, - If the strategy is expiring, describe the next steps and what the path forward looks like. 3. Target and commitments. Targets and commitments are specific and measurable performance goals or management actions that an organization aims to achieve over a specified 21  timeframe. They are critical for delivering an organization’s strategy and demonstrating progress over time and are increasingly combined with aspirational and long-term stretch targets. Some key recommendations are: - Develop a range of verifiable short-term (operational, interim) and long-term (aspirational, stretch) targets for all material issues with clear baselines. - Ensure targets are SMART (Specific, Measurable, Achievable, Realistic and Time-bound). - Include targets that go beyond direct operations and consider upstream and downstream activities and impacts. - Incorporate context-based targets where possible, such as science-based targets for climate change, - Disclose progress against targets and narrative on forward looking plans to meet targets. Goal setting It is a necessary component for success. Goals must be SMART. A SMART goal is a goal-setting method first introduced in 1981 by George Doran, Arthur Miller, and James Cunningham. Each element of the SMART acronym plays a crucial role in adding value to a goal. To set SMART goals correctly, you need to address each of its components separately before piecing them together. Goals need to be: 1. Specific. A specific goal is a goal that is direct, detailed and meaningful. To achieve specific goals we need to consider the following questions: ▪ Why is this a goal? ▪ What do I want to achieve? ▪ When do I want to accomplish this goal? ▪ Who needs to be included to complete this goal? ▪ Where will I complete this goal? (Necessary only when a goal needs a mandated physical environment to be completed; i.e. I will run five miles on the track every day.) 2. Measurable. A measurable goal is a goal that is quantifiable to track progress or success. Goal tracking is a vital part of the goal-setting process if you’re hoping to keep teams accountable for measuring the progress, success, or failure of a goal. By identifying Key Performance Indicators (KPIs) during the early stages of goal setting, you’ll be able to measure the short- and long-term progress of your business goals over time. To achieve measurable goals, we need to consider the following questions: What metrics will I use to track this goal? 22  Are there multiple ways to measure success for this goal? What quantifiable change to the business am I hoping to achieve by accomplishing my goals? Remember, some goals take longer than others to show results, which is why choosing the right metrics matter. 3. Attainable. An attainable goal is a goal that is realistic, that means that there are the tools and/ or resources to attain it. The most compelling goals push us out of our comfort zones and encourage us to grow, but they also need to be realistic. It’s commendable if your goal is to increase ad revenue by 100% but challenging to accomplish if you don’t have the budget or time to dedicate to testing. Questions to consider when writing attainable goals: Do I have the tools and/or resources I need to complete this goal? Do I have the skill set to accomplish this goal? Is this goal possible, and if so, what is my action plan? 4. Relevant. A relevant goal is a goal that is aligned with the company’s mission. Individual and team goals should connect to the high-level business objectives to ensure employees are fully engaged in their daily work. Connecting goals to the company’s mission statement can help instill a sense of meaning and purpose into an employee’s role, as well as push the business vision forward. Questions to consider when writing relevant goals: Does the goal align with my overarching company objective? Does this goal make sense with our business plan? Will accomplishing this goal move my business forward? 5. Time-based. A time-based goal is a goal that has a deadline. Timing really is everything. Questions to consider when writing time-bound goals: When will I complete the goal? What target dates should I meet to complete the goal? Should I set this goal now or in a later quarter? SMART Goal Example Now that we’ve broken down each part of the SMART acronym, let’s see them in concert with one another. For this SMART Goal example, we’ll say our goal is to increase the number of leads we generate. How can We turn this into a SMART goal? 1. Specific — The sales and marketing team will work together to generate 30 new leads through an email nurture campaign dedicated to our prospects in the healthcare industry. 2. Measurable — We will track the number of leads closed and email engagement to measure the success of our campaign. 3. Attainable — We have an email marketing program in place and a list of our prospects readily available. 23  4. Relevant — Our goal aligns with our company mission to provide better project management software to the healthcare industry. 5. Timely — We will roll this email campaign out over a 4-week period starting on July 28th. Emails will be sent on Tuesdays, and we will continue to track the success of our emails for a 6-week period. [from slide 24 to slide 36 there are examples of sustainability plans, from the sixth power point] SUSTAINABLE DEVELOPMENT GOALS UN sustainable development goals The United Nations adopted the "Transforming our World: the 2030 Agenda for Sustainable Development" in September 2015. This agenda outlines a set of 17 Sustainable Development Goals (SDGs) that aim to address global challenges like poverty, inequality, and climate change by 2030. Why is there the need for a global agenda? To go beyond economic growth. To concretize and increase the awareness of global challenges providing an international agreement. To provide a main framework for international development cooperation. To assist in provisioning coherence. To facilitate the mobilization and allocation of resources. To monitor progress. These 17 goals are relevant for: 1. Economy. Innovation and infrastructures. Responsible consumption and production. Reduction of economic inequalities. Decent work and economic growth that is decoupled from environmental degradation. 