For a business, to become sustainable is no longer about having some side-line projects or charitable actions about environmental protection or social issues.
There is a looming threat for businesses that ignore investment, employment, and consumer behaviour trends that point towards the need to run a responsible company that considers social and environmental factors besides pleasing shareholders and producing profit.
Implementing an ESG policy, which stands for Environmental, Social, and Governance factors related to a business’s core operation, can serve as a compass to navigate the ever-changing market and investment landscape.
Is ESG reporting mandatory for businesses?
Under EU regulations, all large companies and all listed companies, but not micro-enterprises, are required to publicly disclose social and environmental information and the impact of their activities on people and the natural environment.
Additionally, the EU’s Corporate Sustainability Reporting Directive (CSRD), which aims to enhance the calibre and comparability of corporate ESG disclosures, went into effect in January 2023. The first set of standards is expected to be introduced by the Commission by June 2023, which brings ESG reporting to the top of the agenda for companies.
Besides, the recent EU `Environmental Taxonomy` established a framework for assessing the environmental activities of a company and cleared out the language used around it.
However, the social factor is gaining more attention now as the EU Platform on Sustainable Finance published the “Social Taxonomy Report” in 2022, and the European Commission is proposing to review it to establish employers’ social credentials. One of the focus areas is to address `decent work` related issues, such as equal opportunities, pay transparency, or job creation for young people.
It is clear by now that, finally, EU legislations are actively shaping how companies can earn their license to operate by considering and addressing their societal and environmental impact.
What do ESG obligations mean for employers?
When something becomes mandatory, there is a temptation to handle it as a box-ticking exercise and get it over with while doing business as usual.
Going beyond compliance can open up an array of opportunities to improve processes, build a better public profile or employer brand and enhance profitability.
Integrating ESG into business strategy can bring so much to the table and help establish an organisational culture built on solid values that would result in multiple benefits from talent management and increased customer engagement to securing investments.
Setting up an ESG policy and reporting system will require screening, planning, and measuring, but it all links back to the overall business KPIs, which means it can and should improve business performance.
Although starting can be daunting, considering the complexity of topics involved. The first step is to explore the relevant issues to your company and set out realistic plans with KPIs that you can track. Striving for authenticity and transparency along the way will pay off handsomely when you get to communication.
The Environmental element of ESG has been traditionally the main driving force for implementation as the awareness and imminent impact of climate change has increased. Also, typically it is easier to measure related factors than social or governance elements, which does not make these factors less important to incorporate.
Overall, producing an ESG report should not be the goal but only be used to measure progress to achieve environmental, social, and governance goals related to business practices.
How much are employers aware of ESG obligations?
It is far from a new idea to consider environmental, social, and governance factors to mitigate risk and embrace market opportunities as ESG surfaced in the investment sector in 2006.
Looking at current global trends, more than 90 percent of the 500 largest companies listed on stock exchanges in the United States, also known as S&P 500 companies, now publish ESG reports in some form.
While a recent report published by William Fry in early 2023 on how employers are taking on the ESG challenge in Ireland paints a different picture. The survey included more than 1000 employees and over 400 employers that would all have ESG obligations but found that only 17 percent of them actually knew what those obligations are and how to manage them correctly.
This also means that over 80 percent of companies either ignore their responsibilities or are unaware of the requirements and how to handle them. Interestingly, 37% of these employers state, “We`re not focused on it because we don`t think it is relevant to our organisations”.
Another publication assessing the ESG landscape in the Irish business sector was released in January 2023 by the law firm McCann FitzGerald and found slightly different narratives. According to their study, almost three-quarters (72%) of organisations in Ireland believe mandatory ESG reporting will “influence corporate behaviour”. Also, more than half (63%) of responders “believe that actively reporting on ESG issues will attract investment”.
Besides going against current legal regulations, businesses neglecting to address ESGs are risking more than bending the law and being unprepared for stricter rules down the line. They simply risk being in business in the long run.
Is implementing ESG good for business?
Based on a McKinsey report, studies found that solid ESG performance positively correlates with higher equity returns and reduction in downside risk, confirming that implementing meaningful ESG policy is a good business.
Investors have been using ESG for a while to mitigate risks associated with climate change, emerging societal issues, and corporate governance.
Besides investment firms and financial bonds, personal investors align their values with their money. The previously mentioned IBM study also found that “more than 4 in 5 personal investors plan to take action based on sustainability and/or social responsibility factors in the next 12 months”.
The term `ESG investing` is on the rise, meaning investors are looking for social, environmental, and corporate governance scores verified by independent third-party alongside financial indicators. There is a simple logic behind these screenings, as they can influence the overall performance of a company. In the wake of the climate crises and associated social challenges, these factors are expected to put on the scale even more in the near future.
Consumers on the lookout for responsible businesses
According to the `Sustainability at a turning point` study published by IBM, COVID-19 affected 93% of people`s views globally on environmental sustainability. It also confirmed a growing interest and commitment towards social responsibility.
Almost half of the consumers felt that environmental and social issues are equally important to them. When they choose a brand, more than two-thirds consider sustainability important, and 55% say it is very or extremely important.
What can be a red flag for companies is that 62% of consumers now say they are willing to adopt changes in their purchasing behaviour to help decrease negative environmental impact.
Do employees care about Environmental, Social, and Governance factors?
The same IBM study also found that 70% of employees think that employers with sustainability programs are more appealing, and 80% want to contribute to their company`s climate or ESG goals actively.
With that in mind, giving opportunities to employees to get involved with ESG policies and practices could boost performance and engagement at the same time.
Attracting and retaining talent is an everyday challenge for companies, especially with the Great Resignation induced by the Covid-era.
The study also revealed that 7 in 10 workers are more likely to stay with an employer with a “good reputation on environmental sustainability”, while nearly 3 in 4 expect their employers to “take action on social responsibility issues”.
Upskilling employees in ESG areas and having strong company values interlinked with relevant environmental, social, and governance issues could be a game-changer, especially with GenZ and Millennials.
Is ESG a burden or blessing for employers?
Instead of putting ESG into the compliance folder, forward-thinking employers embrace opportunities linked to these areas. It takes up resources to implement new systems, measure performance and impact and educate stakeholders, yet the overall benefits will outweigh these investments.
There is an ongoing debate if ESG is the best system for companies, and it might not always be called ESG. Still, sustainability, social and ethical issues will only grow stronger, leaving businesses with all associated challenges and opportunities.
Besides focusing on reporting and compliance, it is also crucial to find a way to communicate transparently the efforts of becoming a sustainable and socially responsible business. This would massively help engage stakeholders and involve them in the journey to strengthen the company`s position further. By no means should a company wait until everything is perfect before they start communicating their efforts. Since being environmentally sustainable and socially responsible is an ongoing endeavour, you cannot be ready, only on the way to progressing. Future-proofing any business will heavily rely on how ESG factors are integrated into the business strategy and getting your company ahead of the curve to ride the waves rather than survive – or not – the tsunami of inevitable changes. Our Diploma in Business Sustainability course can help you craft your sustainability strategy and embed ESG values so you can thrive in the fast-evolving world of sustainability.