ESG ?
In recent years, Environmental, Social, and Governance (ESG) criteria have become essential considerations for businesses worldwide. ESG represents a set of standards for a company’s operations that socially conscious investors use to screen potential investments. But nowadays, ESG is more than an investment tool, it becomes necessary to do business: Getting loans from your bank without a view on your ESG roadmap becomes harder and harder and EU regulation is pushing for more focus on ESG, even for SMEs. But ESG can (and probably should) be an asset in your strategic mix.
EU Obligations and Regulations on ESG
There are multiple directives looking at ESG, but on January 5th 2023, the Corporate Sustainablity Reporting Directice (CSRD) entered into force.
This new directive modernises and strengthens the rules concerning the social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report on sustainability.
If you like to read yourself (prepare yourself for heavy reading ;-)):
https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32022L2464
EU Regulation
In terms of content of the reporting, there is quite a lot. Just to give you a gist, a part of the requirements:
- A description of the undertaking’s business model and strategy, including:
- the resilience of the undertaking’s business model and strategy in relation to risks related to sustainability matters;
- the opportunities for the undertaking related to sustainability matters;
- the plans of the undertaking, including implementing actions and related financial and investment plans, to ensure that its business model and strategy are compatible with the transition to a sustainable economy and with the limiting of global warming to 1,5 °C;
- how the undertaking’s business model and strategy take account of the interests of the undertaking’s stakeholders and of the impacts of the undertaking on sustainability matters;
- how the undertaking’s strategy has been implemented with regard to sustainability matters.
- A description of the time-bound targets related to sustainability matters.
- A description of the role of the administrative, management and supervisory bodies with regard to sustainability matters, and of their expertise and skills in relation to fulfilling that role or the access such bodies have to such expertise and skills.
- A description of the undertaking’s policies in relation to sustainability matters.
- Information about the existence of incentive schemes linked to sustainability matters which are offered to members of the administrative, management and supervisory bodies.
- A description of the due diligence process implemented by the undertaking with regard to sustainability matters.
- A description of the principal actual or potential adverse impacts connected with the undertaking’s own operations and with its value chain, including its products and services, its business relationships and its supply chain, actions taken to identify and monitor those impacts, and other adverse impacts which the undertaking is required to identify
- A description of the risk related to sustainability.
- Indicators that show you are monitoring all the above.
Quite a lot, so the thing is, can we do something with all this ESG obligations?
Source: EU website
ESG Criteria put to use
The nice thing is that ESG gives a consistent framework on how different elements play a role in ‘a sustainable approach. This gives companies an approach to not only define a ’sustainability baseline’, but also to define actions that help make a company more sustainable.
Some typical measuring points for the different ESG aspects:
Environmental (E):
- Carbon Emissions: Measurement of the company’s greenhouse gas emissions and efforts to reduce them.
- Energy Efficiency: Evaluation of energy consumption and initiatives to enhance efficiency.
- Renewable Energy Usage: Percentage of energy derived from renewable sources.
- Waste Management: Strategies for reducing, recycling, and managing waste.
- Water Usage: Assessment of water consumption and conservation practices.
Social (S):
- Diversity and Inclusion: Representation of diverse groups within the workforce and leadership.
- Labor Practices: Fair wages, working conditions, and adherence to labor laws.
- Human Rights: Policies and practices ensuring respect for human rights in the company’s operations and supply chain.
- Community Engagement: Initiatives and investments in local communities where the company operates.
- Employee Well-being: Programs promoting employee health, safety, and work-life balance.
Governance (G):
- Board Composition: Diversity and independence of the board of directors.
- Executive Compensation: Transparency and fairness in executive pay structures.
- Shareholder Rights: Protections and rights afforded to shareholders.
- Ethical Business Practices: Adherence to ethical standards and anti-corruption measures.
- Risk Management: Effectiveness of systems in place to identify and manage risks.
Implementing ESG in your business strategy.
Apart from all the obligations, with customers (both B2B and B2C) becoming more and more on the lookout for companies with a sustainable approach, integrating ESG into your strategy might prove to be a win-win.
With both Environmental, Social & Governance elements at the core of ESG, it gives you a good set of ‘lenses’ to look at and define your strategy. It is not about integrating the ‘ESG stamp’ in your external communication, but about using the elements of ESG to build a stronger, more resilient, and – yes – more sustainable company for both shareholders, employees, customers, and the environment.
Some steps you can take:
- Integration into Corporate Strategy: Companies can start by integrating ESG considerations into their overall corporate strategy. This involves identifying key ESG risks and opportunities relevant to their industry and business model.
- Setting ESG Goals and Metrics: Establishing measurable ESG goals and metrics is essential for tracking progress and holding the company accountable. This may include targets related to emissions reduction, diversity and inclusion, and ethical supply chain practices.
- Stakeholder Engagement: Engaging with stakeholders such as investors, customers, employees, and regulators is crucial for understanding their ESG expectations and incorporating feedback into decision-making processes.
- Embedding ESG into Operations: Companies should embed ESG considerations into their day-to-day operations, from procurement practices to product design and supply chain management. Adding an ESG check in all your project charters can also prove to be a pragmatic way to become more sustainable and
- Reporting and Transparency: Transparent reporting on ESG performance is key to building trust with stakeholders. Companies can use frameworks such as the Global Reporting Initiative (GRI) or the Task Force on Climate-related Financial Disclosures (TCFD) to guide their reporting efforts.
Do you see ESG as a new administrative burden or do you see options to leverage your business strategy, customer experience & bottom line?
