THE INTEGRATION OF SUSTAINABILITY INTO MANAGEMENT REPORTS

THE INTEGRATION OF SUSTAINABILITY IN MANAGEMENT REPORTS

The current year may not require companies to compulsorily prepare sustainability reports, as they may not have exceeded the size limits set by the EU DNF and CSRD directive.

However, while considering that only 0.002% of corporations in Italy were subject to such obligations in 2021 (source: National Observatory of Non-Financial Reporting - Deloitte), it is essential to assess the goodness of including sustainability-related information in the management report or in the notes to the financial statements, starting as early as fiscal year 2023.


INFORMATIVE IMPORTANCE

In today's market, sustainability reporting or the inclusion of such information within management reports/notes has become a crucial element for companies for several reasons: 

  • transparency and accountability; the expectations of stakeholders, including investors, customers, employees, and communities, regarding the social and environmental responsibility of companies are steadily increasing: a sustainability report provides a means of transparently communicating the actions taken by the company to address the social and environmental challenges it sets and plans year by year; 
  • risk management; integrating sustainability into corporate decision-making allows companies to identify and mitigate risks associated with environmental, social, and governance (ESG) issues: this can help, especially in certain operating sectors, to reduce exposure to potential crises or litigation, improving long-term corporate stability and resilience; 
  • access to capital; institutional investors and private equity funds are increasingly weighing ESG factors when evaluating companies in which to invest: a robust sustainability report can increase a company's financial attractiveness, enabling it to access a larger pool of capital and improve its financing terms, as well as its strategic planning and future economic performance (note that the converse is the same with respect to bank credit lines granted); 
  • competitiveness and Brand Reputation; companies that demonstrate a serious commitment to sustainability can benefit from a competitive advantage in the marketplace: a strong reputation for social and environmental responsibility can enhance their brand image, increase consumer trust and foster customer loyalty.

A PRACTICAL APPROACH FOR FORWARD-LOOKING SMES

Failure to map environmental and personnel-related risks, which must be mandatorily included in the report, could generate a significant information gap, especially given the growing demand for ESG information from stakeholders.

For small and medium-sized enterprises (SMEs), understanding and integrating ESG information into the management report can be a crucial step toward sustainable development: an S.r.l. with a turnover of about 10 to 20 million euros, for example, might be faced with the decision of whether to neglect or include sustainability information in its management report or notes to the financial statements. Under current regulations, the management report is the main document in which relevant financial and non-financial indicators, including those related to the environment and personnel, are reported.

In addition to meeting the minimum requirements of current regulations, companies should provide a comprehensive overview of key indicators for a better understanding of economic and financial balance, including management risks and uncertainties, along with information on the company's social role.

Looking to the future, the evolution of disclosures required by Article 2428 of the Civil Code includes an increased focus on ESG indicators in sustainability: the voluntary adoption of EFRAG standards for SMEs will become a practically mandatory standard, required by both financial and broader business stakeholders. Therefore, already to date, it appears essential for companies to understand and incorporate this new information in the annual report or notes to the financial statements: for SMEs, governance is a central issue, especially for family-owned SMEs.


THE ROLE OF THE PROFESSIONAL

The role of the Certified Public Accountant appears strictly necessary to accompany such companies in this transition process, an opportunity to be seized to improve transparency, meet stakeholder expectations, and promote sustainable business development: an important first step is to analyze the current governance model and identify any discrepancies from international standards.

sustainability checklist can be a valuable tool for structuring an appropriate path: taking a cue from the checklist developed by IFAC, companies can identify steps to be taken and report a summary analysis of progress in the management report.

 

Edited by: Mattia Christian Scioli, Chartered Accountant

You can download the article in PDF here

For more information:

mattiascioli@valoreassociati.it

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