2. Society. Eradication of poverty. Improvement of social justice, peace and health. Gender equity. 3. Biosphere. Clean water and sanitation. Climate action. Life on land. The SDGs represent the global agenda for sustainable development. They can be used as a contextual framework against which companies can report on the impacts (both positive and negative) they have on the external environment. 24 For the project: 25 Millennium development goals (MDGs) 2000 - 2015 The Millennium Development Goals (MDGs) were eight international development goals established by the United Nations in the year 2000. These goals aimed to be achieved by 2015, focusing on a wide range of issues in developing countries. The MDGs were a partial success: - Extreme global poverty was reduced by more than 50%. - Reduced gender inequity in primary school enrollment. 26  - Child mortality reduced. - Progress in preventing and treating HIV, malaria and tuberculosis. - Most of the poverty reduction has been realized in China and India. - No goals have been achieved in fragile and low income countries (South Africa and South Asia). - Improvements in income poverty do not necessarily translate into progress of other dimensions (decent work, food security, health and nutrition). SDGs are a better version of MDGs 5 Goal of the SDGs It states the importance of achieving gender equality and empowering all women and girls. It includes: End all forms of discrimination against all women and girls everywhere. Eliminate all forms of violence against all women and girls in the public and private spheres, including trafficking and sexual and other types of exploitation. Elimate all harmful practices, such as child, early and forced marriage and female genital mutilation. Recognize and value unpaid care and domestic work through the provision of public services, infrastructure and social protection policies and the promotion of shared responsibility within the household and the family as nationally appropriate. Esure women’s full and effective participation and equal opportunities for leadership at all levels of decision-making in political and public life. Ensure universal access to sexual and reproductive health and reproductive rights as agreed in accordance with the Programme of Action of the International Conference on Population and Development and the Beijing Platform and the outcome documents of their review. 27  Undertake reforms to give women equal rights to economic resources, as well as access to ownership and control over land and other forms of property,financial services, inheritance and natural resources, in accordance with national laws. Enhance the use of enabling technology, in particular information and communication technology, to promote the empowerment of women. Adopt and strengthen sound policies and enforceable legislation for the promotion of gender equality and the empowerment of all women and girls at all levels. 15 Goal of the SDGs It states the importance of the shift in humanity’s relationship with nature. The forest losses, land degradations and species extinctions represent severe threats to people and the planet. It includes: By 2020, ensure the conservation, restoration and sustainable use of terrestrial and inland freshwater ecosystems and their services, in particular forests wetlands, mountains and drylands, in line with obligations under agreements. By 202, promote the implementation of sustainable management of all types of forests, half deforestation, restore degraded forests and substantially increase afforestation and reforestation globally. by 2030, combat deforestation, restore degraded land and soil, including land affected by desertification, drought and floods, and strive to achieve a land degradation-neutral world. SDG washing “SDG washing” is an evolution of the term “green washing” originally used to describe companies that portray themselves as environmentally friendly when in reality they are not. “SDG washing” refers to companies that use the SDGs as “window dressing” to present a deceptively positive picture of their environmental and social impacts. Examples of SDG washing include communicating a one-sided story of your company’s positive contributions to the SDGs without acknowledging that, like any business, it also contributes to the very problems the SDGs seek to solve. Repacking pre-existing sustainability and CSR programs as SDG solutions can also be considered a form of SDG washing. If your company is accused of SDG washing, for example by an NGO, a campaign group, a journalist or a customer, then you risk damaging your organization's credibility, reputation and relationships. On the other hand, if your organization is seen to be honest about its impacts, and serious about changing the business to contribute to the SDGs in meaningful ways, then there is much that can be gained. Principles to communicate the company’s commitment to SDG KPMG does advocate for businesses to integrate sustainability into their operations and align with the SDGs. However, they likely wouldn't have a single, public list of eight specific communication principles. While KPMG might not have a formal list, these 8 following principles align with KPMG's overall approach to promoting businesses' engagement with the SDGs. The list of the 8 principles is composed by: 28 1. Principle 1: Show the company understand the business case for taking action on the SDGs. Without a clearly defined business case, there is a risk that your company’s action on the SDGs could be limited to philanthropic programs. While helpful in building reputation and relationships, such programs are often separate from core business. Communications around the SDGs will be far more effective and convincing if the company demonstrates that it understands the business opportunities inherent in the SDGs; for example, the opportunity to develop new products and services that help to solve global problems while generating revenues and profits for the company. The lack of an SDG business case, on the other hand, could be a missed opportunity for many companies given the huge potential market for SDG-related products and services. Communication directors can play a lead