Decryption with Hortense Bioy, Director of Sustainable Investment Research at Morningstar Sustainalytics, a rating agency specializing in ESG (environment, social, governance) and sustainable finance.
What is the role of corporate CSR in your understanding of the issues they face?
Interestingly, we don’t use the term “CSR” at Morningstar Sustainalytics. Although we collect data that can be incorporated into corporate social responsibility (CSR) documents, we prefer to use terms such as “ESG” (environmental, social and governance) and “sustainability”.
CSR is a voluntary approach through which companies integrate social and environmental concerns into their activities and interactions, while ESG refers to specific criteria used by investors to assess the impact and sustainability of a company.
Investors may have a good understanding of a given sector, but for them it is crucial to understand the particularities of each company. They therefore need a set of data and indicators that allow them to understand risks and opportunities precisely. This need is particularly marked among investors with a long-term horizon. They are interested not only in current indicators, but also in the way in which the company projects itself into the future and the strategy it adopts in the face of future social and environmental challenges.
What will the new CSRD regulation change both for analysts, like you, and for investors?
With the introduction of directives such as the CSRD (Corporate Sustainability Reporting Directive) in Europe, we expect to see a significant improvement in data, which will make the work of analysts and investors easier.
Data is truly the backbone of our work: without precise, reliable and comparable data, it is impossible to correctly assess sustainability risks and identify investment opportunities.
It’s not about producing reports to tick boxes, but about providing accurate and useful information that helps investors understand the specific risks and opportunities of each company, to make informed decisions.
Companies must therefore not only collect the right data, but also know how to contextualize and explain it.
Concretely, what will this change on the business side, in their communication?
Many CSR reports have until now been used as communication tools, often more marketing than informative, with great selectivity in the choice of data. With the CSRD, the emphasis is placed ondata transparency and rigor. Companies will be required to publish more detailed and standardized information, which means they will have to integrate sustainability not just as a communication component, but as a real business strategy.
This regulation also pushes companies to adopt a common language, which is crucial to avoid greenwashing. In the past, the terms and indicators used varied widely, making comparison between companies difficult.
As part of this new regulation, companies will also have to report on their ability to adapt their strategy and economic model to the ecological transition. Guides adapted to each sector of activity have been designed to help companies better communicate their transition plan.
The CSRD will force companies to have a good understanding of their own social and environmental issues. This means clearly identifying material risks and opportunities, which can impact the value of the company, as well as the company’s impact on the environment and society. This involves carrying out a dual materiality analysis. Once these issues have been identified, it is crucial to communicate them in a transparent and coherent manner. Investors are not only looking to know the risks, but also to understand how the company plans to deal with them. Good communication requires a clear explanation of the indicators used, how they are monitored over time, and how they fit into the company’s overall strategy.
Does this new European regulation, which is very restrictive for businesses, not represent a risk for their competitiveness compared to regions like Asia or America, where large parts of the economy are not subject to the same requirements?
It all depends on how companies approach these new reporting requirements. This can be seen as an additional burden, for those who see it as a simple obligation to fulfill. But it is also a huge opportunity for companies who see the exercise as a way to gainin competitiveness.
Companies that truly commit to sustainability can position themselves as global market leaders.
For investors, a company that does this job correctly may be perceived as less risky and more promising in the long term than a company that is not subject to this European regulation.
Do you already see a change in the way companies integrate CSR risks and opportunities into their daily management?
Absolutely, and it’s one of the most interesting developments in recent years. More and more companies are starting to integrate sustainability data directly into their strategic decision-making process. They assess ESG risks and opportunities not as separate elements, but as an integral part of their overall risk management.
Cette intégration se manifeste par des actions concrètes, comme par exemple des plans de transition pour réduire l’empreinte carbone, des politiques pour assurer le bien-être et la diversité des employés, ou encore des stratégies pour gérer les risques liés aux droits de l’homme dans la chaîne d’approvisionnement.
Are there any companies that, in your opinion, particularly stand out for their innovative approach to sustainability and CSR reporting?
The most advanced sectors are often those that have historically been the most scrutinized due to their high environmental impact. The energy, materials and mining industries are leading the way, as they must respond to strong regulatory and societal pressures. These companies have developed sophisticated reporting practices and often have detailed transition plans in place. Conversely, sectors like technology, which were traditionally seen as less polluting, are only beginning to face these challenges. Microsoft, for example, is often cited as a leader in sustainability. The company was among the first to announce ambitious targets to reduce its carbon footprint and commit to becoming carbon negative. However, its recent announcement of the increase in its emissions due to the expansion of data centers to develop Artificial Intelligence also shows the complexity of the situation. This highlights the need for businesses to not only set goals, but also to quickly adapt to changing realities and to communicate about challenges encountered along the way.
This case perfectly illustrates the need for businesses to remain dynamic and adaptable. They must not only identify risks, but also transform them into opportunities. In a world where sustainability expectations are constantly evolving, the ability to anticipate, adapt and communicate transparently will be a key factor for success.
