ESG – Importance and Impact
ESG compliance has topped the priority list for general partners (GP) and limited partners (LP) as they take the lead on transparently embedding ESG into operations, strategy, and reporting. Stakeholders use an ESG lens to set KPIs, clear targets, identify risks, raise capital, and generate value. In this vein, sustainability frameworks are unlocking the possibilities to standardize measurement and tracking of ESG performance.
As stakeholders demand accountability from businesses, there is growing momentum towards ESG compliance and metrics. Elevating the rigor of ESG metrics and being ESG compliant can drive resilience, returns, and growth. Of late, ESG has become a benchmark to boost brand reputation and assess one’s governance standards, social practices, and environmental performance.
Overview of ESG Compliance
ESG compliance – a set of standards and guidelines a company implements—has become second to none for C-suite leaders. It lays down standards for companies to meet ESG requirements, which are communicated through ESG reporting.
With several organizations eager to implement ESG measures, the conundrum of ESG risks has prompted them to navigate compliance with ESG regulations. In November 2024, SGS introduced a trio of services – CSRD Pre-Assurance, ESG KPI Verification and Assurance, and ESG Disclosures and Sustainability Report Assurance. The three services will underscore Corporate Sustainability Reporting Directive (CSRD) compliance, further ESG disclosures and reporting, and leverage organizations to keep up with evolving standards with precision. In essence, ESG KPI Verification & Assurance service unravels possible compliance issues and expedites due diligence.
In November 2024, the European Commission proposed consolidating major ESG reporting directives into a single “legal framework” by 2025, streamlining business compliance. The proposal will create an omnibus law for the CSRD, Corporate Sustainability Due Diligence Directive (CSDDD), and EU Taxonomy Regulation. The strategy is in line with the Budapest Declaration, alluding to the commitment to streamline regulations by at least a 25% reduction in reporting requirements.
Mapping ESG Compliance Frameworks & Standards
Pressure on businesses to comply with ESG frameworks and standards has compelled them to invest in sustainability reporting frameworks to publicly disclose information on ESG performance and their commitment to responsible business practices. Frameworks and standards provide internal and external stakeholders with a holistic view of the sustainability initiatives undertaken. Similarly, ESG frameworks—with KPIs and reporting requirements—show companies the way through ESG reporting.
Some common ESG frameworks and standards are delineated below:
Global Reporting Initiative (GRI)
It is a globally accepted guidance framework, including universal-, sector- and topic- standards, which help companies make their sustainability reports, emphasizing material topics. It provides a common language for organizations to report the impacts of their business operations on the environment, people and economy. In November 2024, the GRI and Carbon Disclosure Project (CDP) inked an MOU during the COP29 Climate Change Conference in Baku to streamline environmental disclosure.
Corporate Sustainability Reporting Directive (CSRD)
It requires a set of large companies and SMEs to report on sustainability, while some non-EU companies will have to report, provided they garner more than EUR 150 million on the EU market. The European Sustainability Reporting Standards (ESRS) comes to the fore, as companies will have to report in line with ESRS if they are subject to the CSRD.
Carbon Disclosure Project (CDP)
The framework is the global independent disclosure system for companies, states, regions and cities to measure and manage their environmental impacts. The GRI notes that over 24,800 companies disclose through CDP. The CDP is contemplating combining three existing questionnaires across climate change, water security and forests into one questionnaire.
Sustainability Accounting Standards Board (SASB)
The SASB standards provide disclosures across a host of sustainability matters and help companies identify sustainability risks and opportunities. In June 2021, the International Integrated Reporting Council (IIRC) and the SASB announced the merger to form the Value Reporting Foundation. Predominantly, the International Sustainability Standards Board (ISSB) is preserving, enhancing and updating the SASB standards to provide a strong footing when companies use them while applying the new IFRS Sustainability Disclosure Standards.
Sustainable Finance Disclosure Regulation (SFDR)
It aims to provide transparency to investors about the sustainability risks that can affect their investment decision-making processes. The transparency framework also bolsters investor protection and helps them compare financial products and services to make informed choices. The European Commission is bullish the framework will garner private funding and steer Europe towards a net-zero economy. In June 2024, European Supervisory Authorities (ESAs) published an opinion on the assessment of SFDR, pushing for a “coherent sustainable finance framework” that complements improved consumer protection and the green transition.
Amidst the presence of a host of ESG frameworks, selecting the right frameworks may be a monumental task. Aspects such as stakeholder expectations, regulatory mandates, sector preference, geography, materiality and framework coverage shed light on factors that may help navigate ESG frameworks. Given the involvement of multiple stakeholders, there is no one-size-fits-all approach to ESG frameworks and standards.
ESG Metrics – a Quick Glance
ESG metrics have become vital cogs in maintaining regulatory compliance, attracting investments, underpinning transparency and enhancing risk management. They are indicators (qualitative and quantitative, especially non-financial) used to measure a company’s performance and impact across the ESG pillars. For instance, companies with poor labor practices may face legal action if they abstain from using ESG metrics to address the problems. Meanwhile, investors may inject funds into companies with robust diversity and inclusion metrics in the workplace.
ESG metrics depend on the framework a company selects and they can help companies identify growth and innovation opportunities. Besides, customers may support companies that are transparent about their sustainability performance, while companies performing poorly on ESG scores may find themselves in hot water.
Impact of COP29 on ESG
Policymakers, financial market participants, investors and NGOs have exhibited a commitment to responsible investment and navigating the universe of ESG compliance and metrics. At COP29 hosted by Azerbaijan in Baku from November 11, 2024, to November 22, 2024, leaders committed to promote sustainability through:
- Carbon neutrality
- Transparency and Accountability
- Accessibility and Inclusivity
- Sustainable Practices
- Positive Legacy
- Safety for All
- Partnerships and Collaborations
To put this in perspective, COP29 aims to accurately measure, monitor and report the carbon footprint of COP29 across scope 1, 2 and 3 emissions. The connotation of responsible investments can be drawn from a new triple finance goal to support developing countries with USD 300 billion annually by 2035. The financial agreement comes against the backdrop of Nationally Determined Contributions (NDCs) becoming due from all countries in 2025. The new climate plans should cover all sectors and greenhouse gases, keeping the 1.5°C warming limit within reach.
From the governance perspective, transparent climate reporting observed a giant leap in Baku as 13 parties (as of November 24, 2024) submitted their first Biennial Transparency Reports (BTR) and spoke highly of the timely completion of the Enhanced Transparency Framework (ETF) reporting tools.
COP29 has set buoyant sustainability targets, including but not limited to diverting 100% waste from landfills, enabling 80% local food sourcing, promoting renewable energy and maximizing resource efficiency. The vision of creating a climate-neutral event is expected to underscore sustainable practices across operations.
Combating Green Quitting
With trillions of dollars prevalent in ESG investing, people—or younger workers—expect the companies they work address ESG concerns. “Green quitting” may go mainstream in the next half a decade as employees leaving their jobs due to ethical or environmental concerns may become rampant. In February 2022, research from Robert Half found that 38% of employees would look for a new role if their organization failed to act on ESG issues. An IBM study in 2021 claimed that 71% of employees and employee seekers stated that environmentally sustainable companies were ‘more attractive employers.’
A Lasting Legacy of ESG Compliance
Financial regulators, investors and businesses are promoting sustainable economic growth through ESG compliance and incorporation of ESG metrics across their entire value chain. As companies strive to be good corporate citizens, growing regulatory scrutiny has compelled organizations to acknowledge and combat greenwashing and green quitting and report on a full menu of ESG metrics.
Organizations may conduct their materiality assessment to identify sustainability factors and respond to regulations relevant to their businesses; they can establish a governance structure encapsulating each aspect of ESG compliance. Moreover, companies can also invest in data and analytics and advanced technologies and adopt a holistic ESG approach to unlock the door to sustainability and a lasting legacy of ESG compliance.
