89% of investors take ESG reporting into account when considering an investment

What is ESG reporting?

The acronym ESG (Environmental, Social, and Governance) refers to new legislative requirements in the areas of corporate social responsibility, corporate governance and environmental sustainability. These three categories are used to define "socially responsible investors", i.e. those who consider it important to take into account their values and concerns, such as environmental protection, governance or community interests. ESG allows companies to be more transparent about the risks and opportunities they face.

The transition to sustainable business

There is currently a significant shift in the approach to sustainability and corporate social responsibility. This trend is not only the result of increasing social pressure, but is also becoming subject to regulatory measures. Companies are now more motivated than ever to adopt ESG reporting strategies.

ESG reporting regulation in the EU

A new directive known as the Corporate Sustainability Reporting Directive (CSRD) is expected to be implemented in the European Union in 3 phases between 2024 and 26. This directive aims to increase transparency in corporate sustainability. Its implementation means that large companies will have to conduct detailed ESG reporting. However, some of the Directive's requirements will also have a direct impact on smaller suppliers from whom large reporting companies will require ESG data. This highlights the importance of ESG reporting as an essential part of strategic planning and decision-making in companies of all sizes. It aims to ensure that companies are more accountable and transparent about their impact on society and the environment.

Tip: In the context of ESG reporting regulation, it is worth mentioning the impact of FinTech innovations such as open banking. This trend, described in more detail in our article, shows how digital transformation in banking contributes to transparency and corporate social responsibility.

Difference between NFRD and CSRD

According to Infoset.help, the main difference between the Non-Financial Reporting Directive (NFRD) and the Corporate Sustainability Reporting Directive (CSRD) lies in the scope and detail of the required sustainability information.

The NFRD, which was introduced in 2014, required some large companies in the EU to disclose non-financial information. This directive applied to publicly significant entities with more than 500 employees, including listed companies, banks and insurance companies. The NFRD requirements covered environmental, social, human rights and anti-corruption issues.

The CSRD, which was proposed in April 2021 and published in the Official Journal of the European Union on 16 December 2022, is intended to be a fundamental extension of the NFRD as it increases the requirements for corporate sustainability reports. The CSRD applies to all companies in the EU, including those that are not listed. The new directive covers all large companies that meet at least two of three criteria: more than 250 employees, a turnover of more than €40 million and total assets of more than €20 million.

Under the new CSRD, from the 2028 financial year, sustainability requirements will also be extended to non-EU companies if they have significant business activities within the EU or are significant suppliers to EU companies.

ESG reporting - managing risks and opportunities

ESG reporting is becoming a key tool for assessing how well companies are managing the risks and opportunitiesassociated with project sustainability. Given the changes ahead, ESG reporting will play an increasingly important role in corporate governance. Companies will not only need to adjust their internal processes and strategies, but also improve communication and transparency to their stakeholders. This development is an important step towards creating a more sustainable and responsible business environment.

Tip: Although artificial intelligence and machine learning are being used by companies, their roles in managing ESG risks and opportunities are currently rather limited. As discussed in our Technology Trends article, advances in AI and ML are helping companies improve efficiency and optimize processes.

An example of what the implementation of the Corporate Sustainability Reporting Directive (CSRD) might look like in practice for a manufacturing company in the EU: Suppose you have a large manufacturing company in the European Union that specialises in the production of electronic components. Before implementing the CSRD and the associated project sustainability reporting, you had to focus primarily on basic environmental metrics such as total greenhouse gas emissions and energy consumption. This reporting was largely voluntary and not regulated in detail.

However, with the introduction of the CSRD, the situation will change fundamentally. Companies will now be required to provide much more detailed and comprehensive reporting that covers a wider range of ESG factors. These include:

1. Environmental aspects: in addition to basic data on emissions and energy consumption, the company will need to provide detailed information on its impact on biodiversity, water management and waste management. It will also need to report on progress towards renewable energy and carbon footprint reduction targets.
2. Social aspects: The company will have to report on its working conditions, including respect for human rights and labour standards throughout its supply chain. This includes information on gender equality, diversity and inclusion, as well as employee development initiatives and support for local communities.
3. Governance: Here the company will be required to be transparent in areas such as corporate governance, ethical practices and risk management strategies, including those related to sustainability.

According to the CSRD, this detailed and holistic approach to ESG reporting will require not only an expansion of internal data collection and analysis systems, but also improved communication and transparency to investors, customers and the wider public. The implementation of the CSRD will therefore bring about significant changes in how the company approaches sustainability, not only internally but also in its external relationships and reporting.

