Environment & Sustainability

ESG criteria and reporting

A solid foundation for trust and responsible investments

5 minutes09/01/2021

In recent years, people and companies around the world have become increasingly aware of the urgent need for a forward-looking perspective, particularly in relation to industry and production processes. Climate agreements, occupational safety regulations and the European Due Diligance Act are all evidence of the growing pressure to act responsibly now permeating all areas of business. Another example can be found in the financial sector, where classifying sustainable investments based on ESG criteria has gained acceptance. Higher awareness of sustainability in society at large, along with greater environmental consciousness and a stronger sense of global responsibility have all contributed to a visible rise in demand for investment opportunities that fulfill ESG criteria.

ESG: What it stands for and what it means

The acronym “ESG” stands for environmental, social and (corporate) governance. These three aspects cover the areas of responsibility in which companies should strive to operate in accordance with specific criteria. In the financial sector, ESG criteria and corresponding KPIs are also used as investment criteria to ensure that investments are as sustainable as possible.

Strictly speaking, “sustainable” is not an entirely accurate term in this context, as ESG and sustainability are two separate and distinct concepts. In a wider context, the term “sustainability” describes an overarching concept of future-conscious practices that aims to create a balance between resource consumption and renewal without burdening or disadvantaging generations to come. By contrast, ESG specifically focuses on financial aspects and helps prospective investor pinpoint ecologically and socially responsible investments. ESG criteria therefore make it easier for responsible-minded investors to find suitable financial products. However, as ESG-compliant investments are generally in line with the concept of sustainability, the two terms are often used synonymously.

What are ESG criteria?

More precisely, ESG criteria are investment criteria that make it possible to examine the sustainability credentials of various financial products. They have become a de facto industry standard for sustainable investments. However, no universal classification system has been drawn up to date, which has led to different systems being used in parallel.

Software for ESG reporting

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One of the most commonly used environmental criteria is an organization’s climate impact or contribution to climate protection. Meanwhile, the social aspect of ESG is increasingly shining a light on occupational safety, and efforts to improve corporate governance are the focus of the new German law on supply chains. However, as noted previously, there are no specific criteria that organizations are obligated to meet. No fixed, universal ESG criteria have been formulated to date, which sometimes results in uneven requirements that vary from sector to sector. In addition, different types of businesses focus on different ESG metrics and KPIs.

ESG at a glance

 

 

Environment

Social

Governance

Implications

  • Protecting the environment
  • Conserving resources
  • Using renewable energy
  • Working in a future-conscious way
  • Safeguarding human rights & dignity
  • Eradicating child labor & slavery
  • Taking responsibility for employee well-being
  • Shouldering a fair share of one’s social responsibility
  • Ethical business management
  • Combating corruption/anti-competitive behavior

Commonly used criteria

  • Climate protection
  • Resource management
  • Water management
  • Energy & emissions management
  • Building management
  • Occupational health & safety
  • Health & well-being
  • CPD for employees
  • Supply chain audits
  • (Inter)national cooperation
  • Compliance
  • Supervision, management & control structures
  • Reputation management
  • Diversity

Nevertheless, consensus on a standardized, universal set of criteria is already within sight. Back in 2006, a UN initiative called Principles of Responsible Investment formulated six key aspirational principles. In 2020, the EU introduced the EU taxonomy for sustainable activities, followed by the EU Taxonomy Climate Delegated Act in April 2021 as part of its aim to create a standardized, pan-European system for sustainable products. The EU taxonomy also includes a Sustainable Finance Package aimed explicitly at the financial sector. This could make it possible to define strict legal requirements, which would in turn add transparency to the issue of ESG compliance.

Criticisms of ESG criteria

A universal classification system and greater transparency are both essential in order to counter central points of criticism leveled at ESG criteria used to date. At present, companies in different sectors can select different KPIs to measure ESG compliance, which has led to sustainability rating agencies being commissioned to produce ratings for specific aspects only, while disregarding a company’s full sustainability record. This system is prone to conflicts of interest.

These best-in-class ratings enable companies to compare themselves against other players in their sector – usually with very favorable outcomes. The fact that companies can exclude less ideal aspects of their offering entirely allows means they can present themselves as paragons of social and environmental responsibility, leaders on the issue in their sector, even though their approach is less sustainable overall. Consequently, the current system is often criticized as facilitating greenwashing.

Software for ESG reporting

Future classification systems will aim to prevent such issues. Companies hoping to obtain certification under new ESG classification systems now face the issue of implementing ESG regulations and measuring their performance in these areas. It is certainly worthwhile given the rising general interest in ESG-compliant investments and evidence of investors actively seeking out such investments, which could cause companies that ignore ESG criteria to miss out on valuable investor capital. Furthermore, improvements in relation to occupational safety and environmental standards ultimately benefit the entire company. Maintaining a transparent and trackable overview of the implementation of ESG criteria is certainly a challenge. It is therefore often well worth introducing a software solution capable of covering the reporting requirements for environmental, social and governance aspects. A centralized software solution that enables you to manage information and automate workflows both supports and simplifies reporting, inherently improving sustainability in production processes. As a result, companies can easily integrate ESG criteria reporting and monitor their performance.

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Overview of key points

  • Universal ESG criteria are set to be introduced in the next few years

  • ESG criteria help to increase transparency and improve sustainability

  • Environmentally and socially responsible companies can position themselves as more attractive employers and business partners

  • Software supports the integration and reporting of sustainability/ESG criteria

 

A universal ESG classification has the potential to lay foundations for increased social and ecological investments while also incentivizing companies to fulfill these criteria – and thus to do their part to create a responsible future for everyone.

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