role in starting and driving the internal conversation about the business case for SDG action. That conversation would benefit from a senior champion, preferably the CEO, Chair or other board member, and should engage the company’s core functions in order to explore how the SDG’s can shape investments strategies and risk management, and generate returns to the bottom line. 2. Principle 2: Communicate from the top of the organization. Good SDG communications demonstrate leadership commitment to the SDGs as a part of the company’s long-term strategy. For example, discussing the SDG in the CEO and/ or Chair’s annual report messages gives a clear signal that the company’s action on the SDGs is driven from the very top of the organization. It is important to remember that the SDGs have a 15 year time frame from their launch in 2015 ro 2030. Achieving the goals, and reaping the business benefits of doing so, will require consistent and cumulative action over that period. Communications should therefore continue to demonstrate that the SDGs are central to the CEO and/ or Chair’s vision over the long term. Failure to maintain public commitment to the SDGs from the top of the organization could expose the company to accusations of opportunism, damage its credibility and affect relationships with strategic partners such as governments. 3. Principle 3: Take a balanced approach to communicating your company’s impact on the SDGs. Communications should clearly present both the positive and negative impacts a company has on the SDGs showing how the company is contributing to global problems, as well as helping to solve them. 4. Principle 4: Identify priority SDGs for the company. Communications should identify the specific SGs the company considers most relevant to its business and stakeholders, and on which it can have the most impact. Not all the SDGs and their underlying targets are of equal relevance to very company, sector or geography. Companies should focus their actions on the goals of which they have the greatest actual and potential impact, either positive or negative. 5. Principle 5: Explain how the company has prioritized the SDGs. Communication should explain the method or process the company has used to identify the most relevant SDGs and prioritize them for action. Doing this provides all stakeholders with a window into how comprehensively and credibly your company has evaluated the SDGs and on what basis it has selected those on which it will take action. 6. Principle 6: Identify specific targets that are relevant to your company. 29  7. Disclose KPIs for SDG performance. Communication should disclose how the company intends to measure its contributions to the SDGs and what SDG-related performance goals it is setting. Setting goals demonstrates that the company is serious about growing business value by meeting global needs. It can also strengthen relationships with business partners such as customers and suppliers. 8. Principle 8: Make sure the company’s SDG performance goals are SMART. As with any corporate target or KPI, SDG performance goals should be SMART. By putting SMART goals in place your business can: measure, monitor, and communicate its contribution to achieving the SDGs in a convincing and compelling way. For example, stating that the company aims to lift people out of poverty is not enough. You should set a target for how many people will be lifted out of poverty within what timeframe, and how success will be measured. Communication directors are the guardians of the company’s reputation and relationships. They therefore have a critical role to play in shaping their company’s approach to the SDGs rather than simply communicating it. SCENARIO ANALYSIS Scenario analysis Scenario Analysis is used to manage in uncertain times. Scenario analysis is a technique used to assess the potential impact of different future events on a project, investment, or business. It's basically a "what-if" analysis that helps you consider different possibilities and prepare for them. Every single decision in an organization is made under a certain degree of uncertainty. Often, leaders make these decisions based on anticipated events, along with corresponding best case and worst-case predictions about what might happen. Whether or not these predictions will actually come to pass is unknown at the time the a decision is made. Much research has made clear that a leader’s ability to make decisions in the face of varying degrees of uncertainty is key to overall organization success. And this type of successful decision making rarely results from a commitment to a single, inflexible solution. All decisions (business, institutions, people) are based on a set of assumptions and inputs. The lack of certainty in the premises and inputs brings about risk. But it’s not only an issue in terms of risk but also we have many opportunities. Before making an investment or taking a decision, it’s necessary to assess the magnitude of such risks and opportunities and weigh them against potential benefits. The beauty of using scenario analysis is that it doesn’t emphasize on accurately predicting the outcome. Instead, it generates several possible future events that are valid, although uncertain. There’s no question that companies benefit significantly from such an approach. Sensitivity analysis Sensitivity analysis is the process of tweaking just one input and investigating how it affects the overall model. In contrast, scenario analysis requires one to list the whole set of variables and then change the value of each input for different scenarios. For example, the best-case scenario can help one predict the outcome when there’s a decrease in interest rates, an increase in the number of customers, and favorable exchange rates. 