ESG is a set of criteria that assesses a company's impact on the environment, society and its internal governance. It is also a way for investors to find and compare sustainable companies that are worthy of their investment. But what does ESG really mean and who should use it? Find out here.
What is ESG?
ESG is based on the three main criteria of environment, society and governance. It is a financial industry standard used to measure how sustainable a company is. The standard makes it possible to identify and compare companies based on sustainability criteria. In the past, investors have mainly evaluated companies from a financial perspective, but recently it has become increasingly important to also include the environmental aspect.
- Environmental: All businesses have an impact on the environment in one way or another, for example through transportation, emissions, waste or electricity consumption. It is important to be aware of both the direct and indirect impact of businesses on the environment.
- Social: Companies have a social responsibility towards society and their employees. Therefore, it is necessary to map the working conditions of the business, not only in the first stage but also in the second and third stages. It is important that the company has transparency throughout the supply chain and takes a clear position on issues such as working conditions, child and forced labor.
- Governance: A sustainable business requires effective governance processes. Therefore, it is important to review the role and composition of the board. Is there preventive work against bribery and corruption within the company? It also looks at the distribution of individuals in management positions based on factors such as gender and diversity.
Why is ESG important for investors and companies?
ESG criteria provide investors with a broader view of a company's performance by including factors that have not traditionally been part of financial assessments. By integrating ESG factors into investment decisions, investors can minimize risks and maximize opportunities in a rapidly changing world. For companies, ESG presents an opportunity to create long-term value growth. By focusing on sustainability issues, companies can reduce costs, improve their reputation and strengthen customer loyalty.
Read more: Are you on top of your ESG risks?
CSRD and its impact on ESG reporting
CSRD is a new directive that tightens the requirements for corporate sustainability reporting. The CSRD replaces the previous NFRD (Non-Financial Reporting Directive) and requires more companies to report according to clearer and more detailed guidelines. This directive aims to increase the transparency and comparability of companies' sustainability performance, strengthening investors' ability to make informed decisions based on ESG criteria. For companies, CSRD means that they need to develop more comprehensive reporting systems and integrate sustainability objectives into their strategic plans to meet the new requirements.
Read more: How to prepare your sustainability reporting for CSRD
Who can use ESG?
ESG is a versatile and inclusive approach that can be adapted for a range of activities and objectives. Large companies can use ESG strategies to improve their sustainability performance and strengthen their brand. Investors can use ESG criteria to identify long-term sustainable investments that reduce risks. Public institutions can integrate ESG principles to ensure responsible purchasing and policy development. Communities and small businesses can also implement ESG initiatives to contribute to sustainable development. By engaging with ESG issues, different stakeholders can work together to create a more sustainable and responsible future, which benefits everyone.
Read more about how Stratsys product for CSRD sustainability management could help you with your sustainability work, or contact us directly if you would like to know more.
