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.
READ ALSO: 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.
When will ESG reporting become a requirement?
Originally, a three-wave implementation plan, in which groups of companies were to be gradually included in the sustainability reporting requirement:
1 JANUARY 2024, WITH REPORTING IN 2025:
Listed companies with over 500 employees, including those already reporting on the Non-Financial Reporting Directive (NFRD).
1 JANUARY 2025, WITH REPORTING IN 2026:
Other large companies that exceed two out of three of the criteria:
- Balance sheet total: DKK 156 million
- Net turnover: DKK 313 million
- Number of employees: 250
1 JANUARY 2026, WITH REPORTING IN 2027:
Listed SMEs (small and medium-sized enterprises).
However, in February 2024, the EU Commission presented the Omnibus Proposal with the aim of reducing and simplifying the administrative burdens for European companies – especially in the area of sustainability.
With the Omnibus Proposal, the reporting obligation has been postponed for several types of companies. This means that companies that, under the original rules, were required to report for financial years 2025 or 2026, will now only have to report for financial years beginning on or after 1 January 2027.
This change is often referred to as “Stop the clock”, and it is the only part of the Omnibus proposal that has been approved at this time.
At the same time, the proposal proposes further adjustments in relation to who is covered and what companies must report on. If these changes are adopted, it could have an impact on both the scope and complexity of ESG reporting going forward.
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
What is ESG data?
ESG data is a crucial part of ESG (Environmental, Social, and Governance) analysis and reporting. This data consists of information that evaluates an organization’s performance and impact in environmental, social, and governance areas.
Examples of ESG data
- Environmental ESG data: This includes a company’s annual report on its carbon emissions and water use, which shows the CO2 emissions and water consumption resulting from its activities.
- Social ESG data: This includes information about the company’s policies and practices regarding labor conditions, employee rights, and diversity. For example, it may include efforts to promote diversity and initiatives that support employee well-being.
- Governance ESG data: This includes information about the company’s governance practices and ethical guidelines, including reporting, transparency, and integrity in the organization’s operations.
By collecting and reporting such ESG data, organizations can provide stakeholders with a more nuanced view of their performance and impact on the environment, society, and governance aspects. It is an important part of demonstrating that the organization is taking responsibility and working to improve its overall ESG performance.
Voluntary Sustainability Standard: ESG reporting in practice with VSME
While many organizations recognize the importance of ESG, it is not always clear how to best structure their reporting – especially for smaller companies with no prior experience with sustainability data.
To address this challenge, EFRAG has developed a voluntary standard for small and medium-sized enterprises:
VSME – Voluntary Standard for SMEs
The standard serves as a practical framework that helps companies create an overview of their sustainability efforts within the areas of environmental, social and governance. The aim is to make ESG reporting more accessible, flexible and adapted to the resources and needs of smaller companies.
VSME can be a good place to start for companies that want to work systematically with ESG – without being overwhelmed by the requirements that apply to larger companies under the CSRD.
WATCH THE WEBINAR: Get started with your ESG reporting
Why is ESG important?
The importance of ESG is growing in line with increasing demands and expectations for responsible business operations. Today, ESG is not just about taking social responsibility – it is closely linked to business development, risk management and competitiveness.
Three key areas where ESG makes a difference:
- Reputation and stakeholder expectations: ESG strengthens the company’s image and relationships with customers, investors, employees and other stakeholders.
- Regulation and risk management: ESG is a growing part of legislation – including through CSRD – and an important tool for identifying and managing sustainability-related risks.
- Business value and sustainable development: Working with ESG data provides insight and structure that can be used to set goals, track progress and make more informed decisions.
For many organizations today, sustainability is not just an ideal – but a competitive condition. Companies that manage to integrate ESG into their strategy are stronger in the face of both the market, regulation and future expectations.
But for ESG work to create real value, it requires more than ambitions and declarations of intent. It requires structure, overview and the ability to follow developments systematically. By using an ESG software, the organization can ensure a more efficient approach to data collection, reporting and follow-up. It not only provides an overview of ESG efforts, but also creates a platform where you can work purposefully and dynamically with sustainability – set ambitious goals, follow developments closely and adjust efforts continuously.
READ ALSO: Key Factors for Successful Implementation of the CSRD