30  Advantages of Scenario Analysis Advantages of Sensitivity Analysis It improves systems thinking. It provides an in-depth assessment. In the case of a company, a manager can Sensitivity analysis requires that every predict the likely positive and negative independent and dependent variable be outcomes that will result from implementing studied in a detailed manner. It helps to certain policies and strategies determine the association between the variables. Even better, it facilitates more accurate forecasting. It leads to an optimal allocation of It helps in fact-checking. resources. Sensitivity analysis helps companies Since scenario analysis involves forecasting determine the likelihood of success/failure future events, it helps company owners to of given variables. be aware of the external conditions that are likely to affect their operations. This, in turn, helps them to allocate resources more effectively in order to avoid negative consequences that may arise. Changes Corporate leaders have not always viewed disruption as a top business challenge but that has now changed. Executive and board members are focused on disruptive innovation as never before, recognizing it as both an opportunity for differentiation and an existential threat. Companies have stopped wondering whether it merits serious attention and are focusing instead on how to best respond. Business transformation has become the new mantra as companies adapt to the era of disruption with digital strategies, new business models and more. Responding requires a view that is simultaneously wider and more narrowly focused. What disruption leads to? Primary forces, megatrends, and the future working world are all interconnected pieces that paint a picture of how disruption will shape the way we work. Here's how they fit together: 1. Primary Forces: These are the fundamental drivers of change in the world, often acting behind the scenes. Primary forces are the root causes of disruption. They include things like: Technological advancement (think automation, artificial intelligence). Demographic shifts (aging populations, globalization of talent). Geopolitical changes. Climate change, resource scarcity. These forces aren’t new but they evolve in waves; each new wave is disruptive in different ways. For instance, we have seen several waves of technology in recent years, including personal computers, mobile, social and internet of Things. 31  Some examples of the latest waves occurring in the primary forces are: powering human augmentation (technology), gen Z rising (demographics), beyond globalization (geopolitical) exponential climate impacts (environment). 2. Megatrends: These are the large-scale, long-term consequences of these primary forces. They're the big, visible trends that are reshaping societies and economies over decades. Some megatrends related to the working world include: Rise of automation and AI: This is leading to a shift in the types of jobs needed, with some tasks becoming automated and new ones emerging. The knowledge economy: As information becomes ever more valuable, skills in critical thinking, problem-solving, and innovation will be increasingly important. Globalization of work: Technological advancements and remote work opportunities are blurring geographical boundaries, creating a more globalized workforce. 3. Future Working World: Disruption, fueled by primary forces and manifesting as megatrends, will significantly impact the way we work. Here are some potential changes: Demand for new skills: Jobs requiring creativity, adaptability, and human-centered skills like communication and collaboration will be in high demand. Rise of the gig economy and freelance work: More people might choose project-based or freelance work over traditional employment models. Focus on lifelong learning: The rapid pace of change will necessitate continuous learning and upskilling to stay relevant in the job market. The blurring of work and personal life: With technology enabling remote work, the lines between work and personal time could become more fluid. Understanding these connections allows us to anticipate the disruptions in the working world and prepare for them. By being aware of the primary forces driving change and the resulting megatrends, we can develop the skills and mindset needed to thrive in the future of work. 32 Example of COVID The world changed in March 2020. Almost overnight, the COVID-19 pandemic strained health care systems to the breaking point, put much of the global economy on an indefinite hiatus and radically reshaped societal norms and interactions. For business everywhere, these events are undermining established assumptions while catalyzing new models and approaches. 33 COVID-19 has shown that we need to be prepared for the unexpected. It has reinforced that understanding emerging issues is critical, but so too is identifying disruptive forces that have potential to significantly transform business models and spawn entirely new industries. Weak signals The weak signals are waves of primary forces whose biggest impact is farther in the future. Their likelihood and the scale and nature of their impact are, therefore, subject to a greater degree of uncertainty. Disruption can come from anywhere, at any time. Weak signals may provide advance notice. Here are some weak signals that could bring dramatic change and unlock significant new opportunities, thus earning their place on the radars of business and government leaders: Transportation drones, Space commercialization. Behavioral economy Behavioral economics recognizes that emotions, mental shortcuts, and social influences play a significant role in our choices. We are moving from the data economy to the behavioral economy. Like data, behavior is becoming quantified, standardized, packaged and traded. Using sophisticated capabilities such as behavioral economics and affective computing, companies can now measure, understand and shape behavior. Boards should: Steer management to revisit their strategies to bring the voice of the customer into the boardroom. Continue to drive a robust conversation about brand and brand promise on how we will remain relevant to tomorrow’s customers and their expectations around the role of the organization in society. 