In recent years, there has been a dynamic surge of interest in the ESG concept, significantly impacting how organizations manage their operations and how investors assess their potential. ESG stands for ‘Environmental, Social, and Governance,’ representing the three areas of sustainable development evaluation: environmental, social, and corporate governance. These three aspects play a crucial role in assessing how:
- a company contributes to environmental protection,
- its operations affect society, and
- it is managed at the corporate level.
According to the EU CSRD directive, starting in 2024, approximately 50 thousand European companies will be obliged to report ESG indicators. What does this mean for your organization if it falls under the new regulations? It will have the obligation to meet a set of new requirements, which we will describe in this article.
However, there’s no need to worry in advance! You still have some time, and besides, you can participate in our upcoming conference, where you’ll learn everything about the CSRD directive and how to prepare your company for these new obligations!
Table of Contents:
- A Few Words About ESG
- Negative Consequences of Non-compliance with the Directive
- Company Obligations in the Context of the New ESG Directive
- Growing Importance of ESG in Business
- How Technology Can Support Processes and Reporting?
- ESG Management Trends
- How to Prepare for the Implementation of ESG-Supporting Technology?
- Summary
A Few Words About ESG
ESG is a three-tiered structure of criteria and indicators used to assess and analyze the actions of businesses and investments in terms of sustainable development and social responsibility. Here’s a brief characterization of each of the three components: environmental, social, and governance.
- The Environmental aspect concerns ecological issues such as CO2 emissions, natural resource management, and the impact of activities on the natural environment.
- Social refers to a company’s impact on employees, the community, and the overall social aspect, including diversity and business ethics.
- Governance focuses on corporate governance, transparency, ethics, and management principles within the organization.
The CSRD directive aims to increase transparency and credibility in ESG reporting, contributing to more sustainable development and promoting corporate responsibility in the European Union.
ESG has become a key element of management and investment strategies, as more investors, consumers, and regulators emphasize issues related to sustainable development and corporate social responsibility. Companies and investors who effectively integrate ESG criteria into their actions can achieve financial benefits, increase social trust, and minimize risks associated with inadequate ESG management.
Negative Consequences of Non-compliance with the Directive
Failure to comply with the EU directive can lead to serious consequences. Companies neglecting the new regulations risk reputational and legal risks. Negligence in ESG reporting can contribute to a loss of trust from investors, customers, and business partners, negatively impacting the market valuation of the company and its ability to raise capital.
Additionally, failure to meet reporting obligations can result in financial sanctions and penalties. Therefore, companies that do not comply with the CSRD directive risk not only losing competitiveness but also violating existing regulations and norms related to responsible corporate management.
Company Obligations in the Context of the New ESG Directive
Here are some of the actions that organizations will need to take to meet the requirements of the CSRD regulation:
- Expansion of ESG reporting scope: Companies will be required to report their activities in the areas of sustainable development. The directive expands the reporting scope compared to previous regulations.
- ESG reporting standards: Companies will have to adhere to EU reporting standards specified within the directive. This is to ensure consistency and comparability of ESG reports among different companies.
- New obligations for the public sector: Public sector enterprises will need to include information on sustainable development in their annual financial reports. Non-financial companies will be required to prepare separate ESG reports, published alongside financial data.
- External verification: The CSRD directive envisages the necessity of independent verification of ESG reports. Companies will need to collaborate with independent entities to verify their reports to ensure their credibility.
- Compliance reporting: Companies will have to report how they adhere to ESG standards and the measures they have taken to achieve sustainable development goals.
- Stakeholder consultations: Companies will be obliged to engage in consultations with stakeholders such as employees, customers, and suppliers to determine which ESG issues are relevant to these groups and how the company can impact them.
- ESG data acquisition: The directive will require companies to invest in systems and technologies for collecting and analyzing ESG-related data to provide accurate information in their reports.
Growing Importance of ESG in Business
As issues related to climate, social justice, and corporate responsibility become more prevalent, ESG becomes a key factor in business. Companies focusing on sustainable development gain the trust of investors, customers, and society. Investors increasingly prioritize ESG assessment before investing, and companies effectively managing these issues are better prepared for the evolving business landscape. Therefore, effective ESG management becomes a source of competitive advantage, evident in the growing adoption of sustainable business and investment strategies.
How Technology Can Support Processes and Reporting?
One of the primary ways technology can support organizations is through the automation of ESG data collection. By leveraging various sources such as environmental sensors, human resource management systems, and financial accounting systems, companies can automate the gathering of ESG-related data.
Another example is the use of data analysis and artificial intelligence (AI) in ESG assessment. These technologies empower companies to analyze vast amounts of collected data, identify trends and patterns, and predict future risks and opportunities related to sustainable development. Data analysis aids in identifying areas that need improvement and developing more efficient ESG strategies.
Blockchain technology, commonly associated with finance, can also play a role in ensuring the integrity of ESG data. Through blockchain, companies can create immutable and transparent records, particularly crucial in the context of ESG reporting. This helps verify the authenticity and consistency of data, enhancing the credibility of reports.
