Success factor ESG
The meanwhile undisputed relevance of ecological, socio-cultural and ethical aspects of entrepreneurial decisions makes their systematic consideration in the course of the entire value chain a mission critical factor.
As a general rule, production processes as well as services nowadays are globally interconnected. The strongly differentiated division of labour necessarily leads to complex and often also intransparent value chains. In order to survive in a globalised competition, everyone is requested to optimise their value chains according to ESG criteria as well.
Society’s expectations about entrepreneurial acting do no longer just bear on political discussions, norms and laws, but they develop dynamically through Best Practice Standards, voluntary initiatives, comparative platforms of ethical investors and, increasingly, social networks.
Thus, the requirements on reporting and communication increase because the core stakeholders of enterprises – customers, capital providers, staff, partners and government agencies – have developed precise expectations.
The protection against the risk of reputation damage through problems with ESG topics consequently is of vital significance, because their effects on market power, growth and value are material.
Communication of the ESG Performance
Communication is the accompanying tool right away from the beginning. A solid reporting, focussed on the essential points, is indispensable, and the sustainability report is an integrating anchor medium for all functional areas in this process.
The documentation of the measures from the strategy to the results creates the necessary trust. Yet, the reporting alone cannot provide for a successful implementation of the own strategy for the future in the market. Only a consequent coverage in the daily communication conveys to your contacts the priority this topic has in your business model.
The community of states and also the financial markets acknowledge the special meaning of the private sector for the sustainable development and highlight the importance of the coverage of sustainability aspects in the enterprises’ reporting.
Subsequently, voluntary self-commitments and reporting obligations by law as to ESG topics for enterprises are increasing. At the same time, this creates transparency and competition in regard to the ESG performance.
On 16 April 2013, the European Commission presented the European Parliament a guidelines suggestion for acceptance in 2014 that provides for an obligation of disclosure of ESG information for corporations with a headcount of more than 500 employees.
On 5th December 2013, the International Integrated Reporting Council IIRC launched the first integrated reporting framework.
The release of the Framework signifies a step-change as more and more businesses begin to adopt Integrated Reporting as a means of telling the company’s complete story, and how it creates value, taking stakeholders on a much deeper journey of understanding.
Investors and ESG
The vast majority of investors consider topics of sustainability to have a direct impact on the company value, and corporations operating sustainably to be more successful. As a result, these topics will have an increasing importance whenever investment decisions are made.
But recent surveys showed that most of the corporations so far have not elaborated any measures and goals as far as social responsibility is concerned, and if they did their guidelines often lack a strategic focus and are unsystematic.
Some good isolated cases notwithstanding, the lion’s share of enterprises, according to the evaluation of leading rating agencies, lag far behind what would be necessary from the sustainability point of view in the field of sustainable investments.
Consequently, the pressure from the investors’ side on the corporations to place more emphasis on a sustainable kind of operating is growing. Presently, already more than 10 trillion of Euros are invested worldwide in consideration of sustainability criteria, corresponding to a market share of about 20 percent of the aggregate managed wealth. A further increase of this share is to be expected.
By the application of ESG criteria in their investment especially the institutional investors intend to reduce their risks. Enterprises that do not meet these requirements will have to overcome higher obstacles in future to acquire own or loan capital on the equity market.