34 For the project EXTERNAL ANALYSIS The Global Risks Landscape, 2020 The Global Risks Report 2022 presents the results of the latest Global Risks Perception Survey (GRPS), followed by an analysis of key risks emanating from current economic, societal, environmental and technological tensions. The report concludes with reflections on enhancing resilience, drawing from the lessons of the last two years of the COVID-19 pandemic. The risks are classified by their likelihood, impact, risks and whether they are short-medium-long term. The Global Risks Landscape, 2023 The Global Risks Landscape report of 2023 says that said the world's economies wouldn't recover from COVID-19 equally. This could cause even bigger problems between countries when we actually need to work together to solve big issues. Nobody expected things to get so bad so quickly, especially with a new war in Europe. The risks in 2023 foreseen are: Increasing cost of living in the next 2 years. Climate action failure for the next decade. Risks of stagnation, divergence and distress. Geopolitical fragmentation will drive geoeconomic warfare and heighten the risk of multi-domain conflicts. Technology will exacerbate inequalities while risks from cybersecurity will remain a constant concern. 35  Climate mitigation and climate adaptation efforts are set up for a risky trade-off, while nature collapses. Food, fuel and cost crises exacerbate societal vulnerabilities while declining investments in human development erode future resilience. As volatility in multiple domains grows in parallel, the risk of polycrises accelerates. The Global Risks Landscape, 2024 Last year’s Global Risks Report warned of a world that would not easily rebound from continued shocks. As 2024 begins, the 19th edition of the report is set against a backdrop of rapidly accelerating technological change and economic uncertainty, as the world is plagued by a duo of dangerous crises: climate and conflict. 36 Current risk landscape: Focus on AI Extensive integration of AI may generate a gap between high and low income countries. The application of AI technologies to military objectives could threaten global stability over the next decade because the systems could act autonomously, with unpredictable impacts. Fitch Ratings ESG Sector Template Compendium Fitch Ratings has published a compendium of 100 unique ESG sector templates across analytical groups. Fitch Ratings is a credit agency that assesses the creditworthiness of countries and companies, and its ratings influence the borrowing costs of those entities. These are used by credit analysts in their assessment of each entity, transaction or program when assigning ESG Relevance scores (ESG RS). These templates assist the analysts in extracting the elements of ESG that affect fundamental credit at a sector level, helping them clearly identify and display which ESG risk elements have played a part in each entity’s credit rating decision. The templates can be used to identify ESG issues that are potentially relevant to the credit profiles of issuers in a specific sector. Fitch’s Sustainable Finance Group guided our credit analysts to identify sector-specific ESG credit issues that related to each of the General Issue categories, which are split into three broad groupings: - Environmental, - Social, - Governance. These general issues are standardized across all sectors in a particular analytical group, but different for non-Sovereign and Sovereign (including state and local government) entities. Governance General Issue categories are different for Structured Finance transactions and Covered Bond programs. For some sectors, there were one or more General Issue categories that were not material to the credit quality of entities in that sector. ENTERPRISE RISK MANAGEMENT Role of enterprise of risk management in an organization Risk management, if executed properly, can be an essential management tool in driving innovation and value creation. 37 What are the ESG-related risks? ESG-related risks are the environmental, social and governance-related risks and/or opportunities that may impact an entity. There is no universal or agreed-upon definition of ESG-related risks, which may also be referred to as sustainability, non-financial or extra-financial risks. Each entity will have its own definition based on its unique business model; internal and external environment; product or services mix; mission, vision and core values and more. 38 The purpose of this guidance is to help an entity achieve: Enhanced resilience: An entity’s medium- and long-term viability and resilience will depend on the ability to anticipate and respond to a complex and interconnected array of risks that threaten the strategy and objectives. A common language for articulating ESG-related risks: ERM identifies and assesses risks for potential impact to the strategy and business objectives. Articulating ESG-related risks in these terms brings ESG issues into mainstream processes and evaluations. Improved resource deployment: Obtaining robust information on ESG-related risks enables management to assess overall resource needs and helps optimize resource allocation. Enhanced pursuit of ESG-related opportunities: By considering both positive and negative aspects of ESGrelated risks, management can identify ESG trends that lead to new opportunities. Realized efficiencies of scale: Managing ESG-related risks centrally and alongside other entity-level risks helps to eliminate redundancies and better allocate resources to address the entity’s top risks. Improved disclosure: Improving management’s understanding of ESG-related risks can provide the transparency and disclosure investors expect and achieve compliance with jurisdictional reporting requirements. COSO’s enterprise Risk Management Framework The COSO Enterprise Risk Management (ERM) Framework is a prominent framework designed to help organizations effectively identify, assess, and manage risks. Developed by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), it provides a comprehensive approach to integrating risk management with strategy and performance. 39 This framework is made of more components: Governance & culture. This sets the foundation for effective risk management. Governance, or internal oversight, establishes the manner in which decisions are made and how these decisions are executed. Applying ERM to ESG-related risks includes raising the board and executive management’s awareness of ESG-related risks. This chapter relates to the COSO ERM Framework component on Governance and culture and the five associated principles: 1. Exercises board risk oversight: The board of directors provides oversight of the strategy and carries out governance responsibilities to support management in achieving strategy and business objectives. 