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ESG criteria: moving towards corporate sustainability

ESG criteria
Irene Pelegrín

Irene Pelegrín

Expert consultant in the area of Social Innovation

Sustainability is a principle that is becoming increasingly important in business, generating a plethora of new tools for its management, such as the now popular ESG criteria. However, the lack of precision and the substantial number of private standards and frameworks is generating a great deal of confusion. Increasingly, companies are being asked for sustainability information or must adhere to existing legal frameworks without knowledge of the tools available to do so, resulting in unnecessary and avoidable costs.

Recent years have seen major efforts in the private sector to accelerate the transition to a more sustainable economic model. And while the continued emergence of new methodologies and monitoring frameworks is confusing, these initiatives are proving key in guiding companies in developing their stakeholder relations. It is common to see the concept of sustainability confused with other concepts such as ESG, which has spread rapidly since its presentation at the Davos Forum in 2020, but it is important to note that they are not the same.

ESG criteria, a tool for achieving sustainability goals

ESG criteria are a tool for achieving sustainability goals. They derive their name from the acronym for three key areas for measuring non-financial information: Environmental, Social and Governance. They supply a starting point for finding sustainability issues that are relevant for both the company and its stakeholders. The three pillars cover different elements and companies must report on those that they consider relevant. Some examples of the elements covered by these pillars are:

  • In the Environmental pillar, emissions such as greenhouse gas and air, water and soil pollutant emissions; resource use, such as whether recycled production materials are used and proper waste management is ensured; energy efficiency, information regarding land use, biodiversity, deforestation….
  • The Social part addresses issues such as employee development management, responsibilities in terms of product safety and quality, health and safety labour standards, guarantees of compliance with rights in their supply chains…
  • And finally, Governance covers issues relating to shareholder rights, board diversity, executive reward and information on corporate behaviour relating to anti-competitive practices and corruption.

Reducing uncertainty to ensure viability

At a time when diverse and heterogeneous measurement and reporting methodologies are appearing, it is essential to look for ways to reduce uncertainty about sustainability management in company leadership to ensure the viability of sustainable business models. Given that every company has distinct characteristics, it is difficult to set up common rules and the adoption of sustainability business strategies is often understood as a values exercise or as public statements of commitment without real change in a company’s operations or strategy. However, it goes much further.

At the institutional level, the EU has long been encouraging the active management of sustainability by the private sector through funding tools, such as the Next Generation EU funds, aimed at incorporating innovation into business management, and by updating its legal frameworks.

The latest example is the new CSRD (Corporate Sustainability Reporting Directive) which shows stricter sustainability reporting criteria and broadens its scope. The aim is to have reliable, comparable and relevant information on corporate sustainability risks, opportunities and impacts.

A standard framework for companies to report on environmental, social and governance (ESG) issues does not yet exist, but work is underway. It is possible that, in a few years’ time, we may find ourselves in a scenario where business impact is auditable and therefore comparable. Companies that are not prepared will be at a competitive disadvantage, not only in terms of positioning, but also in terms of the costs that abrupt adaptation may entail.

Attracting capital

But beyond seeing it as an obligation, companies should consider ESG criteria as a tool to improve stakeholder relations. The main users of non-financial reporting are investors and non-governmental organisations and civil society. The former because they want to know about sustainability risks and opportunities for the profitability of their investments. The latter, because they want companies to be subject to greater scrutiny in terms of the impact of their business activities on people and the environment.

Therefore, incorporating sustainability into our business models is a tool to attract capital and to find risks that can affect debt incurred. It generates value for shareholders, customers, suppliers, employees and other stakeholders, aligning business strategy with a positive impact on society and the environment.

For all these reasons, it is important to highlight that reference frameworks or criteria such as ESG should function as a guide, but it is key that sustainability is aligned with the company’s strategic goals. At Zabala Innovation we go with clients in their innovation strategies, and we understand that innovation in sustainability goes far beyond their production process, it must be transversal to their business model.

When a company finds it difficult to incorporate sustainability into its business model, it will find it difficult to be accountable to its investors, customers, suppliers and other stakeholders, and may be exposed to risks and loss of opportunities that could have been previously identified. As a company that has been working in the innovation sector for many years, the relationship between innovation and sustainability is clear: both are about doing things better. Innovation is key to achieving a company’s sustainability goals, and together they are necessary to achieve the company’s strategic goals and maximise its competitiveness.

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Irene Pelegrín
Irene Pelegrín

Bilbao Office

Expert consultant in the area of Social Innovation

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