ESG, or Environmental, Social and Corporate Governance, is a set of legal standards that require companies to create reports on their activities from the perspective of the impact on the environment and society as part of their annual reports. It is a method that can evaluate the subject's impact on the environment, society and the way it is run. Based on this method, the sustainability of the company and its social responsibility can be numerically expressed.
The purpose of strategies
ESG is an important tool that can be used to monitor environmental and social trends, which is coming to the fore not only as a marketing and PR tool, but is now also gaining a specific legislative framework both at the international and national level. Basically it's about considerate and sustainable approach to investing and business in general. Investors take more into account environmental impacts or social factors such as access to workers, transparent company structure and its ethical rules. The realization that the demand for these quantified values contributes to solving this problem also contributes to this. ESG is therefore an overall view of a company, or if you prefer a company, which is measurable according to the given criteria, so that these companies can be objectively evaluated and compared.
ESG and construction
ESG as such is an indicator within business strategies not only for (small) investors and consumers, but also big players such as banks, insurance companies and large corporations in general, which select their suppliers and business partners based on ESG indicators. The weight of economic indicators is no longer the only factor at stake, but the assessment of the environmental impact and the overall social responsibility of the given company also play a role in the decision-making process.
Within the construction industry, ESG does not only apply to the construction company, but also specifically to the construction process, i.e. concretely impacts of construction on the environment (materials used, recycling of construction waste, carbon neutrality and other areas of ESG rating, such as the provision of health and safety at the workplace or zero incidence of illegal employees). The construction process and the building as such can be certified (for example BREEAM, LEED or WELL certificates). The second factor is energy efficiency of the building itself and its resistance to weather conditions and natural elements. The attractiveness lies not only in the more economical operation of such buildings, but also in terms of increasing ESG requirements in all areas. From the more favorable terms of financing, insurance, but also from the point of view of the competitive advantage of the owners or tenants of these buildings, when there is a requirement for a certain ESG certification of the building of the company (whether its headquarters or premises) is a key requirement from suppliers as well. For large multinational companies, the demand for these buildings is usually already standard, and uncertified buildings, in the vernacular, will no longer "make the cut" for these interested parties.
ESG in the EU
Thanks to its recent legislative anchoring at the European level, the ESG strategy is no longer just a tool for ensuring the competitiveness of a building or company, but will now also be a necessary part for the proper running of a company, such as the health and safety policy or the preparation and establishment of financial statements.
ESG as it has come to the fore thanks 2015 Paris Climate Agreement, following it The 2019 Green Deal for Europe a The European Climate Act of 2021. Newly adopted at the end of 2022 is the Corporate Sustainability Reporting Directive, abbreviated as “CSRD" (full title Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022, which amends Regulation (EU) No. 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU as regards corporate sustainability reporting), which with effective from 2024 (effectiveness is determined gradually for different types of companies) introduces obligation to publish detailed information regarding sustainability issues. Legislation is gradually forming the business space, which must implement the goals adopted at the international level into its internal structures.
As the Corporate Sustainability Reporting Directive (CSRD) states, there has been a very significant one in recent years the increase in demand for business information on sustainability, especially from the investment community. This higher demand is driven by the changing nature of risks to businesses and the growing awareness among investors of the financial implications of these risks. This is especially the case with climate-related financial risks. There is also growing awareness of the risks and opportunities for business and investment arising from other environmental issues, such as biodiversity loss, and from health and social issues, including child and forced labour. The reason for the higher demand for sustainability information is also the increase in investment products that explicitly seek to meeting certain sustainability standards or achieving certain goals in this area.
So what exactly can you imagine under ESG?
As we state in the introduction, ESG is an abbreviation of three English words, environmental, social and governance.
Environmental - environment and climate. Within this area, the following criteria are particularly relevant. Impacts on climate change (emissions of greenhouse gases or efficient use of energy), pollution and waste production (waste management, use of renewable or recycled materials, use of waste, emissions of harmful substances), biodiversity, water resources and the way society approaches innovation and sustainable technologies (electromobility, etc.).
Social - social responsibility. Within this area, the following criteria are particularly relevant. Human resources (care for workers, health and safety, equal pay, the ratio between the amount of management remuneration and the average salary of employees, integration of disadvantaged people into the labor market or GDPR). The company's corporate culture and its good reputation, especially in the area of philanthropy and volunteer activities. Access to consumers and product safety are also evaluated. The legal or reputational integrity of the company in all areas is also important.
Governance – administration and management of business activities and the functioning of the company internally and externally. Within this area, the following criteria are particularly relevant. Governance and management, shareholder rights, independence and reputational integrity of management and its remuneration. Setting up key processes and business ethics, the company's code of ethics, risk management and compliance. An essential part of the company's image is also the transparency of its property structure, while the final seat of the ownership structure in one of the tax havens can also be negatively perceived.
Since the above criteria are relatively indeterminate, a large number of ESG standards are being created that try to embed measurable aspects. The most widespread system in this area is GRI (Global Reporting Initiative) and SASB (International Sustainability Standards Board). The GRI uses a more general approach and also considers social impacts. Rather, SASB is based on industry-specific standards and takes environmental and economic impacts into account. The GRI is a more universal tool for any company's voluntarily disclosed data, while the SASB focuses more on environmentally demanding industries.
Currently, in the European environment, the EU taxonomy standards required by the CSRD directive, which introduces ESRS standards (The European Sustainability Reporting Standards) for non-financial reporting. These standards are based on the GRI and will be valid for companies operating in the EU that will have to process their reporting according to them. The standards are being developed by the European Financial Reporting Advisory Group (EFRAG - The European Financial Reporting Advisory Group) and their complete version is not yet available.
The new CSRD directive introduces an obligation for non-financial reporting with gradual effect from 2024. Companies must disclose information from all three ESG areas mentioned above. In 2024, companies will have to report for the first time, which are already covered by the Non-Financial Reporting Directive (NFRD) 2014. They will have to publish data for 2025 in 2024. These are large companies with more than 500 employees, publicly traded companies, banks and insurance companies .
A year later, i.e. in 2026 (for fiscal year 2025), they will have to publish a non-financial report of large companies that are not covered by the NFRD directive. In 2026, companies with more than 250 employees, which either have an annual turnover of 40 million euros or more, or a balance sheet total of at least 20 million euros, will have to report for the first time.
For the fiscal year 2026, even listed small and medium-sized enterprises will have to report. The obligation will also apply to so-called small and not very complex credit institutions and captive insurance companies. But all these companies can request a one-year deferral, which means that in that case they would have to publish the first report in 2028, for the fiscal year 2027.
Source: Construction
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