Compliance Matters: The Growing Importance of ESG Regulations

Sustainability is not just something nice to have, it is essential

Sustainability is no longer just something desirable, it has become a necessity for the business world. Governments, regulatory bodies, and consumers are increasingly pressuring companies to address environmental risks, social issues, and governance (ESG risks). The pressure stems from growing concerns about climate change, social justice, and equality.

Climate change is one of the biggest issues of our time. Record temperatures, deadly floods, and devastating fires are becoming more frequent and more severe. These events not only endanger human lives and livelihoods, but they disrupt supply chains and cause significant financial losses for companies. By taking sustainability measures, companies can reduce their exposure to climate risks and create more resilient businesses.

In addition to environmental issues, there is a growing demand for social justice and equality. This includes ensuring fair treatment of employees, supporting diversity and inclusivity, and addressing human rights issues in their supply chains.

What are the benefits of sustainability for businesses? First, there is a financial benefit. Sustainable practices can lead to cost reductions and savings in areas such as energy and waste management. They can also attract tax incentives and incentives and make companies more attractive to investors who are increasingly seeking sustainable investments.

Additionally, sustainability can provide a marketing advantage. A recent study showed that two-thirds of North American consumers would be willing to pay more for sustainable products. By promoting their sustainable practices, companies can differentiate themselves from their competitors and build stronger relationships with environmentally conscious consumers.

ESG Criteria and Sustainability

ESG criteria can be divided into environmental, social responsibility, and governance objectives, and they are becoming increasingly important factors in the market. As more consumers and investors prioritize sustainability and ethical practices, companies that prioritize ESG and adopt more sustainable business models are more competitive and given an advantage in investment selection, as well as their products and services to end-users. Companies that successfully steer their business towards sustainability goals can better position themselves in this new environment.

Environmental objectives relate to a company's impact on the natural environment, including its carbon footprint, energy efficiency, and resource use. Social responsibility objectives relate to a company's impact on society, including its treatment of employees, suppliers, and customers, as well as its participation in the community. Governance objectives relate to internal management and decision-making processes within the company.

How to Incorporate ESG into Business?

There are various ways in which companies can incorporate ESG objectives into their business. One approach is to develop ESG policies and objectives that align with the overall mission and values of the company. Another approach is to integrate ESG considerations into investment decisions and supply chain management processes. Ultimately, incorporating ESG considerations into business practices can lead to long-term financial and reputational benefits, as well as environmental and social benefits for society as a whole.

ESG investment boom

ESG investing is becoming increasingly popular, and there are several trends worth following in this context. More and more companies are emphasizing ESG issues, and investors are increasingly interested in investing in such companies. A survey showed that 89% of institutional investors now take ESG factors into account when making investment decisions, up from 84% in the previous year.

ESG investing is based on the idea that investors must focus not only on a company's financial prospects but also on its ability to act responsibly in society. This includes its ability to comply with regulatory requirements, protect the environment, be socially responsible, and have an effective management system.

Greenwashing and false sustainability

In addition to the Norwegian association awarding Zalando the first prize for greenwashing, journalists in Germany have revealed that the company is deceiving its customers. The company falsely promoted its sustainability to customers, claiming it would become the first sustainable online platform and that returns and deliveries would become climate-neutral. It turned out that this was not the case, and that the goods they claimed to "carefully treat and return to the sale" were actually being taken to landfills.

Greenwashing is the practice of exaggerating the environmental aspects of products or services, creating the impression that they are more environmentally friendly than they actually are. This practice can be confusing for consumers who want to make sustainable choices but do not know how to recognize misleading claims.

EU and regulatory frameworks

The European Union seeks to establish a regulatory framework for ESG to ensure that corporations are accountable to their shareholders and the environment in which they operate.

The new regulatory framework, which was introduced in July 2021, includes the Regulation on the Disclosure of Sustainable Investments (SFDR) and the Corporate Sustainability Reporting Directive (CSRD). SFDR aims to ensure that funds, asset managers, and other investors provide information on how their investment products align with sustainable objectives. CSRD requires corporations to disclose data on their ESG performance, as well as on the impact of their activities on the environment and society.

This new regulation puts greater pressure on corporations to be transparent in their business practices and address issues such as climate change, human rights, and diversity. Additionally, regulatory change encourages corporations to incorporate ESG into their business models to ensure sustainable operations.

Furthermore, the EU has developed sustainability reporting standards (ESRS) to help companies report on their sustainability and ESG practices in a standardized and transparent manner. ESRS cover a wide range of topics, including climate change, biodiversity, human rights, and governance. Companies operating in the EU or with significant operations in the EU will be required to report.

Key benefits of implementing ESRS for companies include:

Increased transparency: ESRS helps companies publish clear and accurate information about their sustainability and ESG practices.

Comparability: ESRS enables comparability between companies in the same industry or sector.

Increased stakeholder value: Companies focusing on ESG practices can generate additional value for their stakeholders, such as a better image and increased likelihood of investor support.

Risk management: ESRS can help companies better understand and manage risks associated with sustainability and ESG practices.

While ESRS are currently not mandatory, the European Union expects them to soon become legal obligations. Companies will therefore need to adapt to new sustainability reporting requirements in the coming years.