As investors, customers, and regulators increasingly prioritize sustainability, companies worldwide are adopting Environmental, Social, and Governance (ESG) criteria to enhance performance, manage risks, and bolster their reputations. However, the sustainability landscape is evolving due to significant developments in both the United States and the European Union, necessitating a nuanced approach to ESG implementation.
In the United States, regulatory changes are reshaping the ESG landscape. The Securities and Exchange Commission (SEC) has been focusing on enhancing ESG-related disclosures, aiming to standardize reporting and increase transparency for investors.
Additionally, the Department of Labor has been revisiting rules to potentially facilitate the consideration of ESG factors in retirement plan investments, reflecting a broader acceptance of sustainability considerations in financial decision-making.
Conversely, the European Union is advancing its ESG regulations with initiatives like the Corporate Sustainability Reporting Directive (CSRD), which aims to standardize and enhance sustainability reporting across member states. This directive is expected to significantly increase the number of companies required to disclose sustainability information, thereby promoting greater corporate accountability and transparency.
Given these contrasting regulatory trends, a one-size-fits-all approach to ESG may not be effective for every organization.
In this article, we will discuss how to set the right ESG criteria for your company by understanding the fundamentals and customizing your approach to align with your unique business goals and values.
Understand the Fundamentals of ESG criteria
ESG, an acronym for Environmental, Social, and Governance, represents a triad of principles that gauge a corporation’s influence and efficacy across these interconnected domains.
In the environmental sphere, entities are scrutinized based on their endeavours to curtail carbon emissions, minimize waste, optimize resource utilization, and champion the conservation of nature’s delicate ecosystems.
On the social front, the evaluation of firms hinges on their employment standards, the promotion of inclusivity and diversity, and their proactive involvement with local communities.
Particularly relevant in recent years, social issues have gained increased attention as demographic shifts reshape the labor market and stakeholders expect stronger commitments to equity, worker rights, and community engagement.
Lastly, governance criteria concentrate on the organization’s adherence to ethical practices, such as maintaining a heterogeneous board, ensuring transparency, and upholding accountability.
ESG Standards Frameworks
ESG standards frameworks serve as essential tools for measuring and reporting a company’s performance in Environmental, Social, and Governance dimensions.
Their role is to help organizations align their activities with sustainability regulations and enable investors to make informed decisions based on comprehensive ESG data.
Several prominent ESG frameworks have emerged to guide companies and investors in this area, such as the following.
Global Reporting Initiative (GRI)
As one of the most widely used frameworks globally, GRI provides a comprehensive set of indicators and guidelines for organizations to report on their sustainability performance. The GRI Standards focus on material aspects that have significant economic, environmental, and social impacts, ensuring that reporting is relevant and meaningful to stakeholders.
Sustainability Accounting Standards Board (SASB)
SASB offers industry-specific standards for disclosing material ESG information to investors. By focusing on financially material issues, SASB helps companies identify and manage risks and opportunities related to ESG factors, ultimately improving their long-term value creation.
Taskforce on Climate-related Financial Disclosures (TCFD)
Established by the Financial Stability Board, the TCFD provides a framework for companies to disclose climate-related financial risks and opportunities. Its recommendations aim to enhance transparency and promote more informed investment decisions, fostering greater resilience to climate change in financial markets.
Taskforce on Nature-related Financial Disclosures (TNFD)
With respect to the increasing attention toward biodiversity, companies are expected to adopt integrated frameworks, including the upcoming Taskforce on Nature-related Financial Disclosures (TNFD), which aims to support businesses in identifying and disclosing nature-related risks, further emphasizing the relevance of biodiversity in ESG reporting.
United Nations Global Compact (UNGC)
As a voluntary initiative, the UNGC encourages companies to align their strategies and operations with ten universally accepted principles in the areas of human rights, labour, environment, and anti-corruption. Participating organizations commit to reporting on their progress annually, driving continuous improvement and accountability.
Carbon Disclosure Project (CDP)
The CDP is a global disclosure system that enables companies, cities, states, and regions to measure and manage their environmental impacts. By requesting information on climate change, water security, and deforestation, CDP encourages organizations to set ambitious targets and act to reduce their environmental footprint.
Company's ESG Risks and Opportunities Assessment
Before setting ESG criteria, it is necessary to conduct a double materiality assessment in order to identify a company's key ESG risks and opportunities.
In a draft of the European Sustainability Reporting Guidelines (ESRG) published by EFRAG (European Financial Reporting Advisory Group) a definition of Double materiality, according to the European sustainability Reporting standards (ESRS), is stated.
The draft reports that the concept of double materiality presents guidelines for deciding whether sustainability-related topics or information should be incorporated into an organization's sustainability report.
“Double materiality is the combination (in mathematical terms, the union of two sets, rather than the intersection) of impact materiality and financial materiality. “
Consequently, a sustainability subject or information satisfies the double materiality criteria if it is deemed significant from the standpoint of impact, financial aspects, or both perspectives.
Set Realistic and Measurable Goals
Once the company has identified its ESG risks and opportunities, it can establish realistic and measurable goals that align with the company's values and objectives.
It is important to be specific about the outcomes at which the company aims and set time-bound targets for the short, medium and long term.
In this context, the Science-based Target Initiative (SBTi) is a virtuous example.
The Science Based Targets initiative (SBTi) is a global collaboration between the Carbon Disclosure Project (CDP), the United Nations Global Compact (UNGC), the World Resources Institute (WRI), and the World Wide Fund for Nature (WWF).
Launched in 2015, the SBTi aims to help companies establish and implement science-based targets to reduce greenhouse gas emissions and mitigate the impacts of climate change.
The SBTi provides a comprehensive framework for businesses to align their climate goals with the Paris Agreement's objective of limiting global temperature rise to well below 2°C above pre-industrial levels, while pursuing efforts to limit the increase to 1.5°C.
By adhering to this framework, organizations can develop emission reduction targets based on scientific data and contribute to a low-carbon economy.
Integrate ESG Criteria into the Business Strategy
To ensure the successful implementation of ESG criteria, it is necessary to integrate such criteria into the overall business strategy.
This means incorporating ESG considerations into the decision-making processes, performance evaluations, and supply chain management.
This holistic approach can demonstrate the company’s commitment to sustainability and help it stay accountable to its goals while managing its compliance requirements and evaluating its supply chain sustainability performance.
Monitor and Report Progress
The regular monitoring and reporting of the company’s progress against its ESG goals makes it possible for the business to be compliant with reporting regulations and to have control over its performance.
Transparency allows the company to identify areas for improvement, demonstrate its commitment to sustainability, and showcase its achievements to stakeholders.
It is important to consider the use of recognized reporting frameworks, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB), to ensure consistency and comparability.
Nonetheless, technological innovation is driving a new generation of ESG reporting platforms that utilize automation and real-time dashboards to track key performance indicators, ensuring greater transparency and compliance with evolving international standards.
The importance of integrating ESG criteria
By understanding the fundamentals of ESG, conducting a materiality assessment, setting realistic goals, integrating ESG criteria into the business strategy, and monitoring progress, a company can create a customized approach to sustainable business practices that align with its unique values and objectives.
Moreover, adapting proactively to evolving ESG expectations, particularly around biodiversity, transparency, supply chain and green claims, can position companies as leaders in a competitive and regulation-driven global marketplace.
In doing so, the company will not only contribute to a more sustainable world but also enhance its reputation, attract investment, and ensure long-term success.
