What is ESG?
Environmental, Social, and Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of a company. ESG criteria help to better determine the future financial performance (return and risk) and environmental/social impact of companies.
Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
ESG reporting involves disclosing this information to stakeholders, ensuring transparency and accountability. Companies must collect relevant data, assess their performance against ESG criteria, and compile reports that meet the standards set by various regulatory bodies.
Why Companies Must Start Thinking About ESG Reporting?
There are both significant risks and substantial opportunities associated with ESG practices. Understanding and addressing these aspects is essential for ensuring long-term sustainability, regulatory compliance, and competitive advantage. The following section outlines the risks of not engaging in ESG reporting and the benefits of proactive ESG strategies.
Regulatory Risks and Benefits
Risk #1
Increasing scrutiny from regulators in the US and the EU: Governments and regulatory bodies are intensifying their focus on corporate sustainability practices. This increased scrutiny means companies must adhere to higher standards of environmental and social governance or face potential penalties.
Risk #2
Mandatory compliance with new regulations such as the SEC’s proposed climate disclosure rule and the Corporate Sustainability Reporting Directive (CSRD) in the EU: Companies are now required to provide detailed reports on their ESG activities, with specific metrics and targets. Non-compliance can lead to significant legal and financial consequences, including fines and restrictions on business operations.
Risk #3
Heavy fines and legal consequences for non-compliance: In addition to reputational damage, companies that fail to meet ESG reporting requirements can face substantial fines and legal actions, impacting their financial stability and market position.
Benefit #1
Proactively complying with ESG regulations can enhance a company’s reputation as an industry leader in sustainability, providing a competitive edge.
Benefit #2
Early adoption of regulations positions companies as pioneers in transparency, attracting investors and customers who value sustainability.
Benefit #3
Compliance with ESG regulations can mitigate risks and ensure long-term financial stability and growth.
Financial Risks and Benefits
Risk #1
Investors are increasingly prioritizing ESG, impacting access to capital: Investment firms and financial institutions are increasingly incorporating ESG criteria into their decision-making processes. Companies that fail to meet these criteria may find it challenging to attract investment.
Risk #2
Non-compliant companies might face divestment or exclusion from investment portfolios: ESG-focused investors are divesting from companies that do not demonstrate sustainable practices. This can lead to reduced share prices and a lack of access to critical funding.
Risk #3
Reduced access to European capital markets for non-compliance in the EU: Companies operating in or looking to enter the European market must comply with stringent ESG regulations. Failure to do so can result in restricted access to capital markets, limiting growth opportunities.
Benefit #1
ESG-compliant companies are more likely to attract investors and secure funding at favorable terms, promoting sustainable growth.
Benefit #2
Companies with strong ESG practices can be included in ESG-focused investment portfolios, enhancing their stock performance and investor appeal.
Benefit #3
Compliance with EU ESG regulations can open doors to European capital markets, providing opportunities for expansion and investment.
Reputational Risks and Benefits
Risk #1
Growing consumer awareness and demand for sustainable practices: Consumers are becoming more conscious of the environmental and social impacts of their purchases. Companies that do not align with sustainable practices risk losing market share to more responsible competitors.
Risk #2
Potential for negative publicity and loss of consumer trust: Inadequate ESG performance can attract negative media attention and damage a company’s reputation. This can lead to a loss of customer trust and loyalty, directly impacting sales and profitability.
Risk #3
High public and governmental expectations for corporate sustainability in the EU: The European public and governments place a high emphasis on sustainability. Companies that do not meet these expectations can face public backlash and decreased support from local communities and governments.
Benefit #1
Companies that embrace ESG can build strong brand loyalty and attract a growing base of environmentally and socially conscious consumers.
Benefit #2
Transparent ESG reporting can enhance public image and trust, leading to increased customer retention and brand strength.
Benefit #3
Meeting or exceeding sustainability expectations can result in public and governmental support, fostering a positive business environment.
