We all know what happens when there are too many cooks in the kitchen. But what happens when there aren’t enough? And all the sous chefs majored in economics or early English literature? That’s what it feels like right now to businesses confronting looming deadlines for a host of new sustainability-related compliance and reporting requirements.
As 2024 quickly draws to a close, businesses around the world are scrambling to get their houses in order. Whether it’s the Corporate Sustainability Reporting Directive (CSRD), the EU Deforestation Regulation (EUDR), or the global sustainability reporting standards introduced by the International Financial Reporting Standards’ International Sustainability Standards Board, some of those big reporting compliance deadlines everyone’s been anticipating – and it some cases, fearing – for so long are about to become reality.
As many companies are currently finding out the hard way, the subject matter expertise they need to meet those requirements is simply not available to them in-house. According to a recent Manpower Group survey, some 94% of companies say they do not have the talent needed to implement their environmental, social, and governance (ESG) needs. Unfortunately, the more businesses try to lean on their existing staff to take on new and unfamiliar sustainability-related responsibilities and make them part of their existing jobs, the foggier and less defined their roles and assignments can become.
Connecting the Dots
Aligning all of the skillsets needed for this transition is not as simple as carrying out a LinkedIn search. Companies must first define their overall sustainability strategic objectives, identify where the specific pain points are going to be in their sustainability compliance journeys, and try to find the right candidates to address those gaps. In some cases, that also means finding leaders who can spearhead and drive the company’s overall approach to sustainability – a role that requires being able to collaborate and work across a wide variety of functions.
For many companies, one of the biggest challenges they will encounter on that sustainability journey is data collection and management. The only true way to navigate these new reporting requirements is to ensure that everything undertaken in the service of compliance is informed and backed by concrete, financial reporting grade data with a harmonized approach for each jurisdiction in which a company operates. While there is no denying that data has been one of the mega trends of the decade, the expertise needed to make sense of these multi-faceted, global reporting requirements is a specific skill set unto itself, and companies seem to know it. According to a survey we conducted at Enhesa, which asked more than 900 senior corporate leaders about their biggest ESG and sustainability compliance challenges, data was consistently mentioned as a top concern.
Additionally, these new sustainability reporting requirements demand that companies be able to assess a wide array of impacts, risks, and opportunities across their value chains – details that require them to be able to access information across departments, regions, and supplier and vendor relationships. Simply hiring a Chief Sustainability Officer (CSO) or assigning additional tasks to a Chief Risk Officer (CRO) or Chief Financial Officer (CFO) will not cut it. Companies need people who are both empowered to work across functions and are adept at managing critical relationships between the various different disciplines that are captured under the wide umbrella of sustainability – and of course, they need to have the required subject matter knowledge.
According to Deloitte’s 2024 Sustainability Action report, the share of companies that now have CSOs who are responsible for ESG disclosure has risen from 42% in December of 2022 to 55%, but 47% still rely on CFOs for those duties. An active CFO may have the necessary skills to take on this added workload, but many are not going to have the bandwidth or the specialist knowledge to deal with all the complexities and nuances needed to ensure a company’s compliance with new, multi-jurisdictional, mandatory sustainability disclosure requirements.
What’s more, a recent global survey from the HR Policy Association found that the boards of directors that should be directing traffic on these ESG-related matters are often in the dark. Only 29% of board members that were surveyed said they have sufficient knowledge to effectively challenge management on sustainability plans and ambitions or exercise oversight on the execution of these initiatives. These findings echo a survey of Fortune 500 U.S. and European boards of directors, which found that “a shocking majority of those companies are lagging in sustainability expertise.”
The businesses making the most successful transitions to this new regulatory landscape will have a specific point person with true social, environmental governance, risk, and legal experience identified by a board that understands the global nuances of sustainability needed to pull it all together.
And what about the regulators overseeing it all? They, too, are encountering a resource problem. Even the esteemed European Financial Reporting Advisory Group (EFRAG), the organization appointed to develop the European Sustainability Reporting Standards (ESRS), faced well-publicized challenges acquiring the talent it needed to draft these foundational standards. In the UK, a recent House of Lords Industry and Regulators Committee report expressed concern that a number of regulators “appear not to have sufficient resources to carry out their existing functions effectively.”
While the business leaders now wrestling with implementation of these standards may not look sympathetically on the plight of the NGOs and regulators who developed them, that does not change the fact that they now need to figure out a way to comply.
The Risks Ahead
As companies try to find their footing and define their sustainability compliance workflows, they’ll need to be deliberate about how they assign these responsibilities. Regulators have warned that financial reporting and sustainability skills are both necessary, and firms need to be cautious about promising to meet sustainability goals before they have people to support those efforts.
While that may tempt some companies to lean on third parties to help in these roles, they must be careful not to become over reliant on them, both from cost perspective and when it comes to building the knowledge base and expertise necessary to keep delivering on the ever-evolving demands of sustainability compliance. The right partner can help companies develop a sound sustainability infrastructure, but it will be incumbent on businesses themselves to make sure that they have these vital compliance roles allocated to the right people. As the risks associated with non-compliance start to inch closer, the stakes will soon get even higher. It’s time for companies to choose their people wisely.