Sustainability is here to stay

By introducing the Corporate Sustainability Reporting Directive (CSRD), the European Union has succeeded in advancing the topic of sustainability considerably: Its „Berichtspflicht“ (i.e. reporting obligation) forces companies to present concrete figures about their ecological, economical and social commitment. Carmen Auer and Viola Möller, both heading the sustainability services department, and Frank Wiethoff, Director Management Advisory, discuss how auditing companies can support other businesses in meeting these many new challenges.

The CSRD – initiated by the EU in April 2021 – has already caused many debates. 50,000 companies that are part of the European market will be obligated to issue their reports from the fiscal year 2025 onwards. In Germany alone, their number will rise from 500 to 1.500. The economy’s outcry must have been deafening, right?

Carmen Auer: That could have been expected, yes. The actual outcry in 2021 was rather low, though, because many companies didn’t realise until much later that they would be regulated – and many of the very extensive demands were not published yet. So the outcry happens only now, with a bit of a delay. And there are still quite a number of organisations that only now realise what is waiting for them. You also have to add, though, that many companies have understood that sustainability is a very important subject for them and have already initiated some measures accordingly. They believe that this development is a chance for them and obviously, they want to use this chance.

So there’s more proactive measures than reluctance and unwillingness?

Frank Wiethoff: The pressure is on – and it’s coming from several directions at once. Whether it’s the capital market, the regulations or the consumers: there are quite some expectations that have an effect on the big companies. It is exactly those companies that have many employees who could help work on everything that is connected to the reporting obligation. Nevertheless, those companies face enormous costs as some of them have to completely rethink their business models. Theoretically at least, they’d have to build relationships with new suppliers while letting other suppliers go, thereby interrupting supply chains and building up new chains from scratch. All of this would make their whole production stop for a while. This is why many companies believe – and reasonably so – that everything should happen in a slower pace, one thing after another. This is going to be a gigantic process, started by the reporting obligation, and it will have many more and many more extensive consequences than the digitalisation.

Viola Möller: In addition to all of this, we have to remember that the topic of sustainability is not a new one for these big players. Some have already been obligated to present a report for quite some time and they have investors that are very keen on this topic and have been focusing on it for more than a decade. Even those companies will have to put in a bit of work, but they obviously have a different starting position. The main challenge awaits the many stock corporations that will suddenly become obligated to issue a report – even those that that are not originally obligated to issue said report: Many clients will want to know now where the raw materials are coming from, whether the suppliers are paying their employees enough money and which kind of electricity is used in their plants. And if all these pieces of information cannot be provided or if they are thought to not be compatible, then the clients might decide to drop them. All of this puts quite a lot of pressure on the companies – much more pressure than the mere introduction of the obligation to report ever could create.

Carmen Auer: The EU’s main aim has been very clear from the beginning: It is not about writing and publishing a report that only a rather small number of people will possibly read. The main aim is to make companies deal with sustainability and to force them to rethink their business model and thereby to start transforming the whole economy.

What do you believe to be the biggest chances of a more sustainable economy?

Viola Möller: This obviously depends on the respective business model. Though, even the biggest and most vocal critics of sustainability need to understand that their employees will desert them, if they are not active in this field – or perhaps they just don’t get any applications anymore. In Germany, we already get a taste of that; we do not have a sufficient number of workers. And a big salary might just not be enough. Most applicants want to see an added value of their work, they expect a better work-life-balance and are looking for the bigger sense in what they are doing. This does not only apply to start-ups only, but also to general companies.  

Carmen Auer: The financing is also an important factor to consider. If sustainability standards are not being considered, some banks might refuse to grant credits or grant them with worse conditions only.

What consequences are the companies faced with if they do not fulfill their obligation to publish a report?

Carmen Auer: It is not completely clear yet whether that might result in a fine for the respective company. The directive has not been made into a German law yet. In addition to the obligation to report, there is also an auditing obligation, though – and the auditing certificate might contain some notes on the company’s failure to issue a report. Scientists, NGOs and the press will be quick to look there in order to find out whether everything’s been made transparent or whether there are any signs of greenwashing. All of this would lead to a massive loss of reputation and credibility, which would be much worse for business than any kind of fine.

You’ve even created your own approach, supporting your clients with a strategic schedule.

Frank Wiethoff: Yes, that is correct – it is basically an electronic checklist. The client answers a few specific questions and the software then analyses them and rates the company’s level of maturity, while also showing which regulations will be relevant at which point of time and which steps need to be taken to meet all requirements. Our checklist is mainly relevant for those small and medium-sized companies that do not have the HR resources that are necessary and that act in a more reactive way – in contrast to all the big capital market-oriented companies that are quite close to the regulators anyway and which are following the development rather closely.