2. Establishes operating structures: The organization establishes operating structures in the pursuit of strategy and business objectives. 3. Defines desired culture: The organization defines the desired behaviors that characterize the entity’s desired culture. 4. Demonstrates commitment to core values: The organization demonstrates a commitment to the entity’s core values. Attracts, develops and retains capable individuals: The organization is committed to building human capital in alignment with the strategy and business objectives. The following actions are outlined throughout the guidance to help an entity to identify and manage the ESG-related risks of today while maintaining resilience to adapt and respond to the megatrends of tomorrow. 40  Strategy & objective-setting. This connects risk management to the organization's strategic goals. All entities have impacts and dependencies on nature and society. Therefore, a strong understanding of the business context, strategy and objectives serves as the anchor to all ERM activities and the effective management of risks. Applying ERM to ESG-related risks includes examining the value creation process to understand these impacts and dependencies in the short, medium and long term. This chapter relates to the COSO ERM Framework component on Strategy and objective-setting and the four associated principles: 1. Analyzes business context: The organization considers potential effects of business context on risk profile. 2. Defines risk appetite: The organization defines risk appetite in the context of creating, preserving and realizing value. 3. Evaluates alternative strategies: The organization evaluates alternative strategies and potential impact on risk profile. 4. Formulates business objectives: The organization considers risk while establishing the business objectives at various levels that align and support strategy. The COSO ERM Framework defines risk appetite as the types and amount of risk, on a broad level, that an entity is willing to accept or reject in pursuit of value. Tolerance is defined as the boundaries of acceptable variation in performance related to achieving business objectives. Once set, risk appetite and tolerance become the boundaries for acceptable decision-making. Boards and management typically set the risk appetite for the entity when considering strategy and business context, as the two are often intertwined. The following actions are outlined throughout the guidance to help an entity to identify and manage the ESG-related risks of today while maintaining resilience to adapt and respond to the megatrends of tomorrow. 41  Performance. This component focuses on monitoring and evaluating the effectiveness of risk management practices. Performance for ESG-related risks: a. Identifies risk: Organizations use multiple approaches for identifying ESG-related risks: megatrend analysis, SWOT analysis, impacts and dependency mapping, stakeholder engagement and ESG materiality assessments. b. Assesses and prioritizes risks: Companies have limited resources, so they cannot respond equally to all risks identified across the entity. For that reason, it is necessary to assess risks for prioritization. c. Implements risk responses: How an entity responds to identified risks will ultimately determine how effectively the entity preserves or creates value over the long term. Adopting a range of innovative and collaborative approaches that consider the source of a risk as well at the cost and benefits of each approach supports the success of these responses. For what concerns the implement at risk responses, Once entities determine the approach, they implement their responses, which involve developing and executing an action plan for each risk response. At this point, the ERM process begins to influence day today business decisions to preserve and potentially create value for an entity. 42  Review & revision. Review and revision of ERM activities are critical to evaluating their effectiveness and modifying approaches as needed. Organizations can develop specific indicators to alert management of changes that need to be reflected in risk identification, assessment and response. This information is reported to a range of internal and external stakeholders. - Assesses substantial change: The organization identifies and assesses changes that may substantially affect strategy and business objectives. - Reviews risk and performance: The organization reviews entity performance and considers risk. - Pursues improvement in enterprise risk management: The organization pursues improvement of enterprise risk management. Information, communication & reporting. Applying ERM to ESG-related risks includes consulting with risk owners to identify the most appropriate information to be communicated and reported internally and externally to support risk-informed decision-making. This chapter relates to the COSO ERM Framework component on Information, communication and reporting and the three associated principles: - Leverages information technology: The organization leverages the entity’s information and technology systems to support enterprise risk management. - Communicates risk information: The organization uses communication channels to support enterprise risk management. - Reports on risk, culture and performance: The organization reports on risk, culture and performance at multiple levels and across the entity. 