ESG, sustainability, sustainability strategy, CSRD, SFDR, EU Taxonomy, EU Supply Chain Act
What is ESG? - A brief history
ESG evaluates an organization's management of environmental, social, and governance risks and opportunities, providing valuable insights for stakeholders. It serves a dual purpose: helping investors make informed decisions and aligning investments with their values, while serving as an internal guide for sustainable capital investments. ESG is essential for a wide range of stakeholders, including customers, suppliers, employees, and more, who seek to understand the sustainability of an organization's operations.
Environmental criteria consider how a company performs in terms of its environmental impact, including its use of natural resources, greenhouse gas emissions, and efforts to reduce pollution and waste.
Social criteria consider how a company performs in terms of its relationships with employees, customers, and the community, including issues such as labor practices, human rights, and diversity and inclusion.
Governance criteria consider how a company is managed and governed, including issues such as leadership, executive pay, and the effectiveness of the company's board of directors.
The origin
The ESG framework has evolved over time, starting with frameworks such as EHS (Environmental, Health & Safety) in the 1980s, and then Corporate Sustainability in the 1990s and CSR (Corporate Social Responsibility). In 2004, the United Nations published a report titled "Who Cares Wins", which is widely considered as the first mainstream mention of ESG in the modern context. This report encouraged all business stakeholders to embrace ESG long-term, addressing managers, directors, investors, analysts, and brokers.
What’s the current picture?
ESG has recently emerged as a crucial aspect of institutional investment strategies, with governments worldwide updating their laws to reflect its importance. Leading companies and investment firms have made ESG a top priority in their operations. Despite its widespread adoption, a major challenge remains: the lack of uniform reporting standards. Companies and investors measure different things and report in different ways. This on the one hand makes the adoption of ESG reporting a more difficult undertaking for companies, having to select the right standard that best suits their needs.
To address this issue, various reporting frameworks have been developed, such as the UN Sustainable Development Goals (SDGs), the Global Reporting Initiative (GRI), or the Task Force on Climate-related Financial Disclosures (TCFD).
On the European scale, a new framework aims to bring order to this in the short run. The EU's Sustainable Finance Disclosure Regulation (SFDR), introduced in 2019, aims to bring order to the sustainable investing market by categorising investments based on their level of "greenness" and setting reporting benchmarks to ensure consistency. While its introduction has caused some confusion, its future, with adjustments, is certain.
ESG is here to stay: Why do businesses need to care?
The significance of sustainability is irrefutable, with growing evidence that immediate action is required. The Earth Overshoot Day, marking the day when humanity's resource consumption surpasses the planet's ability to regenerate them in a year, serves as a sobering wake-up call. It was reached on July 28th, 2022, highlighting the pressing need for immediate attention.
As global threats continue to evolve, ESG regulations are adapting to hold private businesses accountable for preventing negative impacts on the environment, climate, and human rights. The EU, in its commitment to the EU Green Deal, has taken a leading role in driving sustainable investing through the development of new regulations. These regulations aim to eliminate net emissions of greenhouse gases by 2050, break the connection between economic growth and resource use, and ensure that no one is left behind in the fight against climate change and environmental degradation.
One example is the recent implementation of the Corporate Sustainability Reporting Directive (CSRD) on January 5, 2023. This directive enhances the reporting requirements for companies, ensuring that investors and other stakeholders have access to the vital social and environmental information they need to make informed decisions. The CSRD is the revised version of the EU regulation, the Non-Financial Reporting Directive (NFRD), a standard that laid down the disclosure rules for non-financial and diversity information by large companies.
The CSRD requires a broader range of large companies and SMEs to report on sustainability, with roughly 50,000 companies expected to be impacted. In the coming years, this directive will be gradually rolled out, making ESG reporting a fundamental part of doing business:
Jan 2024: NFRD companies - for companies already subject to the NFRD with the firs. Main criteria: Must be a large EU undertaking which
is a 'public interest entity
has more than 500 employees.
Jan 2025: Large companies - for large companies not currently subject to the NFRD with the first reporting being due in 2026. Main criteria: Must meet two of the following criteria:
Balance sheet total of EUR 20 million;
Net turnover of EUR 40 million; and/or
An average of 250 employees during the financial year.