Mrs. Möller, you’ve once said that - with regard to sustainability – it is not about perfection, but about progress. What exactly do you mean by that?

Viola Möller: My experiences from the last ten or fifteen years tell me that it is much more promising to go step by step when trying to get closer to a specific aim. If I did a marathon or were into high jumping, then I wouldn’t start by running 42 kilometres or putting the high jump bar at 2,5 metres right away, would I? It’s just the same with the new sustainability regulations, with the Supply Chain Act and the EU taxonomy – we are talking several thousand pages of regulatory text. If we take all those pages and just put them on the table and tell somebody: just do it exactly as it says here… then this person will almost certainly take on a defensive attitude and rightly so. Using this confrontative approach, nothing at all will change. From my experience, it is much wiser to try and work out what might be relevant for one’s own company first and then keep going one step at a time, instead of just being overwhelmed by everything and getting into a state of shock.

Carmen Auer: And the Federal Office of Economics and Export Control that is responsible for controlling the Supply Chain Act knows that it is not possible to change everything about the supply chains overnight and at once. It is about creating more transparency, gradually increasing the risk analyses and entering into a dialogue with the suppliers.

Why is BDO such a perfect fit as a partner to take on these challenges?

Viola Möller: We are able to cover a very broad range of clients. We have a lot of experience with big companies, but we are also able to adapt to the needs of smaller clients. In addition to that, we have every kind of expertise that might be needed with regard to ESG: our teams are made up of environmental scientists, security engineers, but also graduates of the “classic” economics courses. This is how we can cover a variety of topics, from the calculation of CO2 emissions, the risk analysis with regard to human rights, or the creation of an auditable sustainability report.

How did your work and your self-perception as an auditing company change due to the CSRD?

Frank Wiethoff: You mustn’t forget that we at BDO do not just audit, but we also consult. We support the companies, we ask the right questions and know the right answers: What is the current market situation? What is the goal? How can we get there? And how can we support the company in getting there? We can help them in every aspect of this transformation process.

Viola Möller: I agree – I believe that we as an auditing company can help present things in a more transparent and factual way and thereby play an important role with regard to the CSRD. It is our job to analyse things critically, question them and comment on inappropriate parts, even though they might not be part of the reporting obligation just yet. This is especially important with regard to the so-called greenwashing and the acceptance of the ESG in the long term.

What do you do about sustainability at BDO yourself?

Carmen Auer: First of all: we are under an obligation to report ourselves. And then we believe in the classic saying: walk the talk! If we want to support other companies with regard to sustainability, then we have to do everything we are talking about ourselves as well. Otherwise we’d be completely unbelievable. Fortunately, our board members are very committed to this task and we are working on a variety of goals, concepts and measures. Just as with most companies, there is a number of aspects that are part of the overall topic of sustainability, but that haven’t been recognized as belonging to this topic. It is our current task to strategically align all of these aspects.

What are your biggest challenges there at the moment?

Frank Wiethoff: We are not a manufacturing company. Do we – as an organization – have a big impact on the environment and the climate? Certainly, it’s only a limited impact. Though, we can obviously do something, too: there is the topic of mobility, for instance. We’ve introduced the Deutschlandticket for all employees at BDO, which helps to encourage the usage of public transport. We also believe that restricting the number of short-haul flights is helpful. Additionally, we also offer the “Jobrad”, which is yet another discounted mobility alternative. If we can include our employees and take them on this sustainability mission with us, then we can go quite far.

Viola Möller: It’s also all these small things that you don’t think about in your everyday work life – e.g. the printing of documents. It seems to be a small and unimportant thing, but if you look at it from the company’s perspective, those printed pages add up to quite an amount that can certainly make a difference. Again, it’s the idea that you cannot and should not change everything at once, but you need to take small steps. Day by day, step by step. This does not apply to our field of work or our company only – we need to change our way of thinking everywhere in society, in all aspects of our daily life.

What will become of the CSRD during the next few years?

Carmen Auer: One thing is certain: the framework conditions will become more complex, the rules will become even stricter. And while the focus is on EU-wide regulations at the moment, there will certainly be an effort to establish some standards that can be applied to companies everywhere in the world – and which can do justice to such an important global topic.

Viola Möller: There are quite a few aspects that have not been worked out in detail yet. We are currently witnessing the process of how the topic of “sustainability” is transcending its original meaning and reaching out into almost every part of a company. We have to realise that we are faced with a process that is constantly developing and will never be finished. Sustainability is here to stay: we will be occupied by it not only for a few years but forever.