As a new business and marketing trend, ESG is of growing interest to an increasing number of markets and market participants. More and more businesses are publishing their ESG strategies or striving to comply with ESG-specific assumptions, and with good reason. According to PwC’s 2021 U.S. survey, 83% of consumers indicated a preference for companies to implement ESG best practices, and 86% of employees prefer to work for companies that care about ESG values.
What is ESG?
ESG is an acronym for Environmental, Social and Corporate Governance.
Each of these terms relates to a factor that should be taken into account to make a business sustainable.
The Corporate Social Responsibility (CSR) concept is considered to be the forerunner of the current ESG standards. However, ESG factors not only relate to a broader sphere of doing business than CSR, but also are intended to allow a more precise determination of company compliance with the principles of sustainability, as expected by the market.
ESG as a path towards sustainable business growth
The ESG concept is based on three pillars:
- Protecting the environment and preventing its destruction – this involves adopting a pro-environmental policy, allowing the assumptions made to be verified in a measurable way, i.e. based on a specific plan and indicators to identify risks arising from climate change. Businesses should pay particular attention to energy consumption, emissions, supply of raw materials, water management and renewable energy.
- Social responsibility and human rights – these are factors that determine the impact of a business on the people around it, both internally (employees, suppliers) and externally (communities that the business may – even unintentionally – influence through its activities), including e.g. ensuring equal pay for the same positions regardless of gender, respect for employee rights, data security and protection, combating inequalities, and having a responsible policy in place for suppliers.
- Corporate governance – this is related to the transparent and responsible conduct of business and covers corporate supervision, management structure, and compliance with the duties of information towards shareholders, including e.g. executive remuneration, tax transparency and anti-corruption measures.
The ESG concept is beginning to permeate nearly every aspect of business, but its individual elements are by no means new. Enterprises have long been required by law and codes of ethics to protect the environment and respect employee and shareholder rights.
So where does the current popularity of ESG in business come from?
Non-financial reporting as a stimulus for the growth in ESG popularity
ESG principles have now linked the concept of running a sustainable and responsible business to a sense of business accountability.
ESG is intended to encourage businesses to care more about the environment and the people around them via introducing non-financial reporting mechanisms. This means that a non-financial, i.e. ESG, component is added to traditional financial statements businesses are required to produce. This includes data about a firm and its activities from the perspective of the ESG criteria discussed above.
So far, however, such reporting requirements have been imposed on very few businesses, who have been allowed to select their preferred reporting standard from dozens of more or less detailed standards on the market, developed by more or less reputable organisations.
This is, however, set to change with a new EU directive.
Draft CSRD and its impact on enterprises
This directive is the CSRD (Corporate Sustainability Reporting Directive), a draft of which was published in April 2022.
The draft provides for extending the catalogue of business entities obliged to produce ESG reports, and introduces a uniform reporting standard. This means that consumers and investors will be able not only to find out how responsible a specific firm is, but also to compare it against others, including its competitors.
The bottom-up impact of the draft directive, which has not even entered into force yet, is significant, with businesses already starting to collect, record and analyse new business data to prepare for the reporting obligations on the horizon.
The impact is also top-down – a number of large enterprises, in order to improve their non-financial performance and be able to demonstrate the ESG compliance of their entire supply chains, have already started to influence their smaller business partners and suppliers to start incorporating ESG principles in their operations.
Given that the CSRD has not even been enacted yet and that most of the demands of the European Green Deal are still to be implemented, we can expect ESG in business to keep increasing in their momentum.
If you would like to talk to us about ESG support, or any of the matters mentioned above, please do not hesitate to contact me directly