The most important ESG criteria for companies

The first section highlights the business case for ESG compliance, while the second section describes the origins of ESG in the 2030 Agenda and the United Nations’ Sustainable Development Goals. Section 3 addresses upcoming ESG legislation in the EU. Section 4 describes how companies can implement ESG compliance in their operations. In Section 5, we summarize and provide recommendations for companies to position themselves for the future and ensure ESG compliance.

Business Motivation for ESG Compliance

As an entrepreneur, it is crucial to assess opportunities and risks for your organization and adjust your strategic direction accordingly. ESG compliance—that is, adherence to guidelines in the areas of Environment, Social, and Governance—is not just a megatrend; it has the potential to determine a company’s economic success. It represents a strategic opportunity, but also an existential risk for a business.

Corporate financing is the most direct impact already being felt by companies today. Global financial flows are being aligned with ESG guidelines and are increasingly reflected in fund bylaws. By the end of 2020, the volume of European ESG funds had reached EUR 1.1 trillion. This represented an increase of over 50% compared to the previous year. Even banks are beginning to stop providing financing to companies that do not comply with ESG standards. (See Commerzbank)

However, financing is just one aspect that companies feel directly and immediately. Another aspect is the growing interest among customers and suppliers in their business partners’ ESG compliance. Customers—especially large corporations and state-owned enterprises—must adhere to ESG guidelines when awarding contracts. The topic is also increasingly coming into focus for suppliers. To ensure their own ESG compliance, suppliers pay close attention to compliance throughout their supply chains.

Indirect influence comes from employees and competition. Employees are more likely to choose companies that operate sustainably. Similarly, sustainable companies will be more successful in competitive environments, and we are already hearing from our customers that higher prices can be charged if proof of sustainability can be provided.

ESG has now become a strategic opportunity for every company. It will both increase a company’s value and enable it to charge higher prices for its 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 within companies? We will address this in the following sections.

The Origins of ESG in the UN's 17 Sustainable Development Goals

The origin and central reference point for all requirements in the ESG sector are the United Nations’ 17 Sustainable Development Goals (SDGs). These are enshrined in the 2030 Agenda—meaning they are to be achieved by 2030. Government funding should align with these goals, as should the actions of organizations and companies.

These 17 goals can be used to reflect on and review a company's strategic direction. The central question is what impact the company has on its environment—that is, on the ecosystem, the 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 evaluate its actions in relation to these goals. This table should be viewed as a starting point for reflection, as each company's impact on its environment is highly specific. A company's opportunities and risks can be assessed using these goals.

End poverty in all its forms everywhere

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

Example of action within the company:
Ensure sustainable food production for company catering.

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Promote healthy lives and ensure well-being for all at all ages

Example of an initiative within the company:
Ensure occupational health and safety in production—throughout the entire supply chain

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Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

Example of action within the company:
Ensure equality in training, continuing education, and development programs

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Achieve gender equality and empower all women and girls

Example of action within the company:
Implement a diversity policy within the company

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Ensure access to and sustainable management of water and sanitation for all

Example of corporate action:
End all pollution of drinking water

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

Example of company action:
Reduce energy consumption within the company

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

Example of company action:
Ensure that decent and fairly paid work is created throughout the entire supply chain

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

Example of company action:
Transition production to resource efficiency and sustainable technologies

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Reduce inequality within and among countries

Example of corporate action:
Equal pay for equal work

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Make cities and human settlements inclusive, safe, resilient, and sustainable

Example of corporate action:
Prevent or reduce wastewater and pollution

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Ensure sustainable consumption and production

Example of corporate action:
Life-cycle assessment of the company’s own products and implementation of sustainable life-cycle concepts

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Take action to combat climate change and its impacts

Example of corporate action:
Preventing greenhouse gas emissions

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

Example of corporate action:
Do not discharge wastewater into the sea or rivers

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

Example of corporate action:
Do not destroy ecosystems and habitats through the development of company premises

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

Example of action within the company:
Ensuring no child labor throughout the entire supply chain

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Promoting and revitalizing global cooperation for sustainable development

Example of action within the company:
Conducting trade in accordance with WHO regulations
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Upcoming EU ESG Legislation: Corporate Sustainability Reporting Directive (CSRD)

ESG legislation is being implemented in the EU. As early as 2014, the EU recognized the growing interest in ESG information among various groups, particularly financial investors. Consequently, the EU published its first Non-Financial Reporting Directive (Directive 2014/95/EU) in 2014.

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

This EU ESG initiative is a very positive step in the right direction. There is a growing need for information from stakeholders, but companies are not providing information that is sufficiently clear and understandable. Conversely, companies lack clear and transparent rules on how to report to stakeholders. Therefore, the EU's Corporate Sustainability Reporting Directive (CSRD) represents significant progress for both sides.

CSRD requirements include...

• Mandatory reporting for all large companies with more than 500 employees and for publicly traded companies
• There will be a simplified version of the reporting guidelines for SMEs.
• The published information must be audited by an external party.
• The data should be available in a digital format, making it transferable and traceable.