Several tools and platforms are available in the market to facilitate ESG management. Software for data collection and reporting, analytical platforms for assessing ESG impact, and compliance management tools for adhering to ESG regulations are examples of such solutions. One notable example is the Net Zero Cloud by Salesforce, a platform designed to manage an organization’s sustainable development by tracking its environmental footprint and progress toward net-zero emissions.
ESG Management Trends
Here are some trends related to upcoming changes in EU legislation:
Transition to a green economy requires significant capital investment, and new investments bring business risks. Therefore, companies are starting to form alliances around green investments with other market players, including their competitors. We are witnessing a shift from competition to cooperation.
Chief Sustainability Officers are gaining importance, advancing from lower operational ranks to the C-suite, and gaining more authority, resources, and strategic perspectives.
While some companies still struggle with collecting dispersed data in Excel sheets, ESG pioneers are building automated reporting systems, gaining greater transparency and the ability to monitor and reduce emissions whenever possible.
More companies perceive ESG as a factor helping to build a competitive advantage. They understand that it is a matter of gaining and retaining market share. Therefore, they are creating new products and services, gaining easier access to “green financing,” and more favorable insurance packages.
The COVID-19 pandemic has shown that companies can adapt to new realities, such as remote work and online meetings. There is a widespread consensus that a sustainable way of doing business positively impacts the environment.
The war in Ukraine has led to an increase in raw material and energy costs, impacting economies and the environment. Therefore, companies will seek ways to increase energy efficiency and utilize renewable energy sources.
The mentioned conflict has also generated significant demand for humanitarian aid and infrastructure rebuilding. Companies will have the opportunity to demonstrate social responsibility and engagement in improving the situation in Eastern Europe.
More companies will publish ESG reports, even if they are not legally obligated to do so. This will result from growing expectations from stakeholders such as investors, customers, employees, and regulators.
Currently, there are many standards and frameworks for ESG reporting, making it challenging to compare and assess data. Soon, greater harmonization and integration of these standards can be expected, through initiatives such as the International Sustainability Standards Board (ISSB) or the Task Force on Climate-related Financial Disclosures (TCFD).
Companies will need to care not only about their own ESG actions but also those of their business partners. This will require better collaboration and monitoring of entire supply chains for ESG-related risks and opportunities.
In addition to ESG reports covering basic non-financial information, companies will create voluntary reports showing their commitment to specific ESG goals and initiatives. An example of such a document is a report on progress in achieving the United Nations Sustainable Development Goals (SDGs).
Social issues such as diversity, equality, health, and employee well-being will become increasingly important for businesses. Companies will need to foster good relationships with their employees and local communities, as well as provide them with appropriate working conditions and development opportunities.
ESG reports will undergo increasing scrutiny and verification by independent auditors. This aims to increase the credibility and quality of non-financial information and ensure its compliance with applicable standards and regulations.
Technology will be a key tool for improving ESG management and reporting. To better measure, analyze, and communicate their ESG-related actions and results, companies will use solutions such as
- artificial intelligence,
- blockchain,
- big data, and
- the Internet of Things.
These are just some of the trends that will shape ESG management in the coming years. The advantage will go to flexible and innovative companies capable of meeting the growing challenges and expectations in this area. ESG management will no longer be an option but a necessity for modern businesses.
How to prepare for the implementation of technology supporting ESG requirements?
The implementation of any technology requires proper preparation. Here are the steps to effectively carry out the process of implementing ESG management tools.
The first step is the identification and selection of appropriate technologies
At this stage, it is necessary to determine which solution will be best for your organization. You have several options to choose from:
- ESG data collection and analysis software;
- reporting platforms;
- performance monitoring tools in the field of sustainable development.
The choice should be tailored to the needs of your company and the selected ESG strategy.
Tell me about the needs of your organization in the context of ESG, and I will propose a specific technological solution!
Planning and implementing the change process
The implementation of ESG-supporting technology requires careful conceptualization and organizational preparation. A detailed project plan, goal setting, allocation of appropriate resources, and the creation of an implementation schedule will be necessary.
Monitoring and evaluating results
After the implementation of technology, constant monitoring and evaluation of results are necessary. This involves tracking progress in achieving sustainable development goals, controlling ESG data, and analyzing the effects of actions taken with the support of technology.
Monitoring allows for a quick response to changes and the continued improvement of ESG processes.
Opportunities and benefits of effective ESG management using technology
There are many benefits to managing ESG, including
- improved operational efficiency,
- cost reduction,
- identification of new business opportunities,
- increased trust of investors, customers, and society,
- minimization of risks associated with non-compliance with ESG standards.
The added value of effective ESG management can exceed the initial investment in technology. The implementation of supporting technologies has the potential to make a company more competitive, sustainable, and socially responsible, while also bringing financial and reputational benefits.
Do you want to prepare for new regulations? Come to our conference and find out:
- how to adapt to the new realities related to the CSRD directive,
- how to prepare the organization for non-financial reporting,
- how to choose a tool that aggregates all ESG-related data,
- how to prepare an ESG strategy in the organization.
MORE INFORMATION COMING SOON!
