ESG (environmental, social and governance) will be inevitable in the future. Understand ESG and get ready to implement it in your organization.
What is ESG and why is it important?

What is ESG and why is it important?

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5 minutes of reading

Organizations today are facing increasing demands for sustainable business operations as well as climate and environmental management. There is not just a focus on regulatory requirements, but also expectations from different stakeholders, from employees and customers to suppliers and partners.

No matter the size of the organization, ESG reporting is inevitable if you want to retain everyone involved in the ecosystem. ESG is all about sustainability; environmental, social and governance issues. With a proactive ESG strategy, you show your surroundings that your organization is making an honest effort to track and improve its environmental impact.

What is ESG?

ESG stands for environmental, social and governance. It is a term used for an approach that organizations use to measure and improve their climate and environmental impact, for example, in relation to the UN's Sustainable Development Goals. In practice, ESG can be used to explain an organization's impact and added value in these three areas:

  • Environmental describes how an organization performs as a guardian of nature. It analyzes how its activities impact the environment and manages environmental risks, for example, resource scarcity and resource management, conservation of natural resources, treatment of animals and greenhouse gas emissions.
  • Social takes a closer look at the strengths and weaknesses of the way an organization manages relationships with employees, suppliers, customers and the communities in which it operates. This includes working conditions, operations in conflict areas, health and safety, employee relations and diversity, among others.
  • Governance deals with an organization's management, executive compensation, audits, internal controls and shareholder rights. It also covers topics such as executive pay, gender equality, bribery, corruption and board diversity.

ESG and the reporting thereof is interesting because it offers an opportunity to give the outside world a more nuanced insight into the organization. Even the most sustainable organization impacts the environment and surroundings to some extent, so zero impact is not the goal here. It's about being conscious and honest about your organization's negative impact and positive value creation and continuously working to improve it.

ALSO READ: Manage Your Organization's ESG Risks

ESG strategy: Prioritize sustainability

Previously, the demand for sustainability was driven by stakeholder pressure, but we are now also seeing a number of regulatory requirements that make it crucial for companies to develop an ESG strategy that demonstrates their commitment to sustainability.

One example of the growing importance of ESG is the new EU regulation, the Corporate Sustainability Reporting Directive (CSRD). This legislation requires many companies to report their sustainability performance. This highlights the importance of sustainability and its impact on business operations and investments for many larger companies.

However, it is not just larger companies that are affected. ESG can also play a crucial role for smaller businesses. As part of the value chain for larger companies that must comply with certain requirements and regulations such as CSRD, it is important for smaller companies to consider how this affects their business. While they may not be directly affected by the legal requirements, they may still be impacted by the demands of customers who are looking for sustainable suppliers.

Therefore, it is crucial for companies of any size to have a proactive ESG strategy, and it is beneficial to continuously ensure optimization of the ESG strategy.

How do you measure ESG?

The reporting activities vary from organization to organization. Some examples could be the negative impact on the environment due to waste and energy consumption, the organization's positive contribution to gender equality or it could be something completely different related to the UN Sustainable Development Goals.

When it comes to measurement, consistency in reporting is essential, so it's a good idea to follow international standards in both definitions and calculation methods. In addition to this, it is recommended to follow good reporting practices so that current data has the same value as financial data such as:

  • Delimitation
  • Consolidation
  • Reporting period
  • Accounting policies
  • Performance and development

Why is ESG important?

With customers, partners and employees alike increasingly focusing on sustainability, environmental issues, gender equality etc., ESG is necessary for an organization's reputation. Sustainability is the new ideal, and in the future it will be difficult to run a successful business without managing the organization's environmental and social impact.

Furthermore, there is a growing awareness that ESG may become mandatory. If you as an organization want to stay ahead of regulations and competition, you can start integrating ESG as part of your organization's DNA.

ALSO READ: Key Factors for Successful Implementation of the CSRD