EU ESG regulatory framework
EU ESG regulatory framework – Introduction
The EU ESG regulatory framework is in every company’s interest to adequately address material ESG impacts, risks and opportunities. ESG risks just like any other corporate risks may become detrimental to the company value. The cost to repair damages can be higher than preventative measures and proactive management. Evidence shows that companies that fully integrate ESG consideration in their operations and that are transparent and accountable to their stakeholders are better positioned for a long-term success.
Furthermore, companies face increasing pressure to report on ESG matters driven by shareholder demands, regulation, reputational concerns and other factors.
ESG refers to a broad range of environmental, social and governance factors that are used to evaluate how companies are managing their sustainability impacts, risks and opportunities. These factors can be either considered from the inside-out perspective (how the company operations impact the environment and the society at large) or an outside-in perspective (how ESG issues can affect the company’s positions). Here are examples of differente ESG Issues:
Environmental factors include issues that stem from or affect the environment. They include but are not limited to company impact on climate change (through GHG emissions); its management of climate related risks and opportunities; the use of energy, water and other resources; pollution and waste management; and impact of its business activities on biodiversity and natural environment.
Social factors refer to how the company affects humans it interacts with – its employees, clients, suppliers, local communities and other stakeholders – and how they in turn can affect the company. They include but are not limited to issues such as treatment of workers in own operations and in the supply chain; employees’ health and safety; diversity and inclusion; respect for human rights; as well as impacts on local communities and users of company’s products and services.
Governance refers to a system of internal practices, controls and procedures that a company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of its stakeholders. Governance encompasses a system by which a company is managed, operated and held to account. Its primary objective is to help build the environment of trust, transparency and accountability that is key to ensure stability and encourage long-term investments. In the context of a broader range of ESG issues, governance can be broken down into two main areas: corporate governance and business ethics (or responsible business conduct).
The first one covers issues such as: ownership structure; board composition, independence and compensation; approach to risk management and internal controls; shareholder rights; and communication with shareholders. Business ethics on the other hand, refers to values, standards and principles a company adopts to govern itself in a responsible way, in line with applicable laws and regulations, and commonly accepted norms. It includes issues such as anticorruption, whistle blowing, and political lobbying, among others.
ESG factors are sometimes referred to as “non-financial” or “extrafinancial”. However, there has been some scepticism around the adequacy of those terms, because they imply that the information in question has no financial relevance. Whereas ESG issues in fact may have direct implications for the company financial performance.