Analysis of the three pillars of ESG reporting

This analysis provides an in-depth look at individual topics in the environmental (E), social (S) and corporate governance (G) areas that are critical to sustainable business development. In the following, we will focus on how these pillars influence companies' strategies and how they are integrated into their daily operations.

1) Environment (E)

• Climate change mitigation: includes activities such as increasing energy efficiency, using renewable energy sources (RES) and reducing the carbon footprint. Companies can implement technologies that reduce GHG emissions or switch to green energy sources.
• Pollution prevention and control: Efforts to reduce air, water and soil pollution, including the application of technologies and practices to reduce emissions.
• Climate Change Adaptation: deals with adapting corporate operations and infrastructure to climate change, such as changes in building siting and design, optimizing land and processes for climate resilience.
• Biodiversity and ecosystems: Promoting blue-green infrastructure and nature-based measures that protect and restore ecosystems and help maintain biodiversity.
• Transition to a circular economy: Includes strategies to minimise waste, use resources more efficiently and apply circular solutions in business processes.
• Sustainable use and protection of water resources: Efficient management of water resources, increasing the efficiency of water use and protecting blue-green infrastructure.

2) Social (S)

• Employee training and skills development: Investing in training and career development opportunities for employees.
• Equal opportunities: ensuring equal opportunities for all, regardless of gender, and guaranteeing equal pay for equal work.
• Support for disadvantaged groups: Focus on integration and support for people with disabilities, etc.
• Working conditions and wages: Ensuring fair working conditions and adequate wages.
• Work-life balance: Promoting a work-life balance for employees.
• Respect for human rights and fundamental freedoms: Respect for human rights and freedoms in company operations.
• Social dialogue and collective bargaining: Involving workers in decision-making processes and promoting open dialogue.
• Occupational safety and ergonomics: Ensuring safe and healthy working conditions.

3) Corporate Governance (G)

• The role of governance in sustainability: focusing on how the administrative, management and supervisory bodies of the company support the sustainability of projects.
• International standards and norms: Compliance with relevant international ESG standards and norms.
• Corporate political engagement: Seeking responsible political engagement and lobbying with an emphasis on greater transparency, even if these efforts are perceived as challenging and often debated.
• Long-term development strategy: Incorporating ESG issues into the company's strategic planning.
• Business ethics and corporate culture: Adherence to high ethical standards and the fight against corruption and bribery.
• Internal control and risk management systems: Effective systems for managing internal risks and controls.
• Audit and reporting: Transparent and regular ESG audit and reporting.
• Business partner relationship management: Maintaining quality and sustainable relationships with business partners, including environmental and social aspects.

Current data and statistics

Here are some interesting statistics and data regarding the ESG Index from the year according to ESG Investing Statistics, Data & Trends (2023):

• Climate events could cost businesses $1.3 trillion by 2026.
• The majority of investors (89%) consider ESG issues when making investment decisions, indicating that ESG investing is becoming increasingly popular.
• Global ESG fund assets reached approximately $2 billion at the end of 2022, an increase of nearly 12% over the previous year. The majority of these assets are located in Europe.
• 76% of consumers say they will stop buying from companies that mistreat the environment, their employees or the community in which they operate.
• 85% of asset managers consider ESG a high priority, but 64% express concern about the lack of transparency and corporate disclosure on ESG activities.

ESG Reporting - The Key to Sustainable Business

In this article on ESG reporting, we have covered all aspects of ESG reporting, from the basic principles to the upcoming regulations that are shaping the process. The importance of the ESG Index - the environmental, social and governance (ESG) aspects of business - is undeniable in today's business environment. ESG reporting not only represents an ethical commitment, but is becoming a necessity for transparency, regulation and long-term business sustainability.

With Algotech on the road to comprehensive ESG reporting

Our company Algotech - with extensive experience in digital transformation and process automation - can play a key role in supporting companies to implement and improve their ESG reporting. Implementing ESG reporting can also be the impetus for reviewing internal systems and upgrading them. The modern ERP systems that Algotech supplies include in their data models the capabilities to record data for ESG reporting. However, customers do not always keep the newly required data for ESG reporting today, but they will need it for ESG reporting. Therefore, today is a good time to analyze ESG reporting and possibly upgrade your enterprise ERP system.

With the modern enterprise systems that Algotech supplies, companies can effectively track and report on their environmental impact, social practices and governance activities. In addition, we offer tools and services that can help companies improve internal processes, which is essential to achieving sustainability goals. Contact us for a consultation.