CSRD Strategic Planning: Why Strategy Must Precede Compliance

In our ecosystem, we can see many of our clients caught into pressure to deliver on CSRD before clarifying their strategies. While CSRD is mandatory and helping companies to 1/ clarify material issues, 2/ disclosure principles tracking how to address these material issues, and 3/ take position on governance and resources required to address these material issues, compliance shall not rule strategy. Companies should operate the other way around for the following reasons.

First and foremost, you don’t lead a business by compliance. Compliance helps to clarify the framework and level playing field where business can brisk. When it comes to sustainability, the same applies. Second, you don’t engage colleagues and stakeholders on transformation schemes through compliance. Instead,  working on strategy first helps to clarify business environment, market trends and best options to leverage sustainability addressing risks and opportunities. An outcome of a double materiality shall come later to further one’s priorities and clarify levers and hurdles to factor into the strategy implementation.

Working the other way around is doom to generate frustration and be caught into unnecessary waste of resources. CSRD can encourage to explore 1000+ data points and some may be more relevant than others. CSRD may force to think within the framework of a limited number of themes where every business has to explore sustainability beyond in view of its unique business profile.

We obviously support CSRD at Ksapa – we are actively working with several clients on double materiality projects and subsequent implications. Yet that’s indeed because we are working on CSRD that we also encourage clients to think strategically to navigate compliance rather than the other way around. Here’s a brief explanation why.

What is the difference between sustainability strategy and sustainability compliance?

Sustainability strategy and sustainability compliance are two distinct but interconnected concepts within the broader framework of sustainability management.

1. Sustainability Strategy:

• Focus: Sustainability strategy involves proactively planning and implementing initiatives to address environmental, social, and economic challenges while meeting the needs of the present without compromising the ability of future generations to meet their own needs.

• Goal: The goal of a sustainability strategy is to create long-term value for both the organization and its stakeholders by integrating sustainable practices into its core business operations.

• Approach: Organizations develop sustainability strategies to drive innovation, reduce costs, manage risks, enhance reputation, and capitalize on emerging market opportunities related to sustainability.

2. Sustainability Compliance:

• Focus: Sustainability compliance, on the other hand, refers to adhering to regulations, standards, and guidelines related to environmental, social, and governance (ESG) issues.

• Goal: The primary goal of sustainability compliance is to ensure that organizations operate in accordance with applicable laws, regulations, industry standards, and best practices in areas such as environmental protection, labor practices, human rights, and ethical business conduct.

• Approach: Compliance involves monitoring and assessing the organization’s activities, processes, and products to ensure they meet legal requirements and industry standards. It often involves reporting on environmental, social, and governance performance, conducting audits, and implementing corrective actions when necessary.

In essence, sustainability strategy focuses on the proactive pursuit of sustainability goals aligned with the organization’s values and objectives, while sustainability compliance ensures that the organization meets its legal and ethical obligations related to sustainability. While they have different emphases, they are both essential components of effective sustainability management.

Why it makes sense to work on sustainability strategy before addressing sustainability compliance?

Working on sustainability strategy before addressing sustainability compliance makes sense for several reasons:

• Strategic Alignment: Developing a sustainability strategy allows an organization to align its sustainability efforts with its overall business strategy and long-term objectives. By first identifying sustainability goals and priorities, the organization can then ensure that compliance efforts are strategically integrated into its broader mission and values.

• Proactive Approach: Sustainability strategy involves taking a proactive approach to identifying and addressing sustainability challenges and opportunities. By focusing on strategy first, organizations can anticipate future regulatory requirements, stakeholder expectations, and market trends, enabling them to stay ahead of compliance obligations and potentially gain a competitive advantage.

• Innovation and Efficiency: Developing a sustainability strategy often involves innovation and the implementation of new processes, technologies, and business models to improve environmental and social performance. By prioritizing strategy, organizations can explore opportunities for cost savings, resource efficiency, and revenue generation through sustainable practices, which may ultimately make compliance efforts more effective and efficient.

• Stakeholder Engagement: Sustainability strategy typically involves engaging with stakeholders, including employees, customers, investors, and communities, to understand their concerns and expectations regarding sustainability. By involving stakeholders in the development of the strategy, organizations can build support and commitment for sustainability initiatives, making compliance efforts more successful in the long run.

• Risk Management: Addressing sustainability risks is a fundamental aspect of sustainability strategy. By conducting comprehensive risk assessments and developing mitigation plans as part of the strategy, organizations can proactively manage environmental, social, and governance risks, reducing the likelihood of non-compliance and associated negative impacts on reputation, finances, and operations.

Overall, working on sustainability strategy before addressing compliance helps organizations establish a strong foundation for their sustainability efforts, ensuring that compliance activities are integrated into broader strategic objectives and aligned with stakeholder expectations, while also fostering innovation, efficiency, and risk management.

What are the risks of working on sustainability strategy before sustainability compliance?

While there are several benefits to working on sustainability strategy before addressing sustainability compliance, there are also risks associated with this approach:

• Non-Compliance: Focusing solely on sustainability strategy without considering compliance requirements may result in overlooking or underestimating legal obligations and regulatory constraints. This can lead to unintentional non-compliance with environmental, social, and governance (ESG) regulations, exposing the organization to legal liabilities, fines, and reputational damage.

• Reputational Damage: If stakeholders perceive that an organization’s sustainability efforts are primarily focused on strategy without tangible actions to ensure compliance, it may lead to skepticism, criticism, and reputational damage. This can erode trust among customers, investors, employees, and communities, undermining the organization’s credibility and long-term sustainability goals.

• Financial Risks: Ignoring compliance requirements in favor of pursuing sustainability strategy may result in unexpected costs associated with fines, penalties, legal fees, and remediation efforts to address non-compliance issues. Failure to adequately manage compliance risks can also impact access to capital, insurance premiums, and investment opportunities, affecting the organization’s financial performance and stability.

• Operational Disruptions: Non-compliance with regulatory requirements can disrupt business operations, leading to production delays, supply chain disruptions, project cancellations, and regulatory interventions. This can result in loss of productivity, revenue, and market share, as well as damage to relationships with suppliers, customers, and partners.

• Loss of Stakeholder Trust: Stakeholders, including customers, investors, employees, and communities, expect organizations to demonstrate a commitment to sustainability through both strategic initiatives and compliance with relevant laws and regulations. Failing to meet compliance obligations can undermine stakeholder trust and confidence in the organization’s ability to effectively manage environmental, social, and governance risks, leading to increased scrutiny, activism, and stakeholder backlash.

• Missed Opportunities: Delaying compliance efforts while focusing on sustainability strategy may cause organizations to miss out on opportunities to leverage sustainability as a source of competitive advantage. Compliance with ESG standards and regulations can open doors to new markets, attract socially responsible investors, enhance brand reputation, and foster innovation, all of which contribute to long-term business success.

Overall, while working on sustainability strategy before addressing compliance can offer strategic benefits, organizations must carefully balance their sustainability aspirations with their legal and regulatory obligations to mitigate the risks associated with non-compliance. Integrating compliance considerations into the strategic planning process can help organizations effectively manage sustainability risks and achieve their sustainability goals while remaining compliant with relevant laws and regulations. CSRD puts great emphasize on governance and resources expected to be provisioned to address risks. When strategy is clarified first, there is greater alignment and business case to manage trade offs and properly resource where strategy drives compliance. Not the other way around.