Corporate social responsibility
Innovation must play a key role in meeting the challenge of climate change.
Companies’ business models need to evolve to embrace lasting value creation that benefits shareholders, stakeholders, and the wider society.
Innovation will play a critically important role in the achievement of the ambitious climate change and decarbonisation targets set by countries and corporations around the world for the next decade and beyond. But, according to Liam McKenna, lead sustainability services partner of Mazars in Ireland, innovation must go far beyond technological advances and include the application of innovative thinking to how organisations operate and conduct their business.
Liam McKenna, lead sustainability services partner of Mazars in Ireland
McKenna explains the scale of the challenge facing Irish organisations. "We are two years into the decisive decade for climate change, and we need to reduce emissions by 7.6 per cent per year over the decade," he says. "We did see a small reduction over the pandemic, but emissions are now moving up again. Innovation needs to play a key role if we are to meet the challenge. The unicorn investments of the 2020s are going to be in sustainability and not search engines or social media companies."
But technology can only go so far. "We need to be careful to not be overly reliant on magic solutions to address the issue," McKenna adds. "We need to be innovative not just in our technology but also in how we communicate and build support for personal action. Between 25 and 33 per cent of global emissions are associated with the choices individuals make. We need to find innovative ways of engaging with individuals to influence their choices."
Interestingly, the technology required to deal with climate change may already exist. "We probably have most of the technology we need," he argues. "We could choose right now to be net-zero, but we would have problems with scaling the solutions, problems with convincing people to adopt them, and problems with the vested interests who stand to lose out."
He points to the construction industry as an example of a sector that faces particular challenges in that regard. There are significant technological innovations in this industry, but there are barriers to bringing them to the world at scale. “Thankfully we have green energy and now have the ability to power the planet with it. But the challenge lies in implementing it at the scale required. That will require further innovation."
Companies understand that we have thankfully passed the passivity point when it comes to environmental, social and governance (ESG) policies
Carbon capture is another technology with lots of potential but with practical limitations at present. "A lot of people have unrealistic hopes for it," McKenna notes. "But only a tiny proportion of the atmosphere is made up of greenhouse gases. It is not currently practical to try to capture carbon efficiently from the air. However, it is practical to capture it at source at factories and so on, and then tap it down into old oil and gas fields. There is a lot of potential there. If we have the same pace of development and innovation with carbon capture as we have seen with wind power over the next decade, that could make a massive difference."
Of course, the majority of companies are not directly involved in the development of these technologies. "They will need to look at the business model and other changes," says Mark Kennedy, assurance partner and member of the Group Executive Board of Mazars International. "That includes how they manage their relationships with customers and suppliers and so on. The issue is how to remain a sustainable company, and innovation will be required for that. Companies understand that we have thankfully passed the passivity point when it comes to environmental, social and governance (ESG) policies."
Mark Kennedy, assurance partner and member of the Group Executive Board of Mazars International
McKenna believes companies now need to fully integrate ESG strategies into their business models. "Given the myriad of issues that environment, social and governance covers, organisations need to identify where they have the biggest impact and focus attention on those areas," he says. "We complete a materiality assessment to help clients do this. Once materiality is understood, it's about understanding how the organisation makes decisions and building on this to embed sustainability commitment and ESG thinking into decision making. This will impact strategy, operations, supply chains and staff policies."
This needs to be done in a way that doesn't undermine the core objectives of the business. "In doing this, we need to always acknowledge that businesses need to remain commercial and financially successful," McKenna explains. "Generally, when we have completed these projects, the clients identify commercial benefits to the actions they put in place. For example, equality, diversity and inclusion (EDI) policies cut down on recruitment costs and the operational inefficiency that comes from high staff turnover while reducing greenhouse gas emissions cuts costs for expensive inputs such as energy and packaging."
Organisations need to start acquiring and developing the skills needed to report on issues and metrics which haven't been included up until now
But there is still the challenge presented by economic growth. "We have to recognise that economies are still based on growth. We deal with clients who are doing a lot to reduce emissions but are also growing as businesses. While their carbon emission intensity is reducing, their absolute carbon footprints are actually increasing despite their efforts."
According to Kennedy, that conundrum makes clear, transparent and independently verified sustainability reporting all the more critical. "This is how businesses are going to establish their credibility about their ESG performance and communicate to stakeholders that they are acting in the right way," he says.
"We are seeing an awful lot more guidance and standards coming from both the public and private sectors in relation to this," he adds. "The EU taxonomy is already being used, the Corporate Sustainability Reporting Directive (CSRD) will become EU law this year, and the Taskforce on Climate-Related Financial Disclosures (TCFD) and the European Financial Reporting Advisory Group (EFRAG) are also doing important work.
These reporting standards take it beyond policies set by boards; companies must now report on how they implement them in practice. And this is not limited to direct impacts, Kennedy explains. "The concept of double materiality was set out by the EU in 2019. It highlights the duality of what companies do, taking impacts on society into account along with financial and economic risks. All good corporate reporting makes materiality judgements. Double materiality closes the loop with the ESG agenda."
Gathering the data and preparing these reports will require new skillsets. "Organisations need to start acquiring and developing the skills needed to report on issues and metrics which haven't been included up until now," says Kennedy. "The assurance side is also important. They need to make sure their external auditors and advisors have the skills and expertise to support them on this journey."
Boards seeking to prepare for these new requirements can get guidance from the 'Practical guide for boards and leadership teams on sustainability' report published late last year by Mazars and Ecoda – the European Confederation of Directors' Associations. "It includes a practical guide for boards and leadership teams tackling sustainability," says McKenna. "It covers issues like leadership and tone from the top, being purpose-led and stakeholder-oriented, creating a strong organisation-wide culture of sustainability, having sustainability deeply embedded throughout the business, having a learning approach, and being committed to openness in reporting."
Practical next steps to tackle sustainability
By working through this practical guide, boards and leadership teams will identify which changes will have the most significant impact and which steps they should prioritise to create a clear action plan tailored to their business. In our guide, we designed tables that provide a non-exhaustive list of potential next steps which companies may want to consider, depending on the level of maturity of their board or leadership team on sustainability. This could be a good starting point for designing a bespoke plan of action, depending on your company's specific needs and priorities.
