As a new business trend, ESG is of growing interest to an increasing number of markets. More and more businesses are publishing ESG strategies and with good reason. According to PwC’s 2021 U.S. survey, 83% of consumers indicated a preference for companies to implement ESG best practices, and 86% of employees prefer to work for companies that care about ESG values.
What is ESG?
ESG is an acronym for Environmental, Social and Corporate Governance. ESG is broadly considered to have developed out of Corporate Social Responsibility. However, ESG factors relate not only to a broader sphere of business than CSR, but are also intended to allow a precise evaluation of compliance with the principles of sustainability.
The ESG concept is based on three pillars:
- Ensuring the sustainability of the environment– involves adopting a pro-environmental policy, whilst allowing assumptions to be verified in a measurable way, i.e. based on a specific plan and identifying risks arising from climate change.
- Social responsibility and human rights –determines the impact of a business on the people around it.
- Corporate governance –related to the transparent and responsible conduct of business, covering corporate supervision, management structures, and compliance with duties of information to shareholders.
The ESG concept is beginning to permeate nearly every layer of business, but its individual elements are by no means new. Enterprises have long been required by law and codes of ethics to protect the environment and respect employee and shareholder rights.
So where does the current popularity of ESG in business come from?
ESG principles have now linked the concept of running a sustainable and responsible business to a sense of business accountability.
ESG is intended to encourage businesses to care more about the environment and the people around them via introducing non-financial reporting mechanisms. This means that a non-financial, ESG component is added to traditional financial statements businesses are required to produce and includes data about a firm and its activities from the perspective of ESG.
So far, however, such reporting requirements have been imposed on very few businesses, who have been able to select their preferred reporting standard from dozens standards on the market. This is, however, set to change with a new EU directive.
This directive is the CSRD (Corporate Sustainability Reporting Directive), a draft of which was published in April 2022.
The draft provides for extending the catalogue of business entities obliged to produce ESG reports, and introduces a uniform reporting standard to allow comparisons to be made.
Given that the CSRD is just over the horizon, we can expect ESG in business to keep increasing in momentum.
By Katarzyna Ziolkowska, Associate, Kochanski & Partners