ESG: The sustainability criteria that companies can’t ignore

4 de August, 2023

Contrary to what some people may think, growing concerns about sustainability are not just a fad or a whim. Given some of the rules that have been established, particularly at European level, companies will begin to have an obligation to measure and report on certain ESG indicators.

But what are ESG criteria anyway? Why are they fundamental for organizations? And how will they have to be demonstrated over the next few years? Come and find out with us.

What are the ESG criteria?

ESG is an acronym for Environment, Social and Governance. It refers to a set of criteria that certify whether companies conduct themselves responsibly in these three areas:

• Environmental: implementing measures to combat climate change, carbon emissions and waste, to preserve natural resources, reduce waste, improve energy efficiency, among others.
• Social: concerns how the company relates to its internal and external stakeholders, including issues such as human rights, working conditions, health and safety, involvement with local communities, etc.
• Governance: related to business ethics and transparency, risk management, data protection and cybersecurity, the fight against corruption, among others.

ESG is sometimes confused with corporate social responsibility (CSR). Although they are related, these concepts are distinct. A company’s corporate social responsibility concerns policies aimed at promoting sustainability. It is voluntary and qualitative in nature. ESG criteria, on the other hand, are concrete and measurable indicators that quantify the results of the actions carried out by the organization.

Why are ESG criteria increasingly important for companies?

The market, and legislation itself, are tending to become stricter with regard to social and environmental issues. In this sense, the demands placed on companies are increasing. It is no longer enough to demonstrate the quality of their products and services, but also to prove their commitment to the sustainability of the planet and society.

Performing well on ESG criteria is becoming crucial for organizations to succeed:

• Accessing capital and attracting investment: access to finance will increasingly be conditioned by the good environmental, social and governance conduct of companies. Investors are already choosing to invest their resources in organizations that demonstrate that they are socially responsible and sustainable, as these are necessarily better prepared to face possible risks (of an environmental, social and economic nature) and to generate long-term value.
• Winning and retaining customers: consumers themselves are becoming more aware of environmental and social issues and tend to favor products and services that have a positive impact on preserving the environment and society itself. In the case of companies operating in the B2B segment, managers are more demanding of other companies that supply them with goods or services. In other words, organizations are starting to evaluate the performance of their own partners and suppliers in terms of ESG criteria, seeking to ensure that sustainability concerns are addressed throughout the value chain.
• Recruiting and retaining talent: according to a study by IBM’s Institute for Business Value, 68% of respondents admit that they would be willing to accept a job offer from a socially responsible organization. The environmental, social and governance concerns – and concrete measures – of companies are increasingly valued by candidates when choosing a company to work for.

Will companies have to report results in terms of ESG criteria?

On November 4, 2016, the Paris Agreement came into force, an action plan in which several targets were set to combat climate change. The governments of the countries that have ratified this agreement, including Portugal, have committed to adopting measures to keep the increase in the average global temperature below 2ºC compared to pre-industrial levels.

In view of this commitment, the European Commission presented the so-called European Green Deal in 2019. The ultimate goal of this package of measures is to achieve climate neutrality by 2050.

One of the great foundations of the European Green Deal – and one that directly concerns organizations – is the Corporate Sustainability Reporting Directive (CISE or CSRD), formally adopted by the European Union in November 2022.

What this Directive imposes in practice is the obligation for companies to report their actions and results in the area of sustainability. This new law brings with it a set of strict requirements that organizations will have to communicate and, therefore, integrate robustly into their operations.

Having entered into force on January 5, 2023, EU Member States have 18 months to transpose the Directive into their national legislation. Even so, the stages of application of the regulation are already known:

• Fiscal year 2024 (reports to be published in 2025): reporting by companies in the public interest and with more than 500 employees that are already subject to the NFRD Directive (Directive on the disclosure of non-financial information, prior to the CISE Directive).
• Fiscal year 2025 (reports to be published in 2026): large companies not subject to the NFRD with more than 250 employees and/or 40 million euros in annual turnover and/or 20 million euros in total assets must report their actions.
• Fiscal year 2026 (reports to be published in 2027): small and non-complex credit institutions, captive insurance companies and listed SMEs will also have to report their indicators.
• Fiscal year 2028 (reports to be published in 2029): reporting becomes mandatory also for companies outside the European Union with a net turnover of more than 150 million euros in the EU.

This means that, over the next few years, communicating information and the concrete results of organizations’ sustainability efforts will become a reality.

In any case, this imposition should be seen as an opportunity to improve ESG criteria. More than a legal obligation, it should be an additional reason for companies to invest in more sustainable and socially responsible actions, products and services.

United Nations Sustainable Development Goals (SDGs)

In 2015, the 2030 Agenda for Sustainable Development, adopted by the 193 member states of the United Nations, defined the priorities for sustainable development at a global level.

To this end, 17 concrete goals have been defined on which countries should focus their efforts. These goals are focused on five principles – planet, people, prosperity, peace and partnerships – and cover topics such as combating hunger and poverty, preserving the environment, gender equality and equal opportunities, access to education, among others.

Instituto Nacional de Estatística has been monitoring Portugal’s progress in meeting these 17 goals. The most recent INE data shows that, between 2015 and 2021, most of the indicators analyzed showed a positive evolution. With the exception of goals 5, 12, 14 and 15 (gender equality, sustainable production and consumption, protecting marine life and protecting terrestrial life), all the SDGs showed favorable developments.

With regard to the responsibility of organizations in achieving these goals, a 2023 study by the Business Council for Sustainbale Development (BCSD) reveals that 93% of the companies surveyed include a commitment to sustainability in their mission/vision. However, only 78% say they integrate sustainability into their business strategy and only 55% develop and monitor that same sustainability strategy. At the same time, only 23% of organizations admit to requesting an ESG indicator report from their customers, suppliers and partners.

These figures show that many Portuguese organizations still have a long way to go towards sustainability. The fact that they will have to is unavoidable.