The Role of Board Directors in Ensuring Transparent Sustainability Reporting: How Csrd and Esrs Compliance Fulfills Climate Governance Principle 7
Author: Kim Turk Mehes, Senior Manager, Government and Public Services / Sustainability at Deloitte & Head of the Working Group of Chapter Zero Slovenia
The World Economic Forum has developed a set of eight principles to guide the development of effective climate governance. To make these principles useful and tangible, each of them is accompanied by a set of guiding questions. These questions help organisations to identify and address potential gaps in their existing climate governance strategies.
As Chapter Zero Slovenia is committed to ensuring that its board members pursue climate governance, we have produced a series of monthly articles explaining the eight climate governance principles, which are designed to increase their climate awareness, embed climate considerations into board structures and processes and improve navigation of the risks and opportunities that climate change poses to business.
“As guardians of enterprise value, boards play a central role in supervising the assessment, management and reporting of impacts, risks and opportunities. In the face of new transparency requirements, companies require both incremental adjustments and a fundamental shift in how they approach sustainability reporting and the integration of sustainability into the heart of business strategy and decision making.” [1]
– Fiona Watson Senior Director, Corporate Performance & Accountability WBCSD
From compliance to strategic action
As environmental challenges increasingly shape the business landscape, the role of corporate boards has never been more critical. The integration of sustainability into governance frameworks is a strategic necessity, driven by mandatory sustainability reporting under the Corporate Sustainability Reporting Directive (CSRD). Principle 7 of the Climate Governance Initiative, which emphasizes disclosure and transparency, aligns seamlessly with the European Sustainability Reporting Standards (ESRS) requirements introduced by the CSRD. This alignment reinforces the board’s role in providing robust, transparent reporting on climate change, pollution, water and marine resources, biodiversity and ecosystems, and the circular economy and other environmental topics—alongside many interrelated social and governance topics.
The goal of sustainability reporting, however, should extend beyond compliance. Indeed, boards must oversee the building of a solid foundation for sustainability reporting to enable accountability, mitigate legal and reputational risks associated with incomplete or inaccurate disclosures that may lead to greenwashing and/or greenhushing claims, and set the tone for a corporate culture that prioritizes accurate, accessible, and meaningful sustainability information.
Double materiality assessment as the foundation of strategic climate action
But boards should also take a strategic approach to ensuring transparency by concentrating on material sustainability matters. This begins with the diligent process of identifying and assessing climate-related impacts, risks, and opportunities through the double materiality assessment. This approach, mandated by ESRS, considers financial materiality (the effects of ESG issues on the company’s financial health, including a company’s climate related risks and opportunities) and impact materiality (a company’s positive and negative effects on the environment and society). The approach ensures companies address not only their risks and opportunities but also dependencies on natural resources and ecosystem services, as well as the company’s broader impacts within their own operations and no less importantly their entire value chains. It is the double materiality assessment that presents the foundation for the preparation of a sustainability statement, setting not only the focus of the sustainability statement and content of the disclosures, but also meaningful climate action as part of the company’s strategy and operations.
Boards must proactively engage in the double materiality assessment process to ensure:
- A deep understanding of the company’s actual and potential environmental impacts, risks and opportunities and the business's reliance on critical natural resources.
- Insights into how environmental factors may influence the company’s strategy and resilience.
- Informed action related to the governance of identified impacts, risks, and opportunities through the integration of concrete measures into financial forecasts, and forward-looking statements.
Climate governance as the backbone of transparency
In assuring transparency and accuracy through reporting on climate action, the role of the board extends to shaping governance structures that integrate climate and other environmental considerations into core business practices. To set up effective governance frameworks ensure boards must define roles and responsibilities for ESG matters by e.g. establishing committees and dedicating board-level oversight to ensure that climate-related issues receive attention at the highest level. This allows them to oversee detailed analysis and assessments of how the company’s activities contribute to or mitigate climate change, pollution, resource depletion, and degradation of biodiversity and ecosystems and understand identified risks, opportunities, and dependencies. The information received may in turn form the foundation for their strategic decision-making and alignment of the company’s business model with sustainability goals.
Boards must also enable the establishment of robust data governance frameworks for producing accurate, reliable, and transparent sustainability disclosures, through establishing clear data governance policies, overseeing data integrity and promoting integration of digital tools in order to effectively monitor and validate data, balancing quantitative and qualitative insights and clearly communicating with stakeholders through multiple platforms to make sustainability data accessible and transparent and reflecting stakeholder concerns.
Embracing transparent reporting as part of Sustainable Leadership
Most companies are struggling to comply with the European Union’s requirements for sustainability reporting [2]. Despite the challenges however, many executives are starting to understand there are few tradeoffs between business success and climate action [3]. Leading with transparency is the foundation not just for meeting regulatory requirements but building trust with stakeholders, enhancing long-term resilience, and positioning a company as sustainability leader. Boards that embrace Principle 7 of the Climate Governance Initiative are uniquely positioned to balance financial resilience with environmental stewardship. This alignment allows them to mitigate risks, unlock opportunities, and contribute meaningfully to a sustainable future. By integrating governance frameworks with robust reporting practices, boards can drive long-term value creation and establish their companies as sustainability leaders.
Resources:
[1] https://www.wbcsd.org/wp-content/uploads/2024/11/RY-WBCSD_Reporting_Matters_2024.pdf
[2] https://carbontracker.org/reports/flying-blind-in-a-holding-pattern/