ESG Reporting - The Driver of Sustainable Action
What companies need to know now
ESG reporting is becoming increasingly important for companies. But: "What does ESG stand for?". The acronym ESG stands for Environment, Social, and Governance - three areas of a company's responsibility that should be built sustainably. If a company achieves good results in these areas, it is considered "ESG compliant" and sustainable. Companies that are environmentally conscious, committed to social justice, and characterized by good corporate governance will prevail in the future.
However, before companies adjust their processes to comply with ESG guidelines, an understanding of the future mandatory ESG reporting must be created. This is because there is a significant difference to previous sustainability and CSR efforts, namely regulated guidelines and criteria specified by the EU Commission, so-called taxonomies.
What is ESG Reporting?
ESG reporting is a tool for identifying and evaluating a company's social and environmental aspects. The results of this report are often published as part of a corporate "Sustainability Report". These are not empty promises but sustainability information subject to mandatory external verification. In addition, the ESG report summarizes the benefits of all qualitative and quantitative ESG measures that a company has already taken or plans to implement in the future. Disclosure of ESG data provides excellent transparency and benefits current and future investors. On this basis, investors can assess whether there is a risk of environmental damage, social maldevelopment, or corruption in a company. If this is the case, they can avoid cooperation in the future. In addition to investors, the target group of ESG reporting also includes customers or the state. For them, topics such as the digital product passport, which proves that a product was produced sustainably, will become increasingly important.
What Is the Difference between ESG and Sustainability?
ESG (Environment, Social + Governance) is a methodology with guidelines and criteria to help companies implement their sustainability strategies. An ESG report and associated metrics help companies verify that their business model is sustainable, which means ensuring long-term success - and demonstrating that actions meet EU ESG criteria.
These criteria, or ESG metrics, can help companies communicate their initiatives to the outside world, allowing investors to safely and reliably assess a company's performance and risks. For this reason, ESG reporting is essential for those companies seeking financing. But it is also vital for listed companies.
How Do Esg and Corporate Social Responsibility (CSR) Differ?
The main difference between ESG and CSR is the goal to be achieved. Corporate social responsibility is a model of various activities to influence the company's social and environmental standards positively. Companies are intrinsically motivated to do these. Examples include encouraging conscious consumption by employees, using sustainable materials, or paying fair wages.
ESG, on the other hand, goes further in that specific taxonomies that must be adhered to are prescribed by governmental bodies. These are made available to the public through ESG reports, as certain companies are required to communicate and disclose their sustainability management initiatives. Potential investors, for example, thus have the opportunity to review ESG reporting and make a decision for or against the investment based on the ESG data. Companies should always aim to integrate ESG and CSR into their strategies and activities.
What Is the Content of ESG Reportings?
A company should provide clear information on how it contributes to combating climate change and reducing carbon emissions. It must also outline how companies are preserving biodiversity, improving water and air quality, and disposing of waste in an environmentally responsible manner. "Does the company manage its resources and supply chain responsibly?" or "What measures does a company take to reduce emissions?" - these questions need to be answered in an ESG report.
The "Social" area is the second part of ESG reporting. Various factors play a role here, for example:
- The promotion of employees
- The improvement of occupational health and safety
- Initiatives for the equality of all genders
- Ensuring data protection and privacy, and
- Human rights, community, and labor standards
"What can a company do to ensure sustainability in the long term?", "How should corruption be avoided?", "What internal controls should be used in the company?", "How should executive compensation be regulated?" - these questions should be answered in the governance section of ESG reporting.
What Is an ESG Rating or ESG Score?
Now that the ESG definition is clear, the question is what the ESG rating definition is. External organizations use a score to evaluate how sustainable a company is and to what extent it implements ESG criteria. Similar to a credit rating or bond rating, an ESG score indicates a company's ability to meet its ESG commitments, performance, and risk.
ESG data forms the basis for the calculation of an ESG rating. RepRisk, Bloomberg ESG Data Services, and Dow Jones Sustainability Index Family are well-known organizations that perform such ratings.
What Are the Regulations in the Field of ESG?
A central concern of the European Union is the fight against climate change and environmental degradation. In this context, great importance is attached to decoupling economic growth from the consumption of natural resources. Thus, there are numerous ESG regulations within the EU. These are defined via the so-called EU taxonomy in a classification system for sustainable economic activities. This classification allows for a definition and standardization of what is considered environmental and sustainable.
A whole range of other ESG frameworks, including the Global Reporting Initiative. It aims to help companies identify and disclose all positive and negative impacts of their business activities on the environment, the economy, and society.
Where Does the Need for Action Arise for Companies?
More and more companies are required to prepare an ESG report. There are three different size criteria. If two of the following three size criteria are exceeded, this results in an ESG reporting obligation:
- First size criterion: According to the CSRD, an ESG reporting obligation applies to all companies that employ at least 250 employees on average per year. The average annual figure is used as a basis.
- Second size criterion: a balance sheet total of 20 million euros.
- Third size criterion: annual sales that regularly exceed 40 million euros.
For many companies, this involves an additional time commitment, which can be minimized if special ESG software is used. Organizational conditions also influence the time required to prepare ESG reporting. For example, it is a regulatory requirement to combine ESG reporting with the annual consolidated financial statements. If the responsible persons in the companies place the ESG reporting in a meaningful area, for example, the finance area, and also use ESG software, they can save a great deal of time.
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With our cloud-based IoT environmental data platform green. Companies succeed in recording, monitoring, controlling, and documenting all of the company's environmental and climate-relevant parameters. It can also be integrated very well into existing software systems.
In the future, companies must be able to provide accurate and consistent information on ESG data. The most important factor here? The accuracy, consistency, and availability of your data. Sustainability management with the Arvato Systems solution green.screen makes this possible. With the help of our cloud-based IoT environmental data platform, all energy and resource consumption can be collected, calculated, monitored, and documented company-wide. The transparency gained opens up optimization potential and, thus, the carbon footprint reduction. In addition, green.screen can be integrated very well into existing software systems.