ESG in a Nutshell
The importance of ESG has been steadily growing across all sectors lately. But do you know what the three letters stand for?
- E is for environmental
- S is for social
- G is for governance
These are in essence the three core areas that can be used to express the level of a business’s corporate social responsibility:
- E – the impact of a corporation’s activities on the environment – climate change, pollution and waste, recycling and sustainability, water resources, biodiversity;
- S – impact on society – care for employees, safety, emphasis on human rights in the supply chain, equal opportunities, impact on the immediate environment;
- G – corporate governance – ethics, management independence, remuneration, risk management, internal control, anti-corruption measures, etc.
Where Did ESG Come from?
The ESG concept has emerged as a consequence of the growing interest of stakeholders (investors, customers, potential employees, etc.) in how corporations and their activities impact the world around us. Questions concerning socially responsible behaviour and investment already started appearing in the mid-20th century, and have evolved significantly since then. This is particularly true for the most recent decades when topics such as protection of the environment, human rights and the fight against money laundering came to the forefront of public interest and debate. The effort to find effective tools that would force companies whose business has a negative social impact to change has led to the development of many measures and ultimately the formulation of the principles of ESG.
Why Should You Care about ESG and Why Start Now?
Simply because any company that wants to remain competitive and sustainable in the long term cannot do so without an ESG solution. Companies that have embraced the issue are now more attractive for investors, potential employees and customers. Individual countries and regulation authorities are also gradually adopting corresponding legislation and formulating requirements for compliance with ESG objectives. Companies that avoid the issue may be exposed to various limitations and related financial and reputational risks.
And if you belong to one of the following categories and do business in EU countries, you will soon be obliged to develop and implement an ESG strategy, gather data and publish non-financial reports.
- From 2025, if you are a large public interest company with more than 500 employees;
- From 2026, if you are a company with at least 250 employees and an annual turnover of at least EUR 40 million, or a balance sheet total of at least EUR 20 million;
- From 2027, if you are a listed SME, a small and not particularly complex credit institution or a captive insurance company.
If you do not fall into any of the categories above, but you supply any services or goods to companies that do, the duty will apply to you indirectly – because they will have to report about you as their suppliers.
So How to Start?
In order for the fulfilment of ESG objectives to be truly efficient and systematic in the long term, you can’t start overnight. The basic building blocks are: 1) an analysis of the current state of the company, processes and technologies; 2) optimally set objectives; 3) development of a strategy; 4) consistent adherence to the strategy and 5) ongoing evaluation. You also need hard data for ESG reporting, which means first developing a methodology for data collection and then implementing it.
Of course that opinions on ESG vary. Some people consider the whole issue to be just another abstract and pointless requirement that cannot achieve any real results, others see it as a step in the right direction towards sustainable and modern business that respects the planet and people. One thing is for sure: in the coming periods, ESG will impact all business relationships and as always, forewarned is forearmed.