The name of the entrepreneur's future is ESG. New opportunities and obligations for companies

Already in 2011, Paul Polman, a Danish investor and former CEO of Unilever, commented on climate change stating: "We cannot choose between economic growth and sustainability – we must have both.". In a word – sustainable development has a real impact on business, and the ESG obligations can bring real and measurable benefits.

WHAT IS ESG?

The term ESG (Environmental, Social, and Corporate Governance) was first used in 2004 in a report resulting from a joint initiative of financial institutions and the United Nations, but it was from the publication of the SDG (Sustainable Development Goals) by the United Nations in 2015 that this term has been becoming more and more popular. Although this acronym is almost two decades old, it is becoming more and more important for entrepreneurs – both in terms of meeting regulatory obligations and in terms of their image, current trends and the resulting market pressure.

  So what is hidden under the term Environmental, Social, and Corporate Governance?

   Nowadays, the company's success is measured not only by the profit generated, but also by examining the company's non-financial indicators, such as respect for the environment and local community. ESG is a measure of the values of companies and investment methods in terms of their performance in the non-financial area – the environment, society and corporate governance.

  The environmental impact is examined in terms of implementing the environmental strategy and policy, as well as caring for and showing concern for the environment, e.g. by preventing pollution and implementing measures to control such activities, studying the impact of energy consumption on the environment or appropriate waste management.

   On the other hand, the issue of cor-porate social responsibility concerns the perception of the responsibility of a company towards people involved in its activities – employees, entities from the supply chain or any people who are affected by the activities of a given business. Therefore, this criterion applies not only to issues related to human rights, employment (labour law and compliance with the principles of occupational health and safety), counteracting discrimination in employment and occupation, but also, inter alia, relations with consumers or the impact on the social and economic development of local communities.

   The last element of ESG is the assessment of management criteria, corporate governance, supply chain oversight policy, business ethics, personal data protection and anti-corruption and anti-bribery policies, among others.

   The above assessment indicators are intended to encourage companies to make a positive environmental and social change in order to contribute to sustainable development and to attract investors, social partners and other concerned parties. These regulations are essential for preventing greenwashing and achieving the goals of the Green Deal in the European Union, including, in particular, climate neutrality by 2050.

ENTITIES SUBJECT TO THE REPORTING REQUIREMENT

Currently, the entities required to provide non-financial reporting are large public- interest entities that meet the criteria of an average annual employment level of 500 employees and reaching appropriate financial values. Therefore, approximately 11,700 enterprises are currently subject to reporting requirements, and it is also possible for other concerned entities to disclose their reports. Nevertheless, the number of companies preparing reports is low and the quality of data is far from reaching a satisfactory level.

  Among others, for these reasons, on 21 April 2021, the European Commission submitted a draft of Corporate Sustainability Reporting Directive, according to which a gradually increasing number of entrepreneurs will be subject to the requirement to provide reporting on sustainable development (even 50,000 entities), and the criteria of the reporting standard will be clarified, which is to affect the quality of the presented data. Importantly, in order to facilitate the clarity of the sustainability data, it is foreseen that information on sustainable development will be published in a separate section of the business activity report. Moreover, this data will be subject to obligatory verification by a statutory auditor or other authorized entity.

   The draft directive on corporate sustainability reporting also provides for sanctions for breaches of national legislation adopted pursuant to it. The prescribed penalties are at least financial penalties, publicizing the nature of the violation together with an indication of the entity liable for such violation, or an order to stop a specific conduct.

   Given the main users of reports, which are investors, government organizations and social partners, it can be safely argued that the ESG criteria apply to all entrepreneurs. This allows for a better understanding of the company's risks, its approach to sustainability and the impact of potential investments on people and the environment, leading to a better understanding of the company's operations and objectives, and consequently to increased trust.

   The company's activities and the application of the ESG criteria may have significant consequences, in particular in the context of potential transactions, attracting investors and social partners. It is noted that users of reports expect companies to stay ahead of trends and local regulatory changes in the context of sustainable development. Proactive actions are required, and gaining social capital translates into increasing competitive advantage and raising capital.

ESG AND TECHNOLOGY

Complying with the ESG criteria and making changes don't have to be as complicated as they sound. The use of technological solutions, including AI and machine learning, designed to set goals, collect and analyze data or mitigate risks can prove to be quite a support for the entrepreneur. In a world where technology and ecology go hand in hand, a combination of proper governance, enterprise ESG strategy and innovative products is proving to be the key to success.

   According to Oracle Group's 2022 Global ESG Survey, up to 61% of respondents believe that bots will succeed where humans have failed in corporate sustainability. What's more, as many as 93% of business leaders would be more likely to trust a bot than a human when making sustainability and social responsibility decisions. This data proves that current ESG efforts are insufficient, and pressure – including from consumers – continues to grow. The answer to these needs is technology that can support companies in making real progress on sustainability and ESG initiatives.

SUMMARY

Frequent changes in the regulatory landscape for sustainable development are now a constant part of our reality. Despite the dynamic situation, multinational companies cannot afford to adopt a wait-and-see attitude. On the contrary, it is an opportunity to act and gain social capital by implementing conscious business processes, taking advantage of available technological products to achieve climate policy goals, and strengthening their social responsibility.

Author: Hanna Wiejowska, Associate, Baker McKenzie

This article comes from magazine:
FOCUS ON Business #6 September-October (5/2022)