Don’t get washed away by the transition to sustainability

Liam McKenna, partner in in the consulting services practice in Mazars, explains why it is crucial for businesses affected to understand and promote sustainability throughout their supply chains

As Europe and the rest of the world face unprecedented heat waves, the need to address the challenges of climate change and sustainability has become evident to most people. Although the pace of change may be frustratingly slow, it is under way and starting to gain momentum.

In Ireland, we can identify three primary drivers behind sustainability strategies and plans: the government’s climate action plan, regulatory compliance (initially focused on the financial services sector but expanding with mandatory sustainability reporting), and access to capital through funds that prioritize environmental, social, and governance (ESG) strategies.

While these primary drivers may not directly impact small- and medium-sized owner-managed businesses, all businesses will be required to promote sustainability throughout their supply chains. As a result, public sector tenders have begun allocating points to sustainability, and larger corporations are demanding insight into their suppliers’ sustainability metrics and carbon emissions.

DEFINE SUSTAINABILITY STRATEGY

Businesses that do not yet consider sustainability but have larger clients will find themselves scrambling to respond to questionnaires and challenges that they do not fully understand or have the data to satisfy. It is critical that these businesses recognise the requirements and regain a balance of control in their business relationships. A foundational step in achieving this is defining a sustainability strategy.

Sustainability is an extremely broad and multifaceted concept that addresses various aspects. It encompasses environmental concerns such as water usage, pollution, and carbon emissions. Additionally, it includes social issues, including the impact on the community, fair working conditions, and diversity and inclusion initiatives. Moreover, sustainability also involves governance aspects, such as transparent reporting, oversight of sustainability efforts, and their connection to pay and bonuses.

IDENTIFYING MATERIAL ISSUES

Given the breadth of topics, no single organisation can address them all, nor is it necessary to do so. What is essential is to identify and address the material issues relevant to each organisation. Material issues for a manufacturing business will differ greatly from those of an insurer or a distribution company.

Once the material issues are identified, their current status can be assessed as a baseline, and improvement targets can be set. This process will shape the sustainability strategy, which, in turn, may drive operational changes and investments in the coming years. The materiality assessment should be of high quality to ensure the organisation does not embark on the wrong path, leading to operational disruptions and inefficient allocation of investment funds. Therefore, it is recommended that the materiality assessment involves direct engagement with key stakeholders such as clients, shareholders, staff, suppliers, executives, and the board.

❝It is wise not to delay in taking action

PLANNING IS ESSENTIAL

The introduction of the Corporate Sustainable Reporting Directive (CSRD) will require large corporates to publish audited sustainability reports from their 2024 year-end. As a result, they will request information and data from suppliers and these should be anticipated, making planning essential. From 2025 to 2028, the mandatory reporting requirements of the CSRD will extend to mid-sized companies.

At Mazars, we believe that sustainability actions need to be taken in a manner that does not undermine the commercial sustainability of an organisation. However, it is important to note that organisations that address these challenges are likely to gain a competitive edge and become more resilient. Conversely, organisations that fail to accept the challenge or provide adequate reporting, run the risk of becoming irrelevant before the end of the decade. We consider this change to be inevitable. Businesses that embrace sustainability early on will benefit by using it as a differentiating factor that can accelerate their success. Recognising the inevitability of this change, it is wise not to delay in taking action.