The key information to be reported is set forth in Article 19 of the Directive, which states:

• Environmental factors related to climate protection; adaptation to climate change; water and marine resources; resource use and the circular economy; pollution, biodiversity, and ecosystems;
• Social factors related to equal opportunities and treatment for all, fair, healthy, and safe working conditions, and respect for human rights;
• Governance factors relating to 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 goal is to make reporting as simple as possible for companies while ensuring that the reported content remains relevant and accurate. Compliance with the globally accepted standards of the Global Reporting Initiative (GRI) has already been confirmed.

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

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 serves as an operational guideline for 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 its reporting accordingly.

Stakeholders that must be considered in such an assessment include business partners, civil society organizations, consumers, customers, employees and other workers, governments, local communities, nongovernmental organizations (NGOs), organizations, shareholders and other investors, suppliers, labor unions, and other vulnerable groups.

The company's impact on these groups determines what is relevant. For example,_{CO2 emissions}are fairly negligible for an office operation. However, for an office operation, equality ("diversity") could be of particular importance. Analyzing stakeholders ensures that companies focus on relevant information.

The Eight Essential Steps for Preparing a GRI-Compliant Report

1. Analysis of Stakeholders and Impact ("Materiality Assessment")
2. ‍Considerationof the company's context and identification of the stakeholders affected by the company
3. Determination of the significance of individual impacts and prioritization of areas (Material Topics) forreporting‍
4. Reporting ("Report Information")‍
5. Report on the "General Standards" – which every company must publish
6. Report on "Sector Standards" – relevant to specific industries such as oil and gas
7. Report on the "Topics Standards" – derived from stakeholder analysis and the company'simpact‍
8. Registration of the report with the GRI

The General Standards, which every company must publish, include the company's organizational profile, as well as its sustainability strategy and reporting processes. The Sector Standards outline reporting requirements for specific economic sectors, such as oil and gas. The Topic Standards are the central element of reporting. They are based on an analysis of stakeholders and the company's impact.

Examples of Topic Standards may include areas such as anti-corruption, wastewater, CO2 , occupational health and safety, or diversity. Below, we provide two illustrative examples of Topic Standard requirements: occupational health and safety (GRI 403) and greenhouse gas emissions (GRI 305).

The Topic Standard for Occupational Health and Safety (GRI 403) requires the collection and publication of the following data and key figures:

• Occupational Health and Safety Management System
• Hazard identification, risk assessment, and incident investigation
• Occupational health services
• Employee participation, consultation, and communication regarding occupational health and safety
• Employee training on occupational health and safety
• Promotion of Employee Health
• Prevention and mitigation of occupational health and safety impacts directly linked to business relationships

Metrics 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 be covered by the occupational health and safety management system. This should apply not only to direct employees but also to workers at suppliers and other groups not under the direct control 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

Metrics to be collected:

• Direct (Scope 1) greenhouse gas emissions (direct emissions from the company's production processes, which are also under its direct control).
• Indirect (Scope 2) greenhouse gas emissions (indirect emissions resulting from energy purchased by the organization in the form of electricity, heat, cooling, etc.).
• Indirect (Scope 3) greenhouse gas emissions (indirect emissions not directly controlled by the organization; e.g., emissions from supplied products, distribution of the organization's own products, or business travel)
• Greenhouse gas emissions intensity (this refers to the ratio—that is, how much greenhouse gas is emitted per unit produced, for example)
• Reduction of greenhouse gases (broken down by different scopes and excluding 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., these emissions are particularly important in paint shops)

Greenhouse gas emissions should generally be reported in CO2 (CO2e). Greenhouse gases such as methane are converted into CO2 based on their "Global Warming Potential (GWP)." For example, methane has 28 times the global warming potential of CO2. This means that the emission of one metric ton of methane (CH4) is equivalent to 12 metric tons of carbon dioxide (CO2).

Summary and Recommendations for Action

Our clear recommendation is to view ESG as a strategic opportunity and position your company to be ESG-compliant. This increases company value and ensures the company's financial viability. Regulatory requirements are currently being developed in the EU and will apply to all economic sectors under the EU Corporate Sustainability Reporting Directive (CSRD). Compliance with ESG guidelines will become the decisive factor in a company's sustainable competitiveness.

We recommend familiarizing yourself with the 17 Sustainable Development Goals and aligning the company’s strategy accordingly. To achieve ESG compliance, we recommend conducting an analysis of stakeholders and the company’s impact. This enables the identification of relevant ESG areas and the alignment of reporting. The GRI Standards provide a comprehensive and globally accepted framework for this. The EU has entered into a partnership with GRI and has confirmed compliance with the standards.

The image below illustrates the areas used to calculate a company’s sustainability performance as part of an ESG score. To achieve the required percentage of compliance, a company must meet the relevant GRI Standards (see Section 4) and continuously make improvements. This involves both describing sustainability management systems and collecting and publishing relevant sustainability key performance indicators.

We are happy to assist you with the implementation in your company. With our software , you can ensure that data collection and reporting are effective, compliant with standards, audit-proof, and audit-ready. Use our frameworks toquickly achieve ESG compliance.