The acronym ESG represents the three main categories of criteria by which companies are assessed to measure their sustainability performance. This is an approach that is becoming increasingly important and helps to assess the social responsibility and impact of companies on society and the environment.
The three pillars of the ESG
The ESG assessment is based on three pillars, which form the basis for evaluating companies in terms of their sustainability practices and performance:
- Environment (Environmental): This category describes a company's impact on the environment and includes topics such as energy efficiency, resource consumption, CO2 emissions, water management and ecological impact.
- Social: The "Social" pillar assesses a company's impact on society. This includes issues such as job security, diversity and inclusion, working conditions, human rights and community engagement.
- Corporate governance: Corporate governance concerns the way in which a company is managed and controlled. This includes topics such as board structure, ethics, integrity, compliance and the relationship between the company and its shareholders.
Why is ESG important for companies?
ESG is very important for companies for various reasons. Firstly, awareness of environmental and social issues is growing in society, and consumers, job applicants, employees and investors increasingly prefer companies that operate sustainably. Companies that invest in ESG activities and improve their ESG performance therefore often have a competitive advantage.
Secondly, regulatory requirements and initiatives such as the EU Taxonomy demand ESG reporting obligations from companies. This means that companies must communicate ESG information in a transparent and comprehensible manner.
Thirdly, investors' preferences and values are also geared towards sustainability. 65% of investors expect ESG to become standard practice in the coming years. The same applies to lending, because despite rising costs and financing hurdles, sustainability is becoming a focus for banks. The worse the ESG rating, the more expensive the loan will be or could even be rejected. This is because banks also have to include borrowers in their reports. If they have a poor rating, this in turn has a negative impact on the bank. A study by Deloitte shows that 58% of credit managers expect lending volumes to increase in the medium term and 59% in the long term due to the relevance of ESG criteria. Companies that do not take ESG criteria into account will be affected by very high capital costs and will no longer be able to afford their business in the future.
Finally, good ESG performance can also improve risk management and promote long-term financial stability. Companies that successfully implement ESG criteria are generally better positioned to respond to changing market conditions.
How many ESG criteria are there?
There are a large number of ESG criteria that can be integrated into the three pillars of environmental, social and corporate governance and can vary depending on the sector and region. EFRAG currently has over 60 Sustainable Matters, which are divided into E, S and G. However, there are general guidelines and standards, such as the 17 Sustainable Development Goals of the United Nations, which serve as reference points. "Environmental", for example, includes sub-categories such as the use of renewable energy, environmental protection, reduction of emissions and the sparing use of resources. "Social" covers, among other things, health protection, occupational safety and rights, no child or forced labor and "Governance" includes ethical corporate management, risk management, compliance and no corruption.
The exact number of criteria can be difficult to quantify as they can evolve and adapt over time. Companies need to identify the criteria that are relevant to them and incorporate them into their ESG reporting. With Planted, we offer companies an ESG self-assessment that can be used to easily gain an initial overview of ESG activities.
How does the ESG rating work?
The ESG rating is a process in which companies are assessed on the basis of their ESG performance. This is often done by specialized agencies or service providers that perform ESG ratings and assessments. The agencies analyze a company's ESG reporting and activities and award points or scores based on their performance and industry benchmarks in the ESG categories.
The results of these assessments can then be used by investors, customers and other stakeholders to assess a company's sustainability performance and make investment decisions. This growing interest makes it clear that environmental, social and governance criteria go hand in hand with corporate success.
Is ESG synonymous with sustainability?
ESG and sustainability are closely linked, but they are not the same thing. ESG is a framework used to assess a company's sustainability performance. However, sustainability is a broader concept that encompasses not only ESG criteria, but also other aspects such as long-term impact, environmental responsibility and social engagement.
Who has to do the ESG reporting?
ESG reporting requirements vary by region and industry, but in general, large listed companies are more affected and often have legal obligations for ESG reporting. This often depends on regulatory requirements and initiatives such as the EU Taxonomy.
However, investors and consumers are increasingly interested in knowing the ESG performance of companies, and many companies voluntarily choose to carry out ESG reporting in order to increase stakeholder confidence and act more sustainably.
Overall, ESG has become an important part of corporate governance and valuation. Companies that take ESG criteria seriously and integrate them into their business strategy are better positioned to meet the expectations of their stakeholders and be successful in the long term. It is a paradigm shift that can have a positive impact not only on companies, but also on society and the environment.
What is ESG reporting software?
ESG reporting software is a technological solution that supports companies in collecting, analyzing and communicating ESG data and reports. This software enables companies to make their ESG reporting more efficient and accurate by collecting, aggregating and visualizing data from various sources. ESG reporting software also allows companies to track their progress over time and ensure compliance with ESG standards and guidelines.
With Planted, we support your company both in identifying ESG-relevant activities and in optimizing them within your company.
The advantages of ESG reporting software
ESG reporting software optimizes data collection and management, ensures accurate and transparent ESG reporting and facilitates regulatory compliance. It also enables performance tracking and improves communication with stakeholders. It also supports companies in their risk management.
Companies face challenges such as ensuring data quality and understanding the complex ESG criteria. The integration of ESG into the business strategy requires a rethink and possibly cultural changes. Financial resources must be made available for the implementation of ESG reporting software and comprehensive ESG initiatives. Measuring social parameters and environmental impacts can be difficult, but overcoming these challenges is crucial for long-term success.
How the EU supports ESG in companies
The EU promotes ESG through the introduction of ESG standards and the EU Taxonomy, which sets out ESG criteria and reporting requirements. This creates clear guidelines and incentives for companies to integrate ESG into their business strategy and improve ESG reporting. These regulatory measures are crucial to strengthening companies' sustainability efforts and providing investors and stakeholders with reliable ESG data. The EU therefore plays a central role in promoting ESG in the corporate world.
The future relevance of ESG for companies
The importance of ESG for companies will continue to grow in the future. Companies that invest in ESG reporting and sustainability not only strengthen their competitive profile, but also gain the trust of investors and customers. The introduction of the EU taxonomy and standards will continue to shape the ESG landscape and increase the demands on companies. Companies should therefore keep an eye on these developments and actively respond to them in order to ensure long-term success.
Would you like to take the first step with your company towards a sustainable future and measure, improve and future-proof your ESG performance? Then book a free demo with Planted today.