What is ESG and why is it important?

ESG is a framework that focuses on social, governance and environmental aspects of an organization. The concept is derived from the “Triple Bottom Line”: People, Planet, Profit. ESG, which stands for Environmental, Social and Governance, is used to measure the sustainability of investments in companies. ECG plays a role in all facets of our services.

What does the abbreviation ESG stand for?

The abbreviation ESG stands for Environmental, Social and Governance or, in proper Dutch, Environmental, Social and Governance. Also called sustainable and responsible business. Doing business with an eye for the environment and climate, social responsibility and policy on these issues. Sustainability in the areas of energy and raw materials, but also the conduct of social management fall under this heading. We advise our clients on this through our services. We are committed to working with our clients to optimize these three ESG pillars in order to build future-proof companies.

Why is ESG important?

The ESG framework helps to understand how an organization deals with risks and opportunities related to environmental, social and governance criteria. This includes risks and opportunities created by changing conditions, such as shifts in environmental systems, economic systems and social systems.

ESG is becoming increasingly prominent and has now become an integral part of many institutional investors. There are also several ESG rating agencies that assign ESG scores, as well as reporting frameworks that improve the transparency and consistency of ESG information. This is determined by various ESG factors.

The three pillars of ESG are:

1. Environment

This refers to an organization’s environmental impact and risk management practices. It includes issues such as direct and indirect greenhouse gas emissions, natural resource management and the company’s resilience to physical climate risks, such as climate change, floods and fires.

2. Social

This pillar relates to an organization’s relationships with stakeholders. This covers issues such as human capital management (e.g., fair wages and employee engagement) and the organization’s impact on the communities in which it operates. ESG is also increasingly emphasizing social impact expectations within the supply chain, particularly in developing economies where environmental and labor conditions play a role.

3. Governance (Governance)

How is an organization led and governed? ESG analysts are seeking to better understand how leadership incentives are aligned with stakeholder expectations, how shareholder rights are seen and respected, and what internal controls exist to promote transparency and accountability of leadership.

More than just making a profit

As the ESG meaning and the various ESG factors suggest, business is about more than just making a profit. Companies are expected to do more than just make as much profit as possible. More and more stakeholders, as well as customers and relations, are demanding accountability for the way companies do business. Consider accountability for how the company performs in terms of CO2 emissions, waste production, energy consumption, etc.

Motivated and healthy employees

Social objectives look at how the company wants to deal with people inside and outside the company. Think of policies regarding diversity, inclusiveness, health, personal development, participation, working conditions, etc. This produces motivated and healthy employees, which contributes to a strong corporate culture. A strong corporate culture, in turn, is good for reputation, which attracts clients and staff. This is something that we as an office hold in high regard internally and can also advise our clients on this.

What is ESG legislation?

Due in part to the growing importance of ESG, significant steps have been taken at the European level regarding ESG legislation. ESG legislation aims to promote the integration and reporting of environmental, social and governance factors within organizations. The legislation aims to increase corporate sustainability and give investors and stakeholders a better understanding of the non-financial performance of organizations.

At the European level, the Corporate Sustainability Reporting Directive (CSRD) has been introduced as of 2023. This directive requires large companies to report non-financial performance and have it audited by independent parties. The aim of the CSRD is to improve the transparency and comparability of ESG reporting and ensure that important non-financial information is available to investors and other stakeholders.

Another example of a European initiative on ESG legislation and regulation is the Sustainable Finance Disclosure Regulation (SFDR). This regulation aims to provide investors with relevant information about the sustainability features and impact of investment products. It aims to prevent greenwashing and ensure that investors receive reliable information when making investment decisions.

What is an ESG strategy?

Organizations that are aware of the necessity, but more importantly the opportunities, of ESG would do well to develop an ESG strategy. Effective ESG policies typically consist of integrating ESG factors into decision-making, setting goals and measurements, and reporting on ESG progress and performance. With an ESG strategy, your goal is not only to achieve financial returns, but also to achieve a positive impact on society and the environment. With an ESG strategy, you control risks, create long-term value and meet the expectations of investors, clients and the world around us.

ESG criteria and preparing an ESG report

The three ESG criteria (environmental, social, governance) are incorporated into an ESG report. A thorough assessment of the ESG criteria is followed by a report of an organization’s performance on each of the ESG factors. With the preparation of an ESG report, which ideally meets the guidelines of the CSRD, companies have a powerful tool for attracting investors and obtaining financing. A good ESG report also enhances an organization’s reputation, strengthens brand awareness and promotes transparency.

ESG creates value for your organization

ESG is already high on the agenda at large companies, but this should also be the case at medium-sized and smaller companies. There, moreover, ESG policies can even be implemented faster in certain areas. It also entails investments. But in the long run, these investments will benefit the company’s financial results. And just by having ESG actively on the agenda, value can be created for shareholders and stakeholders. So not only financial objectives, but also ESG objectives create value.

ESG policy and ESG analysis at acquisition

In sales and acquisitions, an ESG risk analysis can provide insight into the risks, but also opportunities. For example, a company that has its ESG policy in order and can call itself sustainable increases its chances of obtaining financing. A modern social policy ensures less staff turnover and less absenteeism, something that benefits the value of a company. We include this check as standard in our acquisition practice.

Do you have questions about implementing ESG policy, creating an ESG strategy or the specific ESG factors? Or would you like to spar about the possibilities for your organization? Please contact us.