WHAT ARE ESG? admin September 18, 2023

ESG (Environmental, Social and Corporate Governance) criteria are the environmental, social and corporate governance aspects that are an essential approach to assessing a company’s commitment to goals beyond profit maximisation. Within the ESG framework, both environmental and social goals are promoted, including support for community movements and the integration of diversity, equity and inclusion into a company’s own strategy.

In less than two decades, what began as a corporate social responsibility initiative has evolved into a global phenomenon with more than $30 trillion in assets under management.

Although some critics raise doubts about its real impact, the ESG movement continues to gain prominence in the investment and business landscape. In addition to the interest generated, the European Commission has set 2024 as the starting date for incorporating these principles in the reports of companies, institutions and organisations.

But what are ESG?

For many years, economic, social and environmental issues have been treated separately, if not at odds with each other. This obsolete way of understanding these elements is a vision that is far removed from reality and has proven in the long run to be more a source of problems than a source of wealth. The cost of mitigating their negative impact is greater than the benefit of ignoring their social or ecological impact.

Playing an active role in society means being aware of the consequences of our daily dynamics at different levels. This is even more important in the case of entities (companies, institutions and organisations).

If we do not assume this active role, these institutions will be, in the least bad case, a necessary evil that will disappear in the face of any option that entails a minimal improvement.

This does not have to be the case.

Institutions must play an active and positive role in society. This is the idea behind the ESG principles:

  • Environmental Criteria (E): These encompass the environmental impact of a company, covering aspects such as waste management, pollution, climate change and the preservation of natural resources. In the field of sustainable construction, these criteria have a direct and profound influence.
  • Social Criteria (S): These focus on the relationships that the company establishes with its employees, customers, suppliers and the community as a whole. They cover factors such as diversity and gender equality, occupational health and safety, and human rights.
  • Governance Criteria (G): These refer to the way the company manages its internal operations, including its corporate governance structure, business ethics and financial transparency. These criteria are a fundamental pillar underpinning the company’s decision-making and integrity.

The European Union has prepared a set of regulations that put member countries at the forefront of turning responsibility into a competitive advantage and bringing us closer to the Sustainable Development Goals, SDGs. ESG will be part of the structure and strategy of companies, institutions and organisations beyond Corporate Social Responsibility.

The ESG criteria have their origin in the Paris Agreement and the European Green Pact.

The Paris Agreement, signed in 2015 by 196 nations, set the goal of limiting global temperature rise to below 2°C above pre-industrial levels and aiming to limit it to 1.5°C. In turn, the European Green Pact, presented in 2019, charts the way for Europe to become the first carbon-neutral continent by 2050.

These milestones prompted concrete actions, such as the European Commission’s Sustainable Finance Action Plan, which encompasses various regulations related to ESG criteria.

For its implementation, there are three main regulations that establish a legal framework to properly apply ESG criteria (in addition to some national regulations):

  1. The Taxonomy Regulation (EU) 2020/852 establishes a framework for creating a unified classification of sustainable activities, determining which are sustainability-friendly and which are not. Its purpose is to guide investors towards sustainable opportunities and to encourage the transition to a more sustainable economy by setting environmental targets that economic activities must meet to be considered sustainable.
  1. The SFDR Regulation (EU) 2019/2088, also known as the Sustainable Finance Disclosure Regulation, provides transparency for investors and prevents greenwashing by setting rules on the integration of sustainability risks into financial processes and financial product disclosures.
  1. CSRD Regulation (EU) 2022/2464 promotes the disclosure of non-financial information by certain companies, improving the transparency of corporate sustainability reporting and facilitating the integration of ESG criteria into business decision-making. This regulation regulates how public interest companies must report on their compliance with ESG criteria.

In short, we are not talking about a declaration of intent or a lament for mistakes made. What we are talking about is the implementation of a specific strategy, with regulatory mechanisms, with specific working elements that we must gradually but unavoidably join.

What until recently was a choice in the way we manage our institutions is now becoming an obligation. The CSRD legal framework and the Green Deal strategy give us a relatively short horizon (2024/2026/2030) to implement various ESG impact measurement models. Given this paradigm shift, it will be easier to look for added value in a different type of management. Implement the ESG vision in business or production plans instead of relying on the correct completion of the audits that are to come.

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