Jan 2026: SMEs - for listed SMEs as well as for small and non-complex credit institutions and captive insurance undertakings with the first reporting being due in 2027. Main criteria: Must have
securities listed on a regulated EU market
meet two of the following criteria:
Balance sheet total: EUR 4 million;
Net turnover: EUR 8 million; and/or
An average of 50 employees during the financial year.
What are benefits of ESG?
These new standards arising for companies should not merely be seen as yet another reporting burden. They can bring significant benefits to businesses:
Creating competitive advantage: Companies that prioritize ESG can gain a competitive advantage in the market. A GreenPrint survey found that 64% of Americans are willing to pay more for products from companies that promote sustainability.
Attracting investors and lenders: Including ESG reporting in earnings reports can attract investors and lenders. A Gallup study found that 48% of investors are interested in sustainable investing funds.
Improving financial performance: ESG practices can improve a company's financial performance by reducing energy bills and costs, avoiding fines and penalties, and improving ROI.
Building customer loyalty: Socially conscious consumers are increasingly looking for brands that align with their values and treat people well. A survey by Accenture found that 50% of consumers have realigned their priorities when shopping for brands as a result of the COVID-19 pandemic, and are willing to pay extra for brands that reflect their values.
Attracting talent: As Millennials and Gen Z become the dominant part of the global workforce, ESG performance will become increasingly important in attracting and retaining top talent. A 2020 study by Marsh & McLennan estimated that by 2029, these generations will make up 72% of the world's workforce. Both Millennials and Gen Z prioritize environmental and social concerns more highly than previous generations, and will expect their employers to prioritize these issues as well.
How should businesses get started?
With the regulatory environment advancing and benefits of ESG becoming more tangible for companies, now is the time to act. Deriving an ESG strategy together with experts that quickly help to build up an internal understanding of ESG and help companies identify the focus areas that matter most to their DNA is crucial.
Incorporating Environmental, Social, and Governance (ESG) policies into business operations is essential for the long-term success and growth of companies. However, making informed decisions about ESG policies requires an understanding of a company's current standing. Here are 6 steps to establish an effective ESG strategy:
Materiality Assessment: The first step in creating an ESG strategy is to identify and prioritize ESG issues that are most critical to your organization through a stakeholder engagement exercise. A materiality assessment can help you understand the relative importance of specific ESG topics to your company by examining potential impact and stakeholder importance.
Baseline Assessment: Measuring a company's current ESG performance is the next step in developing an effective strategy. This includes a comprehensive assessment of the company's current state, including third-party assessments for an objective view. A baseline measurement is important as it sets a foundation for measuring progress over time.
Set ESG Vision and Goals: Once the baseline has been established, it's time to set ESG goals. These goals should reflect the company's ESG vision and can include maintaining good performance, improving weak areas, and optimizing efficiency or overall performance. Involving key stakeholders in the decision-making process can increase buy-in and improve results.
Analyze Performance Gaps: Regularly evaluating what's working and what's not in your ESG strategy is crucial for continuous improvement. Analyzing performance gaps can highlight potential issues the organization may face while implementing an ESG strategy, and inform the development of reasonable time frames for making changes.
Develop a Strategic ESG Roadmap: A strategic ESG roadmap provides a clear picture of a company's strengths, goals, and direction by outlining initiatives, actions, and resources, and ensuring accountability for key actions. To get started, a gap analysis between the current state and vision and goals should be conducted.
Implementation and Reporting: With the current state and roadmap in place, it's time to start implementing ESG goals. Build in key performance indicators (KPIs) to assess progress, and regularly monitor and update progress. Regular reporting to stakeholders using a centralized management system or data software is essential to assess the important metrics of sustainability. The first report should highlight the company's policies and programs that are already in place and evaluate progress. Reports can include both organization-specific and industry-specific metrics, as well as evaluating engagement and progress across key metrics of sustainability. Earning additional certifications and hitting sustainability benchmarks will demonstrate further growth.
If you want to find out more about how you can get started, please reach out to our team and we will help you launch your journey towards sustainability.