The most important ESG criteria for companies

While the motivation in the first section points to the business need for ESG compliance, the second section describes the origins of ESG in the 2030 Agenda and the United Nations Sustainable Development Goals. Section 3 elaborates on the upcoming ESG legislation in the EU. Section 4 describes how companies can operationalize ESG compliance. In section 5, we summarize and recommend a course of action for companies to become future-proof and ESG-compliant.

Corporate motivation for ESG compliance

As an entrepreneur, it is of great importance to assess opportunities and risks for one's own organization and to adjust the strategic orientation accordingly. ESG compliance, i.e. compliance with guidelines in the area of environment, social and governance, is not only a megatrend, but also has the potential to determine the economic success of a company. It is a strategic opportunity, but also an existential risk for a company.

Corporate finance is the most direct impact already being felt by companies today. Global finance flows are being interpreted against ESG guidelines and are being reflected in more and more fund statutes. By the end of 2020, European ESG fund volumes reached EUR 1.1 trillion. This was an increase of over 50% compared to the previous year. Even banks are starting to stop financing companies that lack ESG compliance. (See Commerzbank)

But financing is only one aspect that is directly and immediately noticeable for companies. Another aspect is the increasing interest of customers and suppliers in the ESG compliance of their business partners. Customers, especially large corporations and state-owned enterprises, have to comply with ESG guidelines when awarding contracts. Suppliers are also increasingly focusing on this issue. In order to be ESG-compliant themselves, suppliers are paying attention to compliance along their supply chains.

Indirect influence is exerted by employees and by competitors. Employees are more likely to choose companies that operate sustainably. Likewise, sustainable companies are more likely to prevail in competition, and we are already learning from our customers that higher prices can be achieved if evidence of sustainability can be provided.

Meanwhile, ESG is a strategic opportunity for every company. It will both increase the company's value and enable higher prices of its own products. In the long term, it will ensure the company's financial viability and competitiveness. But how can ESG compliance be implemented effectively and efficiently in companies? We will address this in the following sections.

The origins of ESG in the UN's 17 Sustainable Development Goals (SDGs)

The origin and the central reference for all requirements in the ESG area are the 17 Sustainable Development Goals(SDGs) of the United Nations. These are anchored in the 2030 Agenda and are to be achieved by 2030. Government funding should be aligned with these goals, but so should the actions of organizations and companies.

The company's strategic orientation can be mirrored and examined on the basis of these 17 goals. The central question is what impact the company has on its environment, i.e. on ecology, economy and social stakeholders.

In the table below, we list the UN's 17 Sustainable Development Goals ("SDGs") and provide examples of how a company can review its actions in relation to these goals. This table should be seen as food for thought, as each company's impact on its environment is highly individual. Opportunities and risks of a company can be evaluated against these goals.

End poverty in all its forms everywhere

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Examples of corporate action:
Paying wages in developing countries that allow people to live above the poverty line.‍
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End hunger, achieve food security and better nutrition, and promote sustainable agriculture

Exemplary action in the company:
Pay attention to sustainable food production for catering in the company.

Promote healthy living, ensure well-being of all people of all ages

Exemplary action in the company:
Pay attention to occupational health and safety in production - along the entire supply chain

Ensure equal education with high quality and provide opportunities for lifelong learning

Exemplary action in the company:
Pay attention to equality in training, further education and support programs

Achieve gender equality and empower all women and girls

Exemplary action in the company:
Anchor diversity policy in the company

Ensure availability and sustainable management of water and sanitation for all

Exemplary action within the company:
Stop any pollution of drinking water

Ensure access to affordable, reliable, sustainable and modern energy for all

Exemplary action in the company:
Reduce energy consumption in the company

Promote sustainable, inclusive and sustainable economic growth, full and productive employment and decent work

Exemplary corporate action:
Ensure that decent and fairly paid work occurs throughout the supply chain

Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation

Exemplary action in the company:
Convert production to resource efficiency and sustainable technologies

Reducing inequality within and between countries

Exemplary action within the company:
Equal pay for equal work

Make cities and settlements inclusive, safe, resilient and sustainable

Exemplary action in the company:
Avoid or reduce wastewater and pollution

Care for sustainable consumption and production

Exemplary action in the company:
Life cycle consideration of own products and implementation of sustainable life cycle concepts