43 Applying the ERM framework on ESG related issues Despite the guidelines issued by COSO and WBCSD, many companies are still struggling to apply the ERM framework to manage ESG-related risks. The roles of ESG and ERM often work in silos within an organization. ESG disclosures should be integrated and align to the risks reported in an organization’s risk disclosure and business review sections of the Directors’ Report. Given the importance of this issue, we have illustrated below an ERM framework that considers ESG issues, which are embedded / integrated into the framework: 44 Difference between KPIs and KRIs SUSTAINABILITY REPORTING What is the sustainability reporting? It is a structured process that allows a company or organization to communicate its environmental, economic and social performance to its stakeholders, to illustrate its sustainability strategy, and describe its long-term improvement objectives. Sustainability reporting is a process that organizations use to: Publicly communicate their economic, environmental, and/ or social impacts, their contributions, positive or negative, and their commitments, goals, and strategies towards the goal of sustainable development. Capture the current economic, environmental, and social performance. Create corporate culture, engage all people, and contribute to creating integrated thinking Other key elements of the sustainability reporting It contains: The organization's actions and activities in relation to its mission and vision; The interactions with the entities and the context in which it operates; The performance (qualitative and quantitative) at the economic, social, and environmental levels and its positive and negative impacts; The results achieved with the goals that the organization had previously set. The standard: To report their sustainability performance, companies/organizations refer to various standards for non-financial reporting. To date, the most widely used reporting standard internationally is the GRI Sustainability Reporting Standards published in 2016 and updated in 2021 by the Global Reporting Initiative (GRI). 45  The GRI Standards define a methodology for identifying material topics to be reported in the Sustainability Report and provide a set of indicators to qualitatively and quantitatively describe the economic, environmental, and social performance and impacts of the individual company/organization. In 2021, the GRI launched the new GRI Standards 2021, the result of a lengthy public consultation process involving numerous international stakeholders. The assurance process: Among the main reasons that drive companies to subject their sustainability report to external assurance is the opportunity to increase the credibility of the information presented to their external stakeholders. The benefits of sustainability reporting The reporting process, whether it be a Non-Financial Statement or a sustainability report, is challenging and complex because it requires the involvement of many actors, but it brings benefits that go well beyond the availability of the final document and that are appreciated year after year. The Sustainability Report is the tool that allows for comprehensive communication of the organization's commitments and results, providing a well-rounded and easily understandable view to all stakeholders. Internal Awareness: Initiating data and information collection offers the company an opportunity to increase internal awareness regarding existing initiatives and lays the groundwork for a deep reflection on its business strategy all throughout the company. Compliance: Companies find themselves subject to an increasing number of laws and regulations pertaining to non-financial reporting (e.g., the European Directive 2014/95 transposed in Italy with Legislative Decree 254/2016) or specific external social pressures (e.g., the "Modern Slavery Act" in the UK). Access to Funds: Non-financial reporting is an excellent solution for communicating and attracting investors, who are increasingly aware and attentive to information transparency. Reputation and Consumer Trust: Reporting on sustainability is an effective way to enhance communication towards stakeholders, as well as to strengthen brand loyalty and improve reputation. Risk Identification: Non-financial reporting offers a company the opportunity to identify risks related to environmental, social, and governance aspects. Innovation and Cost Reduction: Reporting on sustainability allows the company to more deeply understand its internal processes and mechanisms, highlighting elements that can be subject to innovation or improvements (e.g., management and saving of energy resources). Attraction and Motivation of People: Sustainability reporting serves as a calling card for potential candidates and an internal communication tool to increase employees' sense of belonging and motivation. 46 Overview of the maturing and rapidly expanding landscape for ESG reporting To date, the most widespread and internationally recommended standards for drafting Sustainability Reports and Non-Financial Statements are represented by the GRI Standards, published in 2016 by the Global Reporting Initiative. These standards have been used in Italy for the preparation of 100% of the Non-Financial Statements pursuant to Legislative Decree 254/16. Starting from 2023, the new GRI Standards 2021 came into effect. The GRI Standards constitute an international best practice as they: Provide a framework for defining the sustainability content to be reported; Establish a set of indicators to describe the company's environmental, social, and economic performance. 47 GRI STANDARDS 2021: GR1 foundation GRI 1 Introduces the purpose and system of the GRI Standards and explains key concepts for sustainability reporting It outlines the requirements and principles for reporting in accordance with the GRI Standards: 1. Introduces the GRI reporting system and their joint use for reporting. 2. Explains the key concepts that provide a common language for reporting. 3. Specifies the requirements that organizations must fulfill to report in accordance with the Standards. 4. Specifies the principles that are fundamental to ensuring the quality of the reported information and that guide organizations in their reporting processes. 5. Presents recommendations on how to align sustainability reporting with other types of reporting and on how to enhance the credibility of the reported information. Provides guidance for the preparation of a GRI content index. There are 2 options for sustainability reporting: In accordance. With reference. 