Natural resource depletion and environmental degradation are contributing to water, food and energy crises. Weak governance, lack of infrastructure and rising inequalities are limiting economic and social development. And the economic and geopolitical impacts of extreme poverty – such as hunger, disease, unemployment and conflict – are becoming ever more apparent.
Focusing on environmental, social and governance (ESG) is not only about “doing the right thing”. It’s imperative for organizations to grow and profit in a sustainable way. For that reason, ESG issues have become an important parameter for investors to evaluate companies, as they offer a lens through which they can see a company’s resilience, adaptability and sustainability. They want to understand which issues are of greatest risk or strategic significance to the company, how they are embedded in the company’s core business activities, and whether there is strong executive leadership behind the ESG efforts, as well as enterprise-wide buy-in.
Businesses who get it wrong risk:
Despite the need to get it right and the risks of getting it wrong, we have not developed within our planetary bounds. To help get us back on track, the UN set 17 Global Sustainable Development Goals (SDGs) – clear economic, social and environmental goals – to achieve by 2030. The SDGs are an opportunity for businesses to grow and profit by collaborating with others to create a world which is more prosperous, inclusive, sustainable and resilient.
Boards should encourage their management teams to reassess the scope and quality of the company’s sustainability strategy and ESG reports and disclosures.
In December 2019, the European Commission (“Commission”) issued a communication setting out The European Green Deal (“Green Deal”). The Green Deal provides an action plan to tackle climate change and environmental challenges, boost the efficient use of resources by moving to a clean, circular economy, restore biodiversity and cut pollution. The plan also outlines the investments needed and financing tools available, and explains how to ensure a just and inclusive transition.
To reach the objectives of the Green Deal and direct investments towards sustainable projects and activities, we need a clear definition of what is ‘sustainable’. This is where the EU taxonomy comes in – the EU taxonomy is a tool for classifying sustainable activities and will aid in the prevention of “greenwashing” of investment products. This has implications though beyond the financial sector, as investors will want to know that a company is “investable”. If not, it could result in a higher cost of capital.
As part of the Green Deal, the Commission committed to review the Non-Financial Reporting Directive (NFRD). On 21 April 2021, the Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD). The CSRD amends the existing reporting requirements of the NFRD. “The proposal extends the scope to all large companies and all companies listed on regulated markets (except listed micro-enterprises), requires the audit (assurance) of reported information, introduces more detailed reporting requirements and a requirement to report according to mandatory EU sustainability reporting standards, and requires companies to digitally ‘tag’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.”
This topic is continually evolving but there is a trend towards (and need for) more open disclosure and reporting. In this regard, there are a number of frameworks available to companies in their ESG journey, including:
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