The consequences of climate change and increased transparency of supply chains, diversity, equality and inclusion have led to changes in customer and employee demands, investor caution, and a significant increase in the level of legislation in the field of sustainable development against the background of European and international agreements such as the European Green Deal or the Paris Agreement . In other words, companies face enormous pressure to act in a sustainable manner and comply with increasingly stringent regulations. However, it appears that little is still being done substantively to meet ESG criteria. Could it be a gap between intentions and reality?

Clearly, a sustainable business is not only important for the planet and society, sustainability creates value and improves a company’s reputation, ensuring long-term profitability. But developing a sustainable business often requires difficult trade-offs: investors see the benefits of action but are unwilling to accept lower returns, and customers push companies to change but don’t want to give up convenience and low prices.

As a result, companies and investors must find the right balance between short-term performance requirements and the actions required to achieve long-term goals. This requires four steps: setting sustainability goals while complying with legal and regulatory requirements, creating your own vision for ESG actions, building trust among stakeholders through transparent reporting and relevant metrics, and investing in technologies that impact climate change.

Although making a real commitment to sustainability is difficult, there are huge opportunities, from the potential to enter emerging (or as yet unknown) markets to attracting customers, employees and investors. Managers need to do a better job of explaining why sustainability must be prioritized for the company’s long-term competitiveness.

Companies’ desire to invest in such strategies is growing, and investors’ approach to ESG is becoming more sophisticated as their understanding deepens and regulators increase scrutiny of the data and information that underpin ESG strategies.

Therefore, all companies face a serious challenge: how to navigate the strategies and regulations and create a sustainable business model for the new era of ESG-oriented investing.

Achieving this goal will mean long-term strategic decision-making, transparent reporting that reflects the challenges companies face in managing their ESG goals, and a clear roadmap for fulfilling companies’ sustainability commitments. Furthermore, the development of a sustainability strategy goes beyond simply reducing carbon emissions and achieving a net zero goal, involving social elements such as diversity, equity and inclusion, employee well-being, social responsibility and ethical supply chains, but also good corporate governance and accountability. clear responsibilities in the direction of sustainable business.

CEOs will therefore have to integrate sustainability into the overall business strategy and operational decisions, and at the same time establish measurable KPIs in this direction that they can monitor and put into practice.

In addition, reporting on the strategic and financial implications of sustainable development will become mandatory with new reporting standards set by the European Union, in particular the CSRD Directive. Published in December 2022, starting from the 2024 financial year, the directive applies to around 50,000 companies registered in the EU or with significant activities in the EU, regardless of where they are located, requiring them to report more information about their sustainability performance development than any other regulation. And investors support these rules because they will lead to more coherent and consistent sustainability reporting.

Investors want more robust and reliable data to understand how risk and opportunity management affects the assumptions underlying financial statements. They generally agree that ESG should be integrated directly into companies’ strategies and that even increased investment spending should be considered to address issues related to their business.

According to the latest PwC Global Investors Survey 2023 report, to make a decision, investors turn to information from various sources, documents or reports made by companies or third parties. However, the PwC survey suggests that some of these sources may be more reliable than others. Financial reports, which have a higher degree of standardization and integration into the official flow, are among the most used, while sustainability reports are among the least reliable sources of information published by companies. 94% of investors believe that corporate sustainability performance reports contain at least some statements that cannot be objectively evaluated or are not substantiated, more than last year.

To be relevant, reporting must be transparent, reflect the challenges facing companies, and clearly present a strategy for meeting sustainability commitments. In addition to interest in reporting that reflects the impact of sustainability on financial performance (external reporting), 75% of investors wanted to know what impact a company has on the environment or society (internal reporting), a significant increase from 60% in 2022. And in this case, the assessment is difficult and will require a lot of attention from the company’s managers.

European or global regulations will mean a big effort for companies to collect data from which to derive sustainability indicators for specific activities and even define or create new reporting systems that approach the level of trust we see in the case of financial reporting.

However, companies that succeed are expected to have an advantage: 69% of respondents said they would increase their investment in companies that successfully manage sustainability issues related to business performance and prospects. Almost as many (67%) said they would increase their investment in companies that change their business behavior to have a positive impact on society or the environment.

Diminished investment and financing opportunities, successful closing of a transaction, loss of customers or even liability cases at the company’s management level are just some of the risks that companies may face in the absence of a proper ESG strategy.

In conclusion, it is necessary that company managers pay close attention to the creation and monitoring of a sustainable development strategy. It is they who must take responsibility for the implementation of environmental, social and management factors. In the context of the business requirements of the future, it is becoming clear that profit is no longer the only relevant indicator to maintain competitiveness in the market. Approaching sustainable development not only reflects a company’s ethical commitment, but is increasingly important to meet the increasingly high expectations of consumers, investors and the workforce. Thus, executives who adopt and implement a sound sustainability strategy and a high level of transparency through proper ESG reporting will successfully position companies to meet the challenges of the future and promote sustainable and responsible development in the economic landscape.

This article is part of PwC Romania’s Agenda for Tomorrow editorial project, which will run until the end of this year and aims to discuss the context and perspectives that can guide companies to make informed decisions in the midst of change. Previous articles of the series can be read here.

The article was signed by Monika Movilianu, Partner PwC Romania, Sorin Petre, Partner PwC Romania and Ana Maria Iordake, Partner D&B David si Baias

Article supported by PwC Romania