How well is your company doing? No, the question is not about sales figures, but about orientation to and implementation of ESG criteria – Environmental, Social and Governance. A company is rated by the relevant rating agencies on the basis of its compliance with various criteria in these areas. A positive ESG rating will be nothing less than essential for a company’s survival on the market in the near future.
ESG – Three letters change the corporate world
What exactly is behind the three letters? Roughly speaking, environmental protection is, among other things, the avoidance of greenhouse gas emissions and energy efficiency. The basis for this is the so-called Green Deal of the European Commission. The social aspects relate, for example, to demographic change, protection against unemployment, preservation of health, acceptance and tolerance of diversity, and commitment to social issues. Sustainable corporate governance is based on ethical values and ensures the implementation of appropriate management and control processes. ESG thus has implications for entire global supply chains.
ESG rating – rating with changed parameters
Who is responsible for this evaluation? Rating agencies, whose list is currently headed by MSCI (Morgan Stanley Capital International) and Sustainalytics. With the acquisition of Institutional Shareholder Services (ISS) two years ago, Deutsche Börse is also among the top 5 best-known ESG rating agencies. Big players for conventional rating, such as Moody’s, still primarily focus on economic parameters such as revenue, profitability, liquidity and risk. Evaluation by means of ESG rating at Moody’s is handled by a specially founded offshoot called Vigeo Eiris. Other big names such as the U.S. agency Fitch are trying their hand at being all-rounders and have added ESG criteria to their primarily economic parameters. Other agencies include FTSE Russell, S&P Global, CDP, Dow Jones Sustainability Indices (DJSI) and the world’s largest provider of sustainability ratings, EcoVadis.
Transparency and attractiveness for investors through ESG rating
But why all this effort? Who needs such a thing? It is investors such as asset managers and social partners, as well as non-governmental organizations, who are increasingly demanding more detailed information from companies about the impact of their activities on people and the environment. However, the standards of the individual agencies for ESG rating as well as the respective certification are not uniform and therefore rather confusing. This also makes it difficult to compare companies. Due to the lack of uniform standards and frameworks, there is a lack of clarity for companies, which therefore often do not know precisely what information they actually have to provide. It is best to pick the agency whose ESG rating offering best fits the company profile. And smaller companies should make sure that the questionnaire allows for easy customization.
Even small companies are not spared
The ESG rating currently primarily affects large companies on the investment market with an average of more