48 GRI standards: GRI 2 - General disclosures It relates to reporting practices, activities and workers; governance; strategy, policies; and practices and stakeholder engagement. It gives insight into the profile and scale of 49 organizations and provides context for understanding their impacts. GRI 3 Material Topics It provides guidance to determine material topics and explains how the GRI Sector Standards are used in this process. It contains disclosures to report information about the process for determining material topics, the list of topics and how they are managed. GRI standards 50 Non-financial reporting EU rules require large companies to publish regular report on the social and environmental impacts of their activities. Overview: EU law requires large companies to disclose certain information on the way they operate and manage social and environmental challenges. This helps investors, consumers, policy makers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business. Directive 2014/95/EU – also called the non-financial reporting directive (NFRD) – lays down the rules on disclosure of non-financial and diversity information by large companies. This directive amends the accounting directive 2013/34/EU. Companies are required to include non-financial statements in their annual reports from 2018 onwards. 51 Report features Companies must disclose a brief description of their business model, and non-financial key performance indicators relevant to the business. Information must be provided at the minimum for the following matters: Environmental, Social and employee matters, Respect for human rights, Anti-corruption and bribery matters. Companies must disclose, for each of the above four matters, the following information: A description of the group’s business model, A description of the policies pursued by the group in relation to those matters, including due diligence processes implemented. The outcomes of those policies. The principles risks related to those matters linked to the group’s operations including, where relevant and proportionate, its business relationships, products or services which are likely to cause adverse impacts in those aereas, and how the group managed those risks. Non-financial key performance indicators relevant to the business. Although materiality is not referred to as such in the Directive, it is a concept that underpins the Directive and this is reinforced in the EC Guidelines. Companies are encouraged to report on a wide range of potential issues but they need to asses which information is material, disclosing [...] information to the extent necessary for an understanding of the undertaking’s development, performance, position and impact of its activity [...] (Article 1 of the Directive). This is supported by, Recital 8 of the Directive, which states that: “the undertaking which are subject to this Directive should provide adequate information in relation to the matters that stand out as being most likely to bring about the materialization of principal risks of severe impacts, along with those that have already materialized [...]. This information shall be presented in: The management report, or, A separate report published alongside the management report or within 6 months of the balance sheet date, made available on the undertaking’s website and reference in the management report. Which may rely on: A national EU-based or international reporting framework. Context pressures - Regulators and Sustainable Development. Institutional pressure: EU Green Deal Aim: Net zero CO2e emissions by 2050 (reduce min. 55% by 2030). Economic growth decoupled from resource use. No person and place left behind. The European Green Deal Investment Plan builds on 3 dimensions: 1. Funding, through the EU budget and an innovative instrument to attract and mobilise private finance, the Invest EU Programme. 52 2. Enabling, develop tools and frameworks to direct finance to green investments, notably through the Renewed Sustainable Finance Strategy and revised State Aid Rules. 3. Executing, which consists in creating a strong pipeline of green projects by providing technical assistance for the preparation of viable projects. 53 The Evolution of Regulations in the Field of Sustainability Reporting Exemptions and Non-Eu companies Exemptions: The CSRD provides, as did the previous NFRD, for the possibility of reporting at both an individual and consolidated level. A subsidiary is exempt from the reporting obligation if it (and its subsidiaries) are included in the parent company's consolidated sustainability disclosure prepared in accordance with the CSRD. This exemption does NOT apply to subsidiaries that are large public interest entities. Non- Eu companies: Daughter companies and European branches are responsible for publishing (at the group level or consolidated) the sustainability report of a third-country company in accordance with principles applicable to companies established in the Union or principles considered to be equivalent. Such compliance must be attested by a person or company authorized to issue such attestation. Until 6 January 2030, there is the possibility to prepare an "artificial sustainability report", including all and only daughter companies and branches in the European Union (and not those in third countries). Non-EU companies fall within the scope of the Directive if: They have securities admitted to trading on regulated markets in the Union. For two consecutive fiscal years, they have had net revenues from sales and services exceeding 150 million EUR in the Union and: - A daughter company considered a "large company" in the EU or that has listed securities in the EU (except for micro companies); - A branch with net revenues exceeding 40 million euros in the Union's territory. Daughter companies and European branches are responsible for publishing (at the group or consolidated level) the sustainability report of a third-country company in accordance with principles applicable to companies established in the Union or principles considered equivalent. Such compliance must be certified by a person or company authorized to issue such certification under the national law of the third-country company or a member state. 54 The sustainability report should be freely accessible to the public through the central, commercial, or corporate registers of the member states or, alternatively, on the website of the daughter company or branch of the third-country company. If