How can companies anticipate risks that are not always visible, such as political or social risks?
Identifying risks is a complex exercise, especially when it comes to risks that may seem remote or unpredictable. Companies tend to focus on their short and medium term risks.
The COVID-19 pandemic showed that many companies were unprepared to handle major disruptions in their supply chains or even locate their employees. Anticipating risks therefore requires good knowledge of its operations and its value chain, but also through thecapacity to adapt quickly to unforeseen changes. They will have to manage crisis situations at one point or another, which is also a good communication strategy.
In addition, it is crucial that companies have the internal means to effectively manage an incident or controversy. From an investor’s point of view, controversies can be prohibitive. If a company has not identified certain risks or does not have a policy in place to manage them, this can be seen as a lack of preparation, or even incompetence.
What data do investors particularly take into account?
Investors are showing growing interest in the impact of companies on the environment and society and are carefully examining whether companies have policies in place to address critical issues such as deforestation, forced labor, or human rights remediation. These questions, of course, vary by industry.
But their priority remains financial materiality. What interests them first and foremost is how these issues can affect the financial results and the value of the company.
A key question for any company is to determinewhether it wants to be a leader in its sector in terms of social and/or environmental responsibility.If the company aspires to this leadership role, it cannot afford to be hesitant. It must take the lead on issues that affect its operations and its sector.
It’s understandable that some companies prefer not to address these issues until they have a solution in place. However,transparency is key. Even if a solution is not yet achieved, it is possible to communicate the fact that the company recognizes the problem and is actively working to resolve it. For example, by setting up a task force dedicated to this problem.
However, you must be prepared to answer questions about the progress made a year later, because these issues represent significant material risks for the company.
What advice would you give to companies looking to strengthen their CSR strategy and prepare for increasing sustainability demands?
The first CSRD-compliant reports will certainly serve as a benchmark for the sector. What I’m waiting for is to see how companies will adopt these new reporting requirements and how they will integrate them into their overall strategy. It is important that these reports are not seen as a simple regulatory obligation, but as a strategic tool to improve transparency and communication with all stakeholders, whether investors, customers or employees. My advice to companies would be to start now to align their CSR reporting with the CSRD requirements, to ensure that their data is accurate and consistent from one year to the next, and not to hesitate to communicate about the challenges they encounter. Transparency, even regarding difficulties, is increasingly valued by investors. It is a long-term exercise, but the credibility and sustainability of companies are at stake in a world where sustainability is becoming an essential priority.
They must also understand that, just like financial data, information relating to environmental, social and governance (ESG) issues can no longer be limited to qualitative aspects. They are becoming more and more quantitative. This highlights the crucial importance for businesses to ensure they have the right tools to report information.
In the financial field, the reporting scope remains constant from one year to the next, which ensures consistency and understanding of the data reported. How does this question of scope arise in the context of ESG? It is not uncommon to see companies change their focus from one year to the next, sometimes due to difficulties meeting their commitments or in response to the emergence of new issues.
The importance of consistency in the reporting scope is crucial, particularly in a long-term strategy. From an investor’s point of view,it is essential to have continuity over time. If a company starts communicating about an indicator or issue, but then stops doing so, this will raise questions. The company will then have to justify this omission or explain why it is no longer provided. It is therefore essential to maintain transparency and continue to communicate on material issues, even if they present risks.
Is it better not to communicate on a subject if we are not sure of being able to follow it over time? If this issue is critical or represents a real risk, it is necessary to address it from the start. The real challenge lies in identifying relevant risks and deciding to communicate them. As for opportunities, companies can choose to present them later, depending on the progress of their projects.
Do editorialization and the ability of a company to tell its story play a role in the decision-making process?
Let’s say that even in a world where decision-making is increasingly guided by numerical data, this does not free them from being able to interpret this information in context. This need for interpretation, or “human overlay” as it is called in English, will remain an essential component.
Because it is important to emphasize that companies are constantly compared to their competitors, which allows their performance to be contextualized. An isolated figure has little informative value; it must be analyzed in relation to the specificities of the sector in which the company operates. As each sector has its own challenges, understanding these nuances is essential to properly valuing a company.
For example, carbon intensity in the healthcare sector may not be a crucial indicator, unlike social issues which can have a much more significant impact on company value. Conversely, for a company in the energy sector, the carbon footprint becomes a major indicator.
This is not just about measuring emissions from internal operations, but also looking at interactions with customers and the supply chain, particularly within scope 3, which encompasses indirect emissions.
Scope 3 is today one of the most important and most difficult indicators for companies to calculate, because it concerns aspects over which the company has limited control, such as the practices of its customers and suppliers. Regulators are now emphasizing the need for companies to monitor and take responsibility for what happens within their supply chain, because the choice of suppliers and their management is the responsibility of the company.
This highlights the growing importance of the value chain in assessing a company’s performance. Businesses can no longer afford to say they don’t know what’s happening with their customers or suppliers, even those located abroad. They must now be able to understand and communicate across their entire value chain to meet the expectations of investors and regulators.
