What is the ESG regulation and what is it aimed at?
ESG stands for Environment, Social and Governance and refers to the monitoring and evaluation of the environmental, social and corporate governance aspects of companies. The ESG Regulation is a legal regulation that requires companies to provide information on these aspects and to report on their performance in terms of sustainability and responsibility. This essentially involves the following three points:
- Environment: In terms of environmental aspects, the ESG regulation refers to the prevention of pollution and the protection of natural resources:
- Energy efficiency: How is energy consumption minimized? Is there a switch to renewable energies?
- Waste management: How is waste avoided? Is recycling carried out?
- Environmental protection: How is the protection of landscape, flora and fauna and other natural resources ensured?
- Emissions management: How are greenhouse gas emissions minimized? What contribution is made to reducing climate change?
- Social: In terms of social aspects, the ESG regulation refers to working conditions, human rights and corporate social responsibility.
- Working conditions: How are fair and safe working conditions, including wages, salaries, working hours, etc., ensured for employees?
- Human rights: How are human rights respected and protected? What about rights of women, minorities and other disadvantaged groups?
- Social responsibility: How is social responsibility perceived? Is there support for communities or local organizations?
- Governance: In terms of governance aspects, the ESG Regulation refers to corporate governance practices and responsibilities.
- Responsible management: To what extent is responsibility taken for business operations and business practices?
- Transparency: Companies must report transparently on their business practices and responsibilities in order to build an open and trustworthy relationship with their stakeholders.
- Management control: How are internal controls and monitoring mechanisms used to ensure that the company fulfills its responsibilities?
- Responsibility to shareholders: To what extent is accountability to shareholders exercised? Is there fair and open corporate governance and appropriate profit distribution?
The aim of the ESG Regulation is to provide investors and other stakeholders with comprehensive information on corporate sustainability so that they can make their investment decisions in an informed way. The regulation aims to ensure that companies improve their practices and processes to minimize their environmental impact and fulfill their social responsibilities.
The Corporate Sustainability Reporting Directive (CSRD) will be implemented in stages: Adopted in December 2022, national implementation must take place by 30 June 2024. From January 2024, it will apply to companies that were already required to report under the Non-Financial Reporting Directive (NFRD). Larger companies and groups, which were not previously required to report, will follow in January 2025. Capital market-oriented SMEs have the option of deferring first-time application until January 2026, with a possible deadline extension until 2028. Current details can be found on the WKO website.
The impact of the ESG regulation on companies
Compliance with the ESG regulation presents companies with an organizational challenge. Resources must be created internally, appropriate personnel are required, expertise is needed - we have summarized the 5 biggest challenges.
The 5 biggest challenges of the ESG regulation
1. The lack of personnel
The effort that must be expended to sufficiently comply with the ESG regulation is great. As a result, companies will most likely not be able to cover the workload with their existing human resources. As a result, more staff is needed. However, the problem is not only about the quantity of personnel - those employees working on ESG reporting must also be appropriately qualified. Companies that have built up little or no capacity in the area of sustainability must act now. For example, specialized professionals need to be hired to prepare sustainability reports or to measure and monitor the company's ESG performance.
"Employees who have a good idea of how to make abstract issues measurable and tangible are predestined to work on the ESG regulation"
Matthias Schulmeister
2. Create ESG awareness
Once the appropriate personnel have been recruited from existing resources or newly hired, it may still be necessary to implement awareness-building measures. This means that additional training must take place in order to make the requirements of the ESG regulation comprehensible for all involved and thus implementable. Employees must be sensitized to the topic, which in turn requires time resources.
3. A question of money
The ESG regulation may lead to increased costs for companies, as additional resources and budgets must be allocated to meet the requirements. This is especially true for small and medium-sized companies, which may not have the necessary resources in-house. The costs can arise, for example, from hiring consultants, implementing software tools or building internal capacity.
4. Overcoming boundaries
Meeting the requirements of the ESG regulation typically requires cross-departmental collaboration and coordination within a company. To identify, measure, assess and manage the company's environmental, social and governance risks and opportunities, different departments such as sustainability, finance, risk, HR and procurement management need to work closely together. For many companies, this means organizational transformation.
5. ESG as a lived practice?
Broadly speaking, the ESG Regulation presents companies with two major tasks:
- First, reporting must be done properly and in accordance with the requirements. ESG performance must be regularly monitored, updated and reported for this purpose. This requires a well-organized and systematic reporting process to ensure that all information is reliable and consistent.
- On the other hand, ESG practices must of course actually be lived, because: even the best reporting cannot replace a lack of practice. To achieve this, company processes that have been established and successful for years may have to be changed.
The benefits of the ESG regulation: How your company can score
However, for all the challenges that the ESG regulation provides, it should not be ignored that it also brings certain benefits to companies. Here is a short list:
- Enhanced image: A transparent and credible ESG profile can improve the company's reputation among customers, investors, employees and other stakeholders and strengthen trust in the company.
- Employee retention and recruitment: A credible ESG profile can help attract and retain talented employees, especially young professionals who are committed to social and environmental issues.
- Access to capital: Investors and lenders are increasingly paying attention to ESG performance and prefer companies with a strong ESG profile. A strong ESG profile can therefore improve access to capital and financing.
- Cost savings: Sustainability measures can also lead to cost savings, for example by reducing energy and material consumption or optimizing supply chains.
