From Consultant to Probation Officer

1 - Sustainability Becomes a Sustainable Competitive Advantage

A Sustainable Competitive Advantage as described by Porter does not view "sustainability" in ecological or social terms but sees it as a company's ability to be successful sustainably - in the long term. This can even have legal consequences, but more on that later.

The handling of the topic of "sustainability" has now become a critically successful factor and also a competitive advantage, as the demands of various stakeholders have fundamentally changed. To list just a few examples:

Customers
Consumers take "sustainable products" into account in their purchasing decisions with transparency regarding the materials used and their origin. Furthermore, the avoidance of waste or the use of recyclable packaging is particularly emphasized.

Suppliers
Since suppliers also influence the sustainability of their own company, interest in the sustainability of companies in both the upstream and downstream supply chains is increasing (keyword: Product Carbon Footprint).

Employees
Sustainable companies with a noticeable external perception are more attractive to the labor market and can score points in the "War for Talents."

Banks
Banks are more restrictive in their lending decisions regarding sustainability criteria for investment. This can lead to investments (e.g., in high-emission machines) failing or demonstrably sustainable companies receiving better credit conditions.

Legislators
The legislator requires consideration of sustainability aspects in business decisions; at the same time, companies are required by regulatory requirements to be transparent. Considerations on partial aspects related to sustainability are therefore no longer sufficient: Rather, a holistic and strategic rethink is necessary to transform the company into a measurably sustainable enterprise.

The sustainable transformation, along with the increased responsibilities (especially related to sustainability reporting), presents a high advisory potential, as the uncertainties within companies are enormous.

The consultant can provide valuable support here by establishing facts regarding the status quo and deriving next steps based on that. What regulatory requirements are in place now, and what does this mean for the consulting industry and the associated market potential?

2 - Same Customer, Different Business?

The European Commission is expanding reporting obligations concerning sustainability through the Corporate Sustainability Reporting Directive (CSRD). Consequently, the affected companies must publish standardized key performance indicators in their management report. These obligations will apply from the 2024 financial year to capital market-oriented companies as well as to companies with more than 250 employees, a total balance sheet of over 20 million euros, and/or a turnover of over 40 million euros.

Approximately 15,000 companies in Germany and around 50,000 companies in Europe will be affected. Additionally, the sustainability report that needs to be published must also be assessed for content by external auditors as part of the annual audit.

The consulting market thus consists of companies subject to the reporting obligations. However, there will also be a need for support in the auditing process to efficiently handle these audits. The content that needs to be published in the sustainability report is preceded by a materiality analysis. The key performance indicators to be determined relate to the topic areas of Environment, Social, and Governance (ESG). At the same time, the EU sustainability standards require that ESG risks be given adequate consideration. In this context, the principle of double materiality is essential: What do sustainability risks mean for the company ("Outside-In Perspective") and also the reciprocal perspective: What does the company’s behavior mean for the environment ("Inside-Out Perspective")?

The binding nature of sustainability reporting thus rises to the level of financial reporting or, in other words: Greenwashing is now on the same level as balance sheet fraud!

One can certainly ask what consultants and probation officers might have in common? The same clientele, because:

“Anyone who is fined with imprisonment of up to three years or a monetary fine is punished if […] as a member of the management or supervisory board of a corporation, they misrepresent or conceal the circumstances of the corporation in the opening balance sheet, in the annual financial statements, or in the management report including the non-financial declaration […]” (§ 331 Abs. 1 Nr. 1 HGB).

3 - What Are the Challenges?

Current studies show that the challenges for companies to meet the requirements of the legislator are enormous. A central aspect for companies subject to reporting obligations is the collection of qualitative and reliable data as well as their processing and analysis. This is further complicated, among other factors, by:

// the tight timeline (the sustainability report for the 2024 fiscal year requires that the necessary data be collected in the 2024 fiscal year),

// new roles and responsibilities to be created, and

// resources and competencies to be built within the company.

The liability question and the required content-oriented audit from the auditor increase the pressure further on the companies.

