What is ESG?

How new policy changes could affect your business

ESG stands for Environmental, Social and Governance, and is a measure of how a company is behaving and performing in these three areas. With new ESG reporting requirements coming down the line, along with green procurement requirements for public sector work, we take a look at what ESG could mean for your business.

For some time, talk of the term ESG was largely limited to the corporate world, where investors may examine a company’s ESG credentials before deciding to make a move. However, as the requirement to file an annual ESG report is set to come into force for many companies, and climate action rises further up the agenda, the concept is becoming more mainstream.

As part of the European Green Deal, EU member states have committed to reaching zero carbon emissions by 2050. In Ireland, this has been put in motion with initiatives like the Climate Action Plan 2021. Among the contents of the Climate Action Plan is a commitment to including Green Public Procurement criteria for contracts in the public sector.

Green Public Procurement

From next year, all works using public funds must include Green Public Procurement (GPP) criteria during the tendering process. The EPA defines GPP as “a process where public authorities seek to source goods, services or works with a reduced environmental impact.” The broad aims of GPP across various sectors are to reduce environmental impact such as carbon emissions and to bring about a circular economy. A circular economy is one where waste is minimised through recycling and reusing existing products and materials. While these procurement policy changes apply directly to public contracts, there is also increasing adoption of green procurement criteria in the private sector. In their guidance on GPP, the EPA lists the ‘design, construction and management of office buildings’ as one of 10 areas of particular focus. Factors that will be examined using GPP criteria include the selection of contractors, strip-out, demolition and site preparation, and various elements of the design of the buildings themselves. As the promotion of a circular economy is a key aim behind GPP, the use of demolition waste and recycled concrete in the construction process will also be examined. The particular selection criteria under GPP vary from contract to contract, but there are some universal grounds for exclusion, such as if a contractor is not complying with the relevant environmental legislation. Another factor that can be considered is whether the bidder has the resources, experience, qualifications or equipment to meet GPP requirements. Having up-to-date environmental management systems in place such as ISO 14001 or the EU Eco-Management and Audit Scheme (EMAS) can also influence the decision. So as to prevent ‘greenwashing’, certificates or other documentation will be required to back up any claims made in the application.

ESG Reporting

Currently, large publicly-listed companies – that is, those with over 500 employees – are required to submit a yearly ESG report under the Non-Financial Reporting Directive (NFRD). This directive will soon be replaced by the Corporate Sustainability Reporting Directive (CSRD), which is due to be signed into law toward the end of 2022. The CSRD will initially expand the reporting requirements to include large, listed firms with either more than 250 employees or an annual turnover higher than €40m. These companies must begin recording ESG data next year and filetheir first report in 2024 based on the 2023 financial year, similar to financial accounting. In 2026, the CSRD will expand further to include all listed SMEs, although these companies will have the choice to opt out until 2028. Taking into account their smaller scale, it is understood that SMEs will be held to proportionate standards. CSRD reporting will be mandatory for large, listed companies and listed SMES, along with non-EU companies with an EU branch who have a turnover of more than €150m. However, it is important to note that reporting will be optional for privately-owned SMES as well as all micro companies (those with fewer than 10 employees or a turnover lower than €2m). This means that many firms in our industry will notbe legally obliged to comply with the reporting standards. The exact contents of an ESG report will be dependent on various factors relating to each particular company, but the general points covered can include sustainability and ESG performance targets, goals, and progress; sustainability risks (including climate change) affecting the company, as well as the organisation’s operating impacts on society and environment; how sustainability and ESG risks are impacting operating results and business performance; environmental protection policies and actions; social responsibility, treatment of employees and respect for human rights; anti-corruption and bribery practices; and diversity. Third party assurance will be mandatory to support claims being made. To prepare for ESG reporting, a company can carry out a ‘materiality assessment’ – a process that will allow you to identify the particular ESG topics that are most relevant to the industry and market. For example, the biggest ESG issues for a contractor may be lowering carbon emissions or reducing the amount of waste produced from a job.

ESG for private companies

Although the CSRD will not make reporting mandatory for private companies, there are still reasons for these firms to take ESG into account. For instance, if a private company does business with a listed company, the listed company may have an interest in the private company’s ESG performance as it forms part of their supply chain and could reflect on their own ESG rating. What is ESG? How new policy changes could affect your business ESG stands for Environmental, Social and Governance, and is a measure of how a company is behaving and performing in these three areas. With new ESG reporting requirements coming down the line, along with green procurement requirements for public sector work, we take a look at what ESG could mean for your business. Research has also shown that companies that focus on their ESG standing perform better in a number of areas, though this research has tended to focus more on larger corporate entities than smaller firms. For example, research carried out by consulting firm McKinsey showed that better ESG performance was associated with higher sales, reduced operating costs, better employee productivity, fewer regulatory and legal interventions, and optimised investment and capital expenditures. ESG can also come into play when seeking finance. For listed companies, ESG is now a consideration for many investors. Finance providers are also beginning to factor in elements of ESGwhen an application is made. For example, asset finance provider Capitalflow are now keeping track of the emissions levels of the vehicles and machinery they finance. As financial institutions, companies like Capitalflow will themselves be liable to submit a yearly ESG report. “It will help us from an ESG perspective to show that the assets we have funded are better on emissions”, says Ronan Kelly, Managing Director, Asset Finance. It is highly likely that as lenders begin to pay closer attention to the ESG-related impacts of the assets being financed, this will lead to incentives to opt for more sustainable assets through finance at lower rates.