Environmental, Social, and Governance

Retrograde analyses can drastically reduce the effort required to create meaningful and transparent sustainability reports, thus providing relief. With greenwashing, one remains dirty. "Do good and talk about it" – as the title of the work published by Georg-Volkmar Zedtwitz-Arnim suggests – is often associated with the sustainability reports published by companies. Does this mean that one should only talk about good things and better not discuss the bad? When is "good" actually good, and how should it even be talked about? Is what is good for me also good for someone else? And with whom am I actually discussing this?

Such questions, along with a lack of standards, inadequate legal requirements, changed consumer needs, and peer pressure, provide explanations for why the subject of "sustainability" is sometimes approached rather vague and why companies are led – knowingly or unknowingly – to engage in "greenwashing." Close to a Potemkin village and far from reliability, it can be suspected that such sustainability reports are numbered and that greenwashing is no longer an option.

The European Commission envisions a gradual expansion of corporate obligations starting in the 2024 financial year to report on sustainability practices in the context of the annual financial statement. A multitude of companies will be affected by the reporting obligation for the first time. These companies will be required to determine and publish non-financial metrics to create transparency and also allow for comparability with other companies. This sustainability initiative by law aims to ensure that the sustainability report, through the application of an international standard, becomes more sustainable and its paper finally holds value. In addition, the reporting contents must then be certified by external auditors, similarly to the annual financial statement report.

Everyone talks about sustainability – but do they all really mean the same thing? The terminological definition of a long-term-oriented effect or the principle that resource consumption must be less than the respective regeneration possibility, as supported by Duden, is undisputed. Corporate Social Responsibility (CSR) deals with the anchoring of sustainability in corporate actions and values to ensure corporate responsibility for society – whereby these efforts are generally of a rather ideological and qualitative nature. For the actual analysis of sustainability, the ESG approach is suitable, as it considers the dimensions of Environmental, Social, and Governance to make non-financial metrics quantitatively tangible (in terms of measurable, controllable, and comparable). Errors in dealing with sustainability, however, do have a financial impact (usually concerning the company's reputation); the treatment in risk management also requires the quantification of ESG risks.

On Risks and Side Effects

The collection, analysis, and preparation of data is challenging, as the determined values must also be valid and reliable to meet the necessary diligence expected of a prudent and conscientious manager (in terms of the Business Judgment Rule according to § 93 AktG) (keyword: "appropriate information"). The legislator places the burden of proof on the manager (§ 93 Abs. 2 Satz 2 AktG): If, for example, better interest rates are granted to a company due to a positive ESG rating, and it later turns out that the information for the metric determination was incorrect (i.e., "inappropriate"), personal liability risks for the manager may arise. Ultimately, the "executive matter" can also manifest itself concerning compliance requirements, as the diligence of a prudent and conscientious manager also includes meeting regulatory obligations (for example, for ESG reporting).

A central challenge, therefore, is to identify relevant data for ESG reporting (or potentially systematically capturing it first) and preparing it for metric determination. The "breaking down of silos" is a known problem (at least not in the cross-sectional disciplines of risk management, knowledge management, marketing, etc.).

To create meaningful and transparent sustainability reports, manually generated documents can hardly provide reliable support, as, in addition to handling a wide variety of data sources, geospatial or temporal (partial) aggregations are also required for metric determination: How many tons of waste are generated in your operations per year, and what is the composition of the waste? How many tons of CO2 does your company consume due to business travel by vehicle type and travel country?

Although tools for calculating emissions are provided for practical implementation, their actual use in practice – due to regularly required manual processing activities – is subjectively influenced, cumbersome, slow, prone to error, and thus risky and costly.

To determine valid ESG metrics (in terms of "appropriate information"), there is a need for economic analysis of relevant data sources. This includes logistical processes in an ERP system. Ultimately, this also requires that the data necessary for metric determination are available in the system.

Sustainability Report at the Push of a Button

While greenwashing approaches correspond to "sustainability at the push of a button," the charming idea entices to actually create reliable sustainability reports (at least largely) at the push of a button. A promising approach lies in the retrograde analysis of business application systems through rule-based review steps. This can identify usage focuses and deficiencies that can be found in master data, functions, and business processes. Companies can take advantage of this method for sustainability reporting by enriching the ERP system with ESG data and analyzing it based on defined ESG requirements. The rules are based on recognized standards (for example, the upcoming mandatory regulations of the European Commission; the guidelines of the International Sustainability Standards Board (ISSB), metrics of the Global Reporting Initiative (GRI), etc.) and show, based on the system data, how the company is positioned concerning the respective requirements. At the same time, such a usage analysis transparently reveals whether the necessary data for analysis are maintained in the system at all or which data still need to be maintained to subsequently determine meaningful sustainability metrics. The advantage for companies is clear, as instead of subjective surveys, robust facts are created based on higher data quality, allowing for valid decisions: On the basis of the determined meaningful ESG metrics, measures can then be defined that are intended to improve the current sustainability situation. Through the regular repetition of such an analysis, changes over time can be determined.

It is conceivable that this procedure will also be used in auditing, where the auditor conducts a retrograde analysis to determine sustainability metrics and compares them with those determined by the company. This creates a solid testing foundation along the respective standard, relieving the auditor (also in terms of reducing effort; recall the massive increase in the number of companies subject to reporting obligations). However, through the standardized process, the effort for companies is also reduced that would have to be handled in manual data collection and preparation. Thus, the EU regulatory madness felt by some can indeed contribute to compelling companies to become more sustainable, as circumventing the requirements will likely not be feasible sustainably.