Ultimately, the data required is the key to the success of all efforts, as inadequate data quality is reflected in the quality and thus also the reliability of the sustainability report.

4 - But Where to Get the Data?

A comparatively "simple" way to acquire ESG data lies in the analysis of financial documents (e.g., incoming invoice documents) and their further processing using familiar spreadsheet software to calculate greenhouse gas emissions. However, closer examination reveals that

// the leading unit is not euro or dollar but kilowatt-hours, tons, or liters;

// a multitude of different data sources are required;

// manual processing activities are subjectively influenced, slow, and error-prone, and when considering the necessary binding nature: risky and expensive!

The Enterprise Resource Planning (ERP) system of a company serves as its central software-based control system and ideally integrates all core business/logistical processes. Therefore, the ERP system of a company is the data source for sustainability reporting or predisposed to become one. In reality, however, these data are not yet fully available in the ERP system, as many of these data points were not previously relevant for business activities.

To tackle the problem at its root, the company's ERP system must be configured in such a way that all necessary data can or must be collected during the work process. For example, the collection of transport documents must also include information about the weight of the goods, means of transport, transport service providers, and distance information. This data is needed to determine the emissions during the transport of goods to the customer, and it becomes clear that relying solely on invoice analysis is not sufficient. The support potential of an ESG consultant extends much further. Besides expertise regarding ESG regulation, in-depth knowledge of systems and processes is also required. The ESG Preparation Analysis by IBIS provides support in this area.

5 - IBIS Helps with Data Availability and Quality

By employing the ESG Preparation Analysis, the data quality in the SAP ERP system of the company is compared with the requirements of the ESG standards. This shows how the company is positioned regarding the respective requirements. At the same time, such a usage analysis transparently reveals whether the data required for the analysis is actually maintained in the system or which data still need to be maintained to derive meaningful sustainability key figures. The individual analysis areas focusing on the examination of ESG data availability and quality include:

Organizational Structure
Overview analysis of overarching aspects, e.g., business activities in different countries with different stakeholders. 

Material Flow Analysis
Where are which materials purchased? How are materials processed within the company, and where are processed materials delivered?

Energy
What energy is purchased, and how is it used within the company? How are resources assigned to specific business processes?

Waste
How does the company manage waste and hazardous materials in the disposal environment?

Water
Where in the company is water or water-relevant materials used? Is data maintained that allows for geospecific allocation?

Packaging
Are packaging materials being used, and in which processes? Are units such as weight/volume maintained?

Transport
How are finished products and goods transported to the customer? Are there transport documents for the deliveries, and do the transport documents contain ESG-relevant information (e.g., regarding distances, transport weight, means of transport, etc.)?

Fleet
Does the company operate a fleet? Are ESG-relevant data (e.g., type of fuel, vehicle category) maintained?

Business Trips
Are there business trips, and are ESG-relevant data about them maintained correctly? Where do employees travel from and to? Which modes of transport are used?

Employees
To what extent are the employee master data maintained concerning sustainability requirements?

Accident and Safety Management
Are data on workplace accidents and safety aspects maintained?

The ESG Preparation Analysis Summarized

With the analysis as a starting point, a valid status quo is established for further consulting projects, which can then be addressed successively. By parametrically adjusting system processes, transforming companies can benefit not only in the short term but sustainably (in the sense of long-lasting).

The improved availability of data and their quality now allows the company to create a valid sustainability report. Valid data availability and quality are in any case the prerequisite for the subsequent use of reporting tools (e.g., SAP Sustainability Control Tower or similar), as the quality of the report is contingent upon the quality of the data included. The Garbage-In/Garbage-Out effect should be well known.

The alignment of the SAP system and ESG standards results in a reliable response regarding the status quo and the next actionable items for consultants and clients. The ESG Preparation Analysis is so to speak a rock in the storm of regulatory dynamics. It serves as a foundation to expand consulting in terms of thoroughness, quality, and speed and supports the transition into the new era of Smart Consulting.

This mitigates the risk of an inadvertently incorrect presentation, thereby sparing the consultant the undesirable path to becoming a probation officer.