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The Sustainability Story
Jane Thostrup Jagd: Aligning Company Boards, Investors, and Sustainability Goals
00:21:21
Listen in as Dr. Jane Thostrup Jagd, Director of Net Zero Finance at We Mean Business Coalition, and Josina Kamerling, Head of EMEA Regulatory Outreach at CFA Institute, discuss the necessity of integrating sustainability departments within companies,...
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- [00:00]
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Hello everyone and welcome to the Sustain Story podcast. I'm one of the three co hosts and my name is Josina Kamerling and I tend to focus on what's happening in the EU bubble because the EU seems to be running fast forward on sustainability and sometimes the things that are happening there will have of course an impact on companies and investors outside the eu. And so for our listeners outside the eu, I'm sure you will pick up a lot of very interesting points. Today I have with me Jane Tostrup Yagt, who is a director of Net Zero Finance, the We Mean Business Coalition. And she's also of course a technical expert on many different working groups with the issb, with the Danish companies and generally she's a recognized technical expert and this was my great pleasure to meet her recently at a brainstorming on, you know, what can companies expect? What can the accountancy profession expect in this challenging journey we have with csrd? So Jane, it's really a pleasure to have you with us today and I'm going to go right into the subject and ask you what are the challenges for EU companies in the implementation of the Corporate Sustainability Reporting Directive, csrd, which came into force in July? What is your take on that, Jane?
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A
Yeah, and thank you for having me. The challenges are many, I would say. I think the biggest challenge for many companies is actually the lack of cowork within the companies. It is still so unfortunately in many companies that the sustainability department have a tendency to be an island. They are over here perhaps in the communication department or something and that doesn't work anymore. So they will have to be pulled into the companies so they co work more especially with the financial people. But it also requires that the financial people are more open to this agenda. It is happening in many companies. Many companies have done this, but we must also say that especially those companies coming in the second wave or the non listed companies, they probably have to do a bigger leap than the listed companies who have done this for for some years by now.
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B
Yes, and you know, it's a very interesting point that you bring up on, you know that sustainability experts are going to have to be brought right into the company. And that knowledge actually is not going to be stuck just at sort of compliance. It has to go throughout the company. Of course this is a challenge. It's a challenge not only, by the way, for companies, it's a challenge for the preparers, the accountants. It's a challenge for the investors. Do they truly understand what the information they're getting, what can they use these new CSRD ESRS reports for? What do you think of that? How prepared are investors to really understand what they're getting?
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A
Unfortunately, I don't think they're prepared. Many are not, at least because we still see many, many, many investors, also large institutional ones, but Also of course, Mr. And Mrs. Jones, they only look at the ratings and that is problematic, especially in the future. If the companies are to report in these details, way detailed ways and they experience that their reports are not being used at all, that doesn't work. But I would like to bring two examples which may inspire the investors. What can we actually use it for? Think of this employee turnover, for instance, especially the voluntary part. That is interesting because if you have a company who stands up at the AGM or the capital markets day and say we will probably, and then you can see in the report that they have a turnover of employees which is higher than the competitors, then it's not very likely that they will grow, at least not as fast as their competitors because they have all the good employees. So that is one example. Another example could be CO2 per share, for instance. If you use that in conjunction with the P value, then you can use it as you could say a risk profile of the company. Because will this company, who have a higher CO2 per share actually be hit by taxes? Will it risk that their assets are old and should be either impaired or replaced or both? That is expensive. So for the investors, will all this extra information actually have impact and they should use the predictive value there is in this data. Not all the data is equally important. Of course not. But there are definitely some data sets which are interesting to look at.
- [05:42]
B
They are also, of course, pointers for further questions. I think the importance of this new reporting will also hopefully push into more interaction. We know, of course, it's a challenge. Big asset managers, big institutional investors hold a myriad of companies and probably they don't have enough people to go to the annual reports meetings to ask questions. They do very much a sort of framework analysis. But I hope that through the use of new technology, through AI, who knows? This is going to free up the time of investors and analysts and to be able to really engage with companies because it's through that dialogue that you're going to build up more knowledge. As to your point, if you see this high turnover in employees, you have to ask a question, you know, what is the direction of this company? Where is it? Where is it going? And I want to take you to an ESG report that we've just recently come out with, which was specifically done amongst our CFA charter holders in the eu and they're looking at csrd. Maybe a third of our survey respondents were positive. Now remember that our CFA charter holders are for the majority on the buy side, analysts, portfolio managers, et cetera. So they were very supportive. But they were also particularly supportive of the double materiality perspective because they think that it's important to understand the impact on people and environment and the social, environmental issues creating the financial risk. So you see there's a starting awareness of how this information can be used. But also there was some criticism about the timeline, saying that organizations will not be ready, that this is a challenge. And of course, as you say, the second wave of the smaller companies is going to be even more challenging than non listed companies and yet they're going to have to come up to the mark because that is the world that is going to be based on. So I think that rejoins a little bit what you were saying. Now looking, and I did mention it, double materiality, that this was seen as a really positive point and important. How can the expectations between how the companies are going to deal with double materiality preparers, do they understand it, do they know how to report on it? And the investors, do they know what to look for? How can this be fully aligned? What would your suggestions be? There.