Take measures to combat climate change and its effects

Exemplary action in the company:
Avoidance of greenhouse gas emissions

Conserve and sustainably use oceans, seas and marine resources for sustainable development

Exemplary action within the company:
Do not discharge wastewater into the sea or rivers

Protect, restore and promote sustainable use of terrestrial ecosystems, manage forests sustainably, combat desertification, halt and reverse land degradation and halt biodiversity loss

Exemplary corporate action:
Do not destroy ecosystems and habitats by building on company land

Promote peaceful and inclusive societies for sustainable development, access to justice for all, and build effective, accountable and inclusive institutions at all levels

Exemplary corporate action:
Ensure that child labor is not used throughout the supply chain

Promote and revitalize global cooperation for sustainable development

Exemplary action in the company:
Trade under WHO regulations

Upcoming EU ESG legislation through the Corporate Sustainability Reporting Directive (CSRD).

ESG legislation is being implemented in the EU. As early as 2014, the EU recognized that there was growing interest in ESG information from various groups, especially financial investors. Therefore, the EU published the first directive on the disclosure of non-financial information (Directive 2014/95/EU) in 2014.

However, the information published by the companies did not meet the requirements of the stakeholders. As part of the "Green Deal 2050", a proposal for the Corporate Sustainability Reporting Directive (CSRD) was published in April 2021, which is to be adopted by the European Commission at the end of October 2022.

This EU ESG initiative is a very good step in the right direction. There is a growing need for information from stakeholders, but no sufficiently clear and understandable information from companies. On the other hand, there are no clear and transparent rules for companies on how to report to stakeholders. Therefore, the EU's Corporate Sustainability Reporting Directive (CSRD) is a big step forward for both sides.

CSRD requirements are ...

• Mandatory reporting by all large companies with more than 500 employees and listed companies
• For SMEs, there will be a reduced version of the reporting guidelines.
• The published information must be externally audited.
• The data should be in a digital format, making it transferable and traceable.

The key elements of what must be reported are set forth in Article 19 of the Directive:

• Environmental factors on climate change mitigation; climate change adaptation; water and marine resources; resource use and circular economy; pollution, biodiversity and ecosystems;
• Social factors on equal opportunities and equal treatment for all, fair, healthy and safe working conditions, respect for human rights;
• Governance factors on the role of administrative, management and supervisory bodies; corporate ethics and culture, including the fight against corruption and bribery; lobbying activities; relationships with business partners; internal control and risk management systems.

The aim is to make reporting as simple as possible for companies while maintaining the relevance and accuracy of the reported content. Conformity with the globally accepted standards of the Global Reporting Initiative (GRI) have already been confirmed.

Operational implementation in the companies based on the standards of the Global Reporting Initiative (GRI)

The Global Reporting Initiative (GRI) was founded in 1997 with the support of the United Nations Environment Programme and has since become the global standard for sustainability reporting and ESG metrics.

The GRI standard is the operational guideline on how a company can ensure ESG compliance. Implementation follows clear principles and a structured process. Essentially, a company must determine where its own influence ("impact") is greatest and then prioritize the report accordingly.

Interest groups ("stakeholders") that must be taken into account in such a consideration are business partners, civil society organizations, consumers, customers, employees and other workers, governments, local communities, non-governmental organizations (NGOs), organizations, shareholders and other investors, suppliers, trade unions and other vulnerable groups.

The impact on these groups by the company determines what is relevant. For example,_{CO2 emissions} are rather negligible for an office operation. However, equality ("diversity") could be of particular importance to the office operation. The stakeholder analysis ensures that companies focus on the relevant information.

