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What is ESG? What is ESG reporting and how do I comply with the appropriate legislation? ESG scoring is also covered here.
Once upon a time, there was a company committed to ESG, where a group of employees decided to organise an eco-friendly office competition. They challenged each other to use as little paper as possible for one month. People started coming up with the most creative solutions as part of this hilarious contest, including folded envelopes and even origami artworks made from recycled memos. Ultimately, the employees ended up saving trees, in addition to boosting workplace togetherness as they addressed this ESG challenge. So as you can see, small changes can make a big impact.
ESG is an acronym that stands for Environmental, Social, and Governance. It is a framework used to assess the sustainability and social impact of businesses and organisations. Sounds familiar? Is ESG the same as Corporate Social Responsibility (CSR)? They are very similar. CSR and ESG both pursue and promote climate-friendly and social-ethical business practices. However, ESG is the more widely known international standard. Several (European) standards have been defined, facilitating reporting for (international) companies.
Interesting read: ESG is the new corporate social responsibility
ESG has its roots in the 17 Sustainable Development Goals (SDGs) that were identified by the United Nations (UN) to end poverty, pursue economic growth, and take climate action. ESG factors can be linked to the SDGs at company level. The 17 SDGs have been transposed into 10 foundational ESG principles, that help businesses develop an ESG strategy that drives their business practices.
In 2023, simply claiming to embrace the SDGs is no longer sufficient. An effective ESG policy requires a more in-depth approach, in which you actively look at ways of creating positive impact with your daily business practices. Actions speak louder than words and concrete action is essential for contributing to sustainability, social responsibility, and good governance.Setting measurable targets is a crucial part of a good ESG policy. These metrics allow you to measure and evaluate the progress and effectiveness of your sustainability efforts. The problem, however, is not the metrics or the targets. Reporting and way in which results are measured could also do with more standardisation.
ESG reports contain qualitative and quantitative metrics about your company’s performance in terms of environment, society, and governance. In it, you shed light on your company's ESG activities, increase transparency for investors, and inspire other organisations to follow your example. In addition, you show how you achieve your goals and that your ESG projects are genuine; i.e., that you are not guilty of ‘greenwashing’. This term is used for businesses that mislead their audience by pretending to be more environmentally-friendly or sustainable than they really are. Preparing and structuring an ESG report is a challenging undertaking for most companies because ESG metrics vary depending on the industry, company size, and complexity. Legislation and reporting standards also have an important role in this.
Interesting read: The challenges of an ESG-strategy
An ESG score is very similar to a credit rating, albeit for sustainability. It provides a measure of how well a business scores in terms of environmental issues, social responsibility, and good governance. It also reveals the extent to which the company adheres to its sustainability commitments, how well it performs in these areas, and the risks it faces. ESG scores are a relatively new development and can therefore be exposed to liabilities. Many companies that offer ESG scores rely on information provided by businesses themselves. As a result, there may be a discrepancy between the score and the company’s actual sustainability performance.A balanced approach is therefore crucial to improve ESG scores and make them more accurate. Good ESG scoring involves a mix of sources of information, including data from businesses themselves, as well as the use of technologies such as Natural Language Processing (NLP) and machine learning, such as AI.
In recent years, numerous laws and regulations have been laid down regarding ESG, mainly at European level. These laws are mainly aimed at large companies, but as their entire supply chain must also comply with these frameworks, this often has a significant impact on smaller companies. As time goes on, SMEs will increasingly play a part in ESG regulatory and legislative compliance.Wondering which rules apply to your business? Below we list the most important ESG laws and regulations.
*When determining the threshold for the total net turnover generated by a non-EU-based company within the European Union, it is worth noting that this does not only refer to the direct revenues of the company itself. This also includes revenues derived from collaborations with other companies in the EU, e.g., in cases where the non-EU-based company has concluded agreements for the use of its products or brand in exchange for payment.
This directive requires companies subject to the CSDD to make their due diligence strategy public. In it, they must indicate how they deal with such issues as child labour, slave trade, emissions, corruption, and so on. This will have an impact on their own supply chain, but also on any suppliers and contractors, both inside and outside the EU.The legislation may cause companies subject to the CSDD to request documentation from smaller businesses to demonstrate compliance with their due diligence obligations because CSDD-regulated companies have a duty to ensure that their partners and suppliers also comply with sustainability standards. In all likelihood, the CSDD will only take effect around 2025-2026 at the earliest.
Preparing an ESG report is further complicated by the multiple reporting standards you can choose from. The best-known ESG reporting standards are:
Besides regulatory compliance, sustainability reporting has many other benefits for business owners!
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