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A
You can see it from two angles. There is the company perspective, the company's perspective is the crux of it all is the stakeholder identification. Because once you have your ID of your stakeholders, then you will have to have an engagement with those. But if your stakeholder ID gets wrong, it's too narrow or you pick the wrong ones, then everything else from there on will be wrong. That is one thing that is super important for the companies on the other side, I would say especially for the analysts, for the investors, this boils back to please use the reports. Because if you are to provide input to the companies that is useful, then you have to have read the reports and not just the ratings. You, you will also have to be honest and say, oh, it's a very pretty chapter you have over here, but we cannot really use it. And then Provide guidance on format and content that is useful for you, whereby the companies can do better. Because currently especially the format part is where the companies struggle. They don't know what should it look like. And this is also why we see that they are trying to make experience groups and other things to figure out, okay, how can we do this in a good way?
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B
Because they, and I think, you know, what I've seen is a lot of sustainability reports are very glossy and have wonderful images about, you know, but is that really what, you know, the investor needs? And I agree with you, I think we have to go beyond the glossiness and find the nitty gritty. But then again, to your point, it's all about this communication. The auditors, the preparers, they have sometimes quite junior people who may not have been trained in sustainability because universities are still catching up on all of this. So they're coming out of universities, they're going into the firms both at company level, whether it's asset manager or quite junior. And are they ready to understand this huge challenging influx of data that they have to cope with. So I think that alignment has to grow through communication and true engagement and transparency as much as possible. Which of course is also a concern for companies because they feel, and maybe you can explain that a little bit more, but you know, the more transparent, the more they give away their business secrets. Right. So how does a company deal with that?
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A
Yeah, we also hear that a lot, especially when we talk about plans, transition plans. That is a trade off for companies. They have this trade off saying we don't want to show our hand. We see it as a playing, you're playing cards. They don't want to show their hands. So that is on the one side, on the other side they have, the investors, they would like to have full insight for good reasons. So it's really difficult for companies. And what I foresee is that many companies will of course report on their risks. Not an issue, they will have to do that. But the opportunities will probably be bit ball fluffy, perhaps not revealed in details before they have the contracts in place, before they actually know that this will happen. So we will see many companies who are refraining from providing information about their opportunities and I fully understand it, that.
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B
Is to the point that, you know, we may go to the opposite of greenwashing. You know, we may actually under, under, under, under give information on those opportunities on where the company is going to, because of that fear that if it's not yet set in a contract, you know, they don't want to give Give it away. So that, that is also going to be, you know, an understanding point for investors. You know, knowing that sometimes they're going to have to make the call and try and get that other information about the opportunities from, from the companies that it will enable them to get to a more sort of evenly balanced view of what the company and where it's going in its net Net zero transition. So how, how are company boards adapting to this new world? What are they doing with csrd? What are you seeing at board level?
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I know that at least some boards they get some training to do more on this but actually the CSRD in itself does not require any actions, it just requires transparency which is enough for, for many companies to just be transparent about for instance their opportunities. So the CSD in itself will not do. Is more likely that the CSDD will require not reporting because it's not a reporting directive. But it will require more activities within the board and we will probably see many of these experience groups there are between board members that they will have to do more on this and perhaps also develop tools and ways of working on this agenda.
- [13:54]
B
Yeah, they're going to have to need expertise on sustainability and tell me if I'm wrong but it also seems to me that this is a great occasion for companies where traditionally senior managers run the company and wouldn't really listen to what's happening down under the junior managerial level or even mid managers. Maybe this is an opportunity for that vertical information flow to happen in a more transparent manner as well. I do remember in my junior years that people were afraid sometimes of saying the truth to their senior managers. This of course in your path to net zero it's crucial to have this honesty right down from where the people are actually dealing with the issues all the way up to the board. I think this is some of the issues we've seen recently with companies have been about that as well. You know, this is sort of presenting a glossy picture to your senior management. It's not going to help in this instance, is it?
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No. And that is some of the issues we see that still some of the plans are too high level, too impractical and it's. And this is also why we see some investors who for instance, now I say okay, it's very lovely that you have all these Net zero targets, but we want to see your green capex. We want to see what do you actually do in real life. So, so that will happen also. So, so the boards will have to understand it's not enough with the words anymore targets are not enough anymore. You will have to actually invest in it. You will have to do more. More which you can show off. We actually do stuff.
- [15:43]
B
You have to walk the talk. Yeah, I like that comment. So now you've gone into this a little bit already, but I want to take you a little bit more. And what are this. What are the really big challenges in the future for EU companies meeting the EU goals on net zero emissions? And of course, we have a new commission coming in. We hope that the green deal is going to keep its ambitious plans, that it's going to come to fruition. But we all know that politics can impact this. You don't have to respond politically, but I do. I would like to see some forward thinking from this on this review.
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A
Yeah, the first thing I will say is be patient. Time is crucial here because right now a tsunami of new reporting and action activities are actually hitting all the companies right now. Some of them have not even kicked in yet. And yet we hear some politicians who are saying, it's not enough, we need more. And I'm like, could you please just let it kick in first? Then we know whether it is enough or not. Especially. The CSRD is so enormous that many companies have not really grasped yet what kind of topics they are to cover yet. And the investors and other stakeholders haven't seen it yet. So maybe it's enough. As it is right now, there might very well be a need for more guidance. There might very well be a need for experience groups and also support in other ways. But more rules I am not entirely sure is the way forward.
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B
Yeah, I think it's true. If we remember, sustainability started with part of a phrase in the CMU Action plan back in 2015. So we're nine years down. I remember revisions to MiFID. One directive took nine years. So here we are talking about a whole batch of regulations and directives which have really significantly impacted. So I totally agree with you. And then of course we have the new Corporate Sustainability Due Diligence Directive, which was a real challenge to get through at the European level. I did doubt at some stages that we would get it through. In the past legislature, it went just through at the very last plenary. It was a subject of hot debates at the trilog level, which was of course, the discussions between Parliament and the Council. For those of us not in the EU bubble, when, you know, the co legislators have to find a common position between what the countries, the national member states think and what the European Parliament and Commission think. So this is going to be applied as of 2027. Again, this is significant. You did mention it already for boards. CSDD as we call it, is a significant issue because of course you have to go all the way down the due diligence chain. We've seen with some companies like Dior came into press recently, you know, big fashion company, very, very large listed company is having issues with its supply chain. You know, do they have enough information? So you know, this is really a big challenge. How, how do you see the compliance and the sort of growing, you know, awareness of this due diligence of the supply chain happening with companies?
- [19:21]
A
Slowly but surely, let me put it that way. The thing is CS Triple D in itself for investors, if you look at it from that angle, is not really useful. It sounds really not nice, but that is how it is in itself. It doesn't do anything because it just requires the company to do anything. It does not require the company to report about it. But in cowork with the CSRD it means something. In cowork with the taxonomy, it means something. So if you take CSDD and the CSRD then the CSDD require larger, even larger companies to have a transition plan. That is not the case for the csrd. If you don't have a plan in the csrd, you can just say it, we don't have a plan. Your stakeholders may think that is odd, but it's okay. That is not okay. If you are covered by the csd, then you have to have a transition plan. So that's a difference. And if you have the transition plan, then the CSD kicks in and say, then you have to reveal it, you have to publish it. So there is a difference. If we take the taxonomy, then all the due diligence efforts that the companies are to do that will hopefully make companies more able to actually meet the minimum safeguards so that they will have more green capex compared to today. So that is some of the trickle down effects of the CSDD in itself. I don't see that it will impact the investors, but all the other effects will have something to say.
- [21:07]
B
Jane, I love how you bring in the fact that, you know, we need to look at all this legislation together. We cannot take each piece separate. And I think also for our listeners outside the eu, this is a very important tip. Jane, it's been such a pleasure talking to you. You've been really engaging and you've given us several snippets of really good nuggets of information for investors and, and for companies. Thank you so much and look forward to another chat at some stage. Thank you very much, Jane. Bye.