The Eight Essential Steps for Preparing a GRI-Compliant Report

1. Analysis of stakeholders and influence ("Materiality Assessment")
2. Consideration of the corporate context and determination of which interest groups (stakeholders) the company has an influence on.
3. Determination of the importance of the individual influences and prioritization of the areas (Material Topics) for thereporting
4. Reporting ("Report Information")
5. Report on the "General Standards" - must be published by each company
6. Report on "Sector Standards" - concerns certain industries such as oil and gas
7. Report on the "Topics Standards" - derived from the analysis of the stakeholders and the influence of thecompany
8. Registration of the report with the GRI

The General Standards, which every company must publish, cover the company's organizational profile, as well as its strategy and reporting processes with regard to sustainability. The Sector Standards relate to the reporting requirements of specific economic sectors, such as oil and gas. The Topic Standards are the central element of reporting. They are based on the analysis of stakeholders and the influence of the company.

Examples of the Topic Standards can be areas such as anti-corruption, wastewater, CO2 emissions, occupational health and safety or diversity issues. In the following, we provide two illustrative examples of the requirements of Topic Standards, occupational health and safety (GRI 403) and greenhouse gas emissions (GRI 305).

The requirement of the Topic Standard for Occupational Health and Safety (GRI 403) calls for the following data and indicators to be collected and published:

• Occupational health and safety management system
• Hazard identification, risk assessment and incident investigation
• Occupational health services
• Employee participation, consultation and communication on occupational health and safety
• Employee training on occupational safety and health protection
• Promoting the health of employees
• Prevention and mitigation of occupational health and safety, impacts directly related to business relationships.

Key figures to be collected:

• Number of employees covered by an occupational health and safety management system
• Number of work-related injuries
• Number of work-related illnesses

It is particularly important that all employees are covered by the occupational health and safety management system. This should not only concern the organization's own direct employees, but also the workforce of suppliers and other groups that are not under the direct influence of the organization.

With regard to greenhouse gas emissions (GRI 305), the following disclosures should be included in the report:

Description of the management system for greenhouse gases and their reduction

Key figures to be collected:

• Direct (Scope 1) greenhouse gas emissions (direct emissions from the company's production processes, which are also subject to direct control.
• Indirect (Scope 2) greenhouse gas emissions (indirect emissions from energy purchased by the organization in the form of electricity, heating, cooling, etc.).
• Indirect (Scope 3) greenhouse gas emissions (indirect emissions that are not directly controlled by the organization. For example, emissions caused by products supplied, distribution of own products, or business travel).
• Intensity of greenhouse gas emissions (this depends on the ratio, i.e. how much greenhouse gas is emitted per unit produced, for example).
• Reduction of greenhouse gases (broken down by the different scopes and separately from the offsets, i.e. how much was actually reduced).
• Emissions of ozone-depleting substances (trichlorofluoromethane or equivalents)
• Nitrogen oxides (NOx), sulfur oxides (SOx) and other significant air emissions (e.g. in paint shops these emissions are particularly important)

Greenhouse gas emissions should generally be stated in CO2 equivalents (CO2e). Greenhouse gases such as methane are converted into CO2 equivalents based on their global warming potential (GWP). Methane, for example, has 28 times the global warming potential of CO2. This means that the emission of one metric ton of methane (CH4) corresponds to 12 metric tons of carbon dioxide (CO2).

Summary and recommendation for action

Our clear recommendation is to view ESG as a strategic opportunity and to make your own company ESG-compliant. It increases the company's value and secures its financial viability. Regulatory requirements are currently being passed in the EU and will become part of all economic sectors with the EU Corporate Sustainability Reporting Directive (CSRD). Compliance with ESG guidelines will become the decisive factor for the sustainable competitiveness of a company.

We recommend knowing the 17 sustainability goals and aligning the company's strategy accordingly. In order to achieve ESG compliance, we recommend conducting an analysis of the stakeholders and the influence of the company. This can be used to determine the relevant ESG areas and align reporting. The GRI standards provide a comprehensive and globally accepted standard for this purpose. The EU has entered into a partnership with the GRI and has confirmed conformity with the standards.

The figure below shows the areas from which a company's sustainability performance can be calculated in an ESG score. In order to achieve the percentage compliance scores, a company must meet the relevant GRI standards (see section 4) and make continuous improvements. This includes both the descriptions of the sustainability management systems and the collection and publication of relevant sustainability key figures.

We are happy to support you in the implementation in your company. With our Software solution, you can ensure that the collection of key figures and reporting is effective, compliant with standards, audit-ready and audit-proof. Use our frameworks to quickly achieve ESG compliance.