Sustainability challenges investors

Extreme weather events, critical change to Earth systems, biodiversity loss and ecosystem collapse, and natural resource shortage are the four biggest global risks in the next 10 years. Nature’s carrying capacity is also in the centre of the megatrends. 

Investors are in a crucial position – channelling finance to green transition, investing in sustainable projects and challenging companies’ sustainability strategies. Sustainable investing not only addresses these global risks but also positions investors to benefit from the resilience and growth potential of well-managed companies.  

How to pick a winner?

Sustainability does not live in a quarterly economy, and sustainability related results are not immediately visible in euros. It might take years for the sustainability impacts, risks and opportunities to be visible or to take place.  

These slowly creeping changes are challenging for investors. They should be able to make investment decisions which may have an impact on well beyond decades.  

The playground of sustainability regulations is moving fast. For example, the EU Corporate Sustainability Reporting Directive (CSRD) obligates companies to report extensively on their environmental (E), social (S) and governance (G) related issues. The directive concerns a large number of companies in Europe, both directly and indirectly.  

Big companies are directly covered by the directive, and the smaller, listed companies gradually later. Nevertheless, the CSRD affects almost all companies indirectly through the value chain. Every company is part of the value chain of another company.  

Readiness to report on sustainability matters may well be a competitive advantage for the companies. Stricter regulations on sustainability reporting (e.g. CSRD) will most definitely help investors in difficult and yet crucial mission.  

Roadmap for sustainability – a winning hand?

The double materiality analysis (DMA) is a mandatory part of the reporting according to the CSRD. The aim of the DMA is to assess how environmental (E), social (S), and governance (G) issues impact a company’s financial performance and how the company’s activities affect the environment and society.  

A well preformed DMA gives a comprehensive overview of the company’s sustainability and stresses material sustainability matters for the company. It lays the base for the reporting according to the CSRD: 

• The sustainability concept.
• Reviewing the business environment, analysing the global risks and ESG trends, and business sector specific ESG risks and possibilities. 
• Defining the value chain(s) and identifying the stakeholders. 
• Double materiality analysis (DMA). 
• Impact analysis – analysing positive and negative impacts of sustainability matters throughout the value chain(s). 
• Financial analysis – analysing risks and opportunities of sustainability matters throughout the value chain(s). 

On the other hand – well preformed DMA may give a winning hand for the investors.  It can be seen as the state-of- the-art:  

• The business environment review is a forward-looking big picture of the company.
• Illustration of the value chain(s) with the stakeholders will sharpen the big picture with the details.
• Impact materiality will create a roadmap with actions and targets for mitigating negative impacts and strengthen positive impacts.
• Financial materiality will complement the roadmap by recognising potential financial sustainability risks or opportunities.

In summary, incorporating sustainability into a company’s strategy is not only beneficial for the environment and society but also critical for the company’s long-term success and competitiveness. Therefore, CSRD and especially DMA should be seen as a possibility.  

By focusing on sustainability, investors can identify companies that are not only managing their current risks but are also positioning themselves for future growth and stability. This forward-thinking approach is essential in a world where environmental and social challenges are increasingly shaping the economic landscape.