ESG revolutionizing the market
Companies face increasing amounts of pressure to operate sustainably. The awareness of issues such as climate change, protection of the environment and ecosystems, and the social impact of business operations has increased tremendously in the past few years. Consumers, investors, employees, and job seekers have high demands for companies — kind words and keynote speeches are not enough, but the sustainability must be visible in practice.
Corporate sustainability, often referred to as ESG (Environmental, Social, Governance), stands for a company’s responsibility for matters relating to environment, society and governance. According to the chief executive of Norway’s oil fund, Nicolai Tangen, the degree to which ESG dictates a company’s prospects is “starting to hit now”. From now on, for example, ESG indicators will determine market return for companies. New sustainable financial products are gaining ground in the financial markets and their demand is growing. For example, green bonds are currently being oversubscribed many times over and their numbers have increased exponentially. Corporate sustainability is directly linked to financing costs and this trend will continue to grow.
Companied that do not adapt to the changes will face a future in which investors, clients, insurance companies and employees defect and social-media shaming will intensify. No company can escape this trend anymore. According to the CEO of Varma, Risto Murto, the current transformation in sustainability and responsibility is a clearly bigger revolution than digitalization. Therefore, this is a transformation that will sweep through all industries and eliminate companies that fail to adapt.
Taxonomy defines sustainability — and future success
ESG and sustainability themes have recently gained momentum driven by new EU regulations, for example. The new regulations are part of the EU’s European Green Deal initiative, one of the key objectives of which is to achieve a climate neutral EU by 2050. In 2021, a classification system for environmentally sustainable economic activities, or taxonomy, was published to help define what is considered environmentally sustainable. It aims to prevent greenwashing, increase transparency, and harmonize the screening criteria for sustainable economic activities.
Previous regulations left companies much room for interpretation in the reporting of non-financial information, such as sustainability matters. The requirements for the scope and level of detail of the sustainability report were vague and allowed companies to emphasize issues of their choosing. Therefore, the reports of the different companies varied considerably. Some gave a comprehensive and realistic picture, while some highlighted successes, leaving less attention to problem areas. The information provided by the different companies was not necessarily comparable. The new taxonomy is designed to, for example, eliminate these problems.
There is a lot of good in the new regulation. The goal is to measure and quantify corporate behaviors rather than focus on what the company itself decides to disclose forward. Fundamentally, corporate sustainability refers to how the company’s values and principles guide people’s daily work. Achieving this will help the companies evaluate how the business will succeed in the future.
The new regulation involves not only large entities, but also many details and technical requirements. Simply put, in the future, ESG reporting will have similar requirements to financial data in financial statements, i.e., the information must be reliable, transparent, and reproducible. From now on, reporting will require companies to explain how and to what extent their activities are related to environmentally sustainable economic activities.
Demand for data and analytics expertise
The scope of taxonomy required for reporting means that a company’s data capabilities and data management must be at the highest level. Investments in ESG data is now growing by approximately 20% annually. In order for companies to get the work on ESG on the right track, data analytics experts and sustainability managers need to work closely together. Management must also be aware of the importance of the matter and enable these experts to work together seamlessly and provide adequate funding. Of course, expertise is also needed to manage analytics and the supporting artificial intelligence, which is used to process data. Indeed, many companies have already begun to use artificial intelligence to analyze diverse ESG data from a variety of sources.
Many companies are faced with a hard nut to crack as the necessary competence may not be found in their own team. In addition, sustainability data is generally not as well managed in companies as financial data. Also, not all information related to sustainability is even in the company’s own possession, but is obtained from various external partners and suppliers, or does not yet exist. In addition, the timetable for reform is tight. The regulation will be implemented gradually between 2022 and 2024. There will also be more reforms in the future. Taxonomy is just the beginning.
In order to do the right things in the right way, data and analytics are needed to point the way forward. For that, we have a diamond team at Loihde Advisory. We believe that sustainability matters and the related obligations should not be seen as a threat, but as an opportunity and a common good that everyone must move towards.
Sustainability must be at the heart of a company’s operations. It cannot be added on as a separate piece on top of everything else. For this is not about numbers but deeds. It is not just about trying to look good, but doing things in a genuinely better way.
Want to know more about ESG, our data analytics expertise, or how we can help you take your company’s sustainability forward? Contact us.
You should also check out the topic on the website of FIBS, the largest corporate responsibility network in the Nordic countries.