Operational Risks and Benefits
Risk #1
Unaddressed ESG issues can lead to operational disruptions, legal challenges, and fines: Ignoring ESG factors can result in significant operational risks, including environmental disasters, labor strikes, and legal challenges. These disruptions can severely impact a company’s ability to operate efficiently and profitably.
Risk #2
Increased scrutiny from NGOs and activist groups in the EU and globally: Non-governmental organizations (NGOs) and activist groups are vigilant in monitoring corporate behavior. Companies that do not adhere to ESG standards can become targets for campaigns and actions that disrupt operations and damage reputations.
Benefit #1
Proactively addressing ESG issues can improve operational efficiency, reduce risks, and enhance overall business resilience.
Benefit #2
Engaging with NGOs and activists through strong ESG practices can lead to positive partnerships and support for sustainability initiatives.
Key ESG Regulations
The table below summarizes the key ESG regulations, including who must report, when they must start reporting, and what they must report. It also indicates whether the regulation is mandatory and for whom it is mandatory.
| Corporate Sustainability Reporting Directive (CSRD) | Global Reporting Initiative (GRI) | IFRS Sustainability Disclosures Standards (ISSB) | |
| Who |
All large companies and companies listed on regulated markets, including SMEs meeting two out of three criteria: more than 250 employees, more than €50 million in net turnover, or more than €25 million in total assets. Approximately 50,000 companies in the EU will be affected starting 2025. Mandatory for all large companies and listed SMEs. |
Organizations of all sizes, sectors, and locations. Voluntary, but widely adopted worldwide. As of 2024, the most widely used sustainability reporting standards.
|
Companies listed on stock exchanges and those operating in jurisdictions that have adopted or plan to adopt ISSB standards. Mandatory for all companies in jurisdictions where ISSB standards have been adopted. Widely applicable globally by 2025. |
| When |
Companies under the NFRD must report from January 2024 for the 2024 financial year. All other large companies must comply starting January 2025 for the 2025 financial year. All listed SMEs are required to report starting the 2026 financial year. Mandatory deadlines. |
No specific mandatory deadlines. Organizations can start reporting as per their internal schedules and stakeholder demands. However, interoperability with CSRD and ISSB increases its importance. | In effect since 2024, with mandatory phased implementation in jurisdictions like the UK and Canada by 2025. |
| What |
Detailed information on their ESG impacts, risks, and opportunities. Includes data on climate change, social and employee matters, human rights, anti-corruption, and board diversity. Mandatory detailed disclosures. |
Comprehensive sustainability reporting, covering economic, environmental, and social impacts. Provides detailed guidelines for a wide range of sectors and issues. Voluntary, but detailed disclosures are recommended. |
Detailed reporting on financial materiality, including climate-related financial disclosures. Mandatory disclosures aligned with financial materiality and investor-focused criteria. |
Centida ESG Services
At Centida, we offer a comprehensive suite of ESG services designed to help your business navigate the complexities of ESG reporting. Our expertise ensures that your company not only meets regulatory requirements but also leverages ESG practices to enhance performance and reputation. Here’s how we can assist.
Framework Selection
Help clients choose the most appropriate ESG reporting frameworks (e.g., CSRD, SFDR, ISSB) based on local laws, industry peers, and potential investor requirements.
Data Collection and Integration
Assist in gathering and integrating ESG data from various departments and sources.
Use advanced data management tools and processes to ensure comprehensive and accurate data collection.
Materiality Assessments
Identify and prioritize the ESG issues most relevant to the client’s business.
Provide methodology for stakeholder engagement and materiality assessments to pinpoint critical ESG factors.
Reporting and Disclosure
Streamline the process of ESG reporting and ensure compliance with regulatory standards.
Develop clear, transparent, and compliant reports that effectively communicate the client’s ESG performance.
Continuous Improvement
Advise on strategies for ongoing improvement in ESG reporting.
Provide continuous support and updates on regulatory changes, helping clients stay ahead of the curve.