ESG in the company
ESG rating, - regulations and sustainability reporting - there are a number of question marks surrounding the topic of ESG and the obligations it imposes on companies. This entry aims to shed light on what ESG factors actually are, which companies are affected by the reporting obligation, and what regulations exist around the topic of ESG.
ESG factors (Environmental, Social, Governance), i.e. ecological, social and economic factors of sustainability, serve to make the impact of investments on the environment and society measurable and to bring sustainability into the economic focus.
While investments are classically evaluated according to economic criteria such as profitability, liquidity and risk, ESG criteria are used to evaluate sustainable investments. This analysis is called ESG rating and helps stakeholders, for example, to determine how sustainable a company or an investment actually is.
In addition to stakeholders, it is of course also relevant for the companies themselves to know and minimize their own ESG risks in order to successfully master a sustainable transformation. Here, companies can be supported by rating agencies.
Leading ESG rating agencies include:
Depending on the industry, companies face individual challenges in implementing ESG factors.
Environmental sustainability factors include factors such as high CO2 emissions, biodiversity, water and environmental pollution, and soil sealing. This poses difficulties for the energy sector, construction and real estate industries, utilities such as electricity and gas suppliers, and retail, for example. To make the sustainable turnaround, and achieve ESG goals, companies in these industries need to establish alternative, environmentally friendly techniques, rethink resource use, and shift to sustainable ways of working.
Social sustainability criteria pose problems for software and hardware companies, healthcare, and the financial industry, among others. Here, the focus is primarily on diversity in the labor market, data protection and the protection of human rights. Companies need to be aware of their potential ESG risks, and pay particular attention to social sustainability in the selection of employees, data processing, and in their upstream and downstream supply chain.
ESG reporting involves companies recording the extent to which they contribute to the environmental goals of the EU. The reporting obligation depends on the size of the company and monetary standards, so not every company is currently obliged to do ESG reporting. However, ESG reports help companies become aware of their environmental and social impacts and identify areas for improvement. Sustainability reporting can therefore also be relevant for companies that are not obliged to do so.
Briefing: ESG regulations
The United Nations Global Compact, established in 2000, initiated a growing global commitment to sustainable investment and development in the face of the climate crisis. Since then, several laws have been introduced worldwide to ensure transparency about sustainable actions and to create criteria for assessing the environmental and social impacts of companies.
Under the so-called European Green Deal, the EU has set a target of reducing net greenhouse gas emissions by 55% by 2030, and aims to be carbon neutral by 2050, with zero carbon emissions, according to the European Commission. To achieve these goals, the Non-Financial Reporting Directive (Directive 2014/95/EU) was published in 2017. This involves mandatory reporting on the consideration of ESG factors, also known as CSR (corporate social responsibility) factors, i.e. non-financial issues such as the environment and social issues. In 2022, the directive was expanded to prevent incomplete reporting. This extension is set out in the CSR Directive Implementation Act, or CSRD for short.
Furthermore, in 2020, the EU Taxonomy Regulation was created to provide a clear definition of sustainability and a common classification system for sustainable business activities.
The environmental objectives set out in the EU Taxonomy Regulation are:
According to the current regulation (CSRD), the following companies must publish an ESG report:
As of 01 January 2024:
Companies already affected by the previous reporting obligation (NFRD) listed on regulated markets (with the exception of stock exchange-oriented micro companies) and large companies that meet at least 2 of the following 3 criteria:
- More than 250 employees.
- €40 million revenue/ year
- More than €20 million balance sheet volume
If the company falls under the sustainability reporting of a superordinate company, it may be exempt from the reporting obligation.
From 01 January 2025:
All large companies, regardless of capital market orientation.
From January 01, 2026:
Small and medium-sized enterprises (SMEs) listed on a regulated market in the EU, but also non-complex credit institutions and captive insurance companies.
The percentage of sales of products that are related to environmentally sustainable economic activities
The proportion of total investments that are related to environmentally sustainable economic activities, or assets.
The proportion of operating expenses that are related to environmentally sustainable economic activities, or assets.
To make ESG reports comparable, implementation guidance from the Global Reporting Initiative (GRI), an organization that establishes frameworks for sustainability reporting, has become established worldwide. In addition to categorization, this also includes universally applicable reporting principles and standards.
The Austrian Sustainability Reporting Award (ASRA) also serves as a guide to best practice ESG reports. This awards the best ESG reports of Austrian companies every year.
Due to the already mentioned increasing national and international regulatory requirements, companies will be confronted even more in the future with their actions in terms of climate protection and will feel both financial and economic consequences, should climate protection not be a pillar of the corporate philosophy.
Failure to comply with reporting requirements will have financial consequences. In Germany, for example, failure to comply with a CSR reporting requirement can result in a fine of up to €50,000. Certain cases may even face criminal consequences should obfuscating or false information be provided. Again, fines or imprisonment of up to 3 years may be imposed.
Furthermore, meeting environmental ESG criteria results in the opportunity for energy efficiency and cost reduction in the corporate value chain.
Implementing recycling programs can also help companies reduce waste management costs. By recycling materials such as paper, plastics and metals, companies can reduce the amount of waste they send to landfills while reducing their environmental impact.
In addition to the aforementioned investment decisions made by investors, potential employees are also increasingly using ESG factors in the company to make decisions.
And it is not only when it comes to investments and employee recruitment and satisfaction that fulfilled ESG factors play a role, but also with customers. It is evident that sustainability creates a competitive advantage over direct competitors in one's own industry, and customers are more likely to choose the sustainable product/company.
Implementing climate protection measures is an additional expense, but in the long term it avoids costs such as high CO2 taxes and allows companies to survive in the market. If the goals of the Paris climate agreement are not achieved, it is not the regulations but the climate crisis itself that will demand immense financial losses from companies. A study by Deloitte and SORA shows that in Austria alone, the "worst case" scenario defined in the study, a global warming of 3 degrees, would result in the loss of "around 90 to 100 billion euros in economic output and a potential of 0.7 to 0.9 million jobs by 2070".