ESG criteria and reporting

7 minutes07/28/2022

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.

An 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.

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.

ESG and CSR in sustainability management

Comprehensive sustainability management includes strategies and measures that help companies to make a substantial contribution to the United Nations’ Sustainable Development Goals (SDGs). Two terms crop up particularly frequently in this context: CSR (Corporate Social Responsibility) and ESG (Environment, Social and Corporate Governance). Both terms relate to companies’ responsibilities but, although related, have distinct meanings and focuses. While the acronym CSR describes a rather normative concept that holds companies accountable for their social engagement from an ethical perspective, ESG helps to measure and quantify these efforts. ESG primarily refers to the sustainability assessment of listed companies in the field of green finance and sustainable investments, but has recently also been applied to sustainability management, as a whole.

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. 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.

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 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 

Why is ESG so important for companies?

Keeping in line with current developments at the EU level, regulatory pressure on companies is increasing. The EU Taxonomy for sustainable economic activities, which is currently being negotiated, will create a framework to determine whether and to what extent certain economic activities are to be classified as (environmentally) sustainable. In addition, financial market participants such as investment funds that wish to market sustainable financial products will be required to report on the proportion of (environmentally) sustainable investments in their portfolios. In the future, companies that are required to provide non-financial reporting in accordance with EU Directive 2014/95/EU (CSRD) will have to provide information on the extent to which the company's activities are linked to environmentally sustainable economic activities. Another aspect is the European Commission's Sustainable Product Initiative (SPI), which is currently being developed. With the "Substantiating Green Claims" initiative, companies will have to substantiate their statements in terms of quantity on the environmental friendliness of their products using the standardized Product Environmental Footprint (PEF) method. It can be expected that the Ecodesign and Energy Labelling directive will be including more product groups and extend its requirements on life cycle, reusability, reparability and recyclability. It is planned that all important information on material composition, reusability and recyclability is to be compiled and processed through digital product passports.

In the future, whether and under what conditions companies can access financial markets, will increasingly depend on their ESG performance.

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.

ESG and occupational health and safety: insights from the Safety Management Trend Report 2022

The consideration companies give to these criteria is closely linked with the work EHS professionals do. The overlaps range from working in a generally sustainable way to taking responsibility for ensuring that measures to protect people and the environment are observed throughout the entire production process. Measures at various political levels have extended and continue to extend companies’ long-term due diligence obligations to supply chains, which has made having an integrated EHS strategy increasingly relevant for commercial success.

A survey of 500 EHS professionals and managers in the Safety Management Trend Report 2022 emphasizes the impact of ESG criteria in occupational safety and health:

While 18% of those surveyed have not (yet) come into contact with the topic, a significant proportion of practitioners (42%) expect ESG criteria to play an important role in the near future. Ultimately, the role of ESG as a trending topic and key success factor is signaled by the fact that these criteria have already become an important driver of investment in better occupational health and safety in almost 30% of the companies of those surveyed.

The survey is supplemented by the opinion of 8 international experts. They see the increasing importance of ESG criteria as an opportunity to improve and raise awareness for the topics of occupational safety and health. Against the backdrop of climate change, some experts believe companies now have an obligation
to implement ESG criteria. These criteria bring about changes that also entail new risks and potential hazards – and companies must react accordingly. These risks obviously relate to CSR; but they also relate to companies’ responsibility to their employees.

ESG as an integrative approach

Organizations usually develop their own systems and procedures for regulating processes, responsibilities and resources in such a way that corporate goals can be achieved. In many cases, they establish standardized quality, environmental, risk or energy management system, as their harmonized structure (once known as the High-Level Structure, or HLS) makes it easier to integrate additional requirements. An Integrated Management System (IMS) incorporates recurring requirements in a way that allows them to be processed with standardized processes. This relates in particular to the following recurring requirements:

Context of the organization

• Purpose of an organization’s activities
• Environment of the organization
• Expectations of interested parties
• Defining the system’s scope and limits

Leadership

• Duties and responsibilities of leadership (top management)
• Defining a corresponding corporate policy and guidelines
• Assignment of responsibilities and authorities within the organization and provision of information

Planning

• Identifying risks and opportunities (risk-based approach)
• Determining objectives
• Deriving plans for achieving objectives

Support

• Determining support processes for provision of resources, improving awareness and competence
• Producing, updating and controlling documented information in order to maintain evidence

Operation

• Core processes for operational planning and ensuring conformity

Performance evaluation

• Evaluation and analysis of results through monitoring and
• measurement, internal audits and annual management review

Improvement

• Deriving actions and corrective measures to address
• nonconformity and derivations
• Continuous improvement process (CIP) to achieve “real” impact

In practice, Integrated Management Systems are dynamic and can be adapted as needed. They also offer an opportunity to bring together different perspectives and departments. After all, an integrative approach that incorporates operational and strategic aspects as well as controlling is essential for effective ESG management.

Software for ESG reporting

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 like Quentic 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.

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

• In the future, whether and under what conditions companies can access financial markets, will increasingly depend on their ESG performance.

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