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In this article we will give you a good overview about ESG criteria and answer the following questions and more: What are ESG criteria? Why is defining a criteria list a necessary step in the management and reporting of ESG factors? Where can you begin and what pitfalls should you look out for?
ESG criteria are environmental, social, and governance dimensions that are used to evaluate, benchmark, and report the sustainability of a company. These aspects should be managed strategically and monitored year-round.
Criteria definition begins with a systematic assessment of materiality. The materiality assessment serves to understand which sustainability topics are relevant to your business and your stakeholders. For example, water consumption matters to a company with water-intensive operations as access to water is a business-critical necessity. But the company’s use of this shared resource also matters to the community surrounding the operations site as high withdrawals may cause water stress.
The concept of double materiality is important in assessing materiality. Double materiality considers that:
It should be noted that there are many ESG ratings and frameworks developed by international or regulatory bodies, industry associations, and investor groups and the number keeps growing. These frameworks define a list of ESG criteria for companies to report. They are a good reference point and will certainly be helpful in narrowing the list of relevant criteria and especially in determining specific metrics and indicators. However, the selection of ESG criteria to assess and report upon for any company should also always be informed by the materiality assessment. The list of ESG frameworks to consider – besides the mandatory ones – can be heavily defined by it.
The materialty assessment should be repeated periodically. The reason is that the relevant ESG criteria can change as the business evolves.
Below is a list of ESG criteria common to a wide range of industries. It is not exhaustive and should not be taken as definitive. Companies should consult industry or topic-specific guidelines where available.
These criteria relate to aspects that have an impact on the environment. For example, if a chemicals company produces a lot of wastewater, pollution would be a top risk both from a regulatory and reputational standpoint. Therefore, waste management would be identified as an environmental criteria to manage, monitor, and report.
These criteria relate to impacts of business operations on people, usually employees and local communities where operations are located. For example, employment of local members of a community and contributions to community development would be highly relevant to a company operating on indigenous land. While the treatment of internal employees should not be neglected.
These criteria relate to the management processes within an organisation that govern the business strategies and ESG plans.
Investors are increasingly interested in ESG criteria because they recognise the risks and opportunities of non-financial information to a business’ long-term performance. Understanding the ESG criteria that investors look for through ratings frameworks can help companies improve the quality of their ESG management approaches.
While defining a criteria list is a necessary step in the management and reporting of ESG factors, companies should be wary of adopting a checklist approach. If there is too much focus placed on reporting indicators and meeting compliance and not enough is placed on actual strategies, it can affect lasting improvements.
ESG is still a developing field and existing frameworks may be inadequate to capture the full complexity of issues that are difficult to measure. Keep pushing for real impact measurement to go beyond the blind spots and surface-level indicators.
Current developments on the regulatory side, especially with the Corporate Sustainability Reporting Directive (CSRD) will make reporting on a very comprehensive set of ESG criteria mandatory for all companies affected by the regulation. This does not mean, however, that the materiality assessment and the definition of ESG criteria to focus on in a company’s ESG strategy will become less relevant. Ideally, companies would comply with their reporting obligations and on top put specific focus on those ESG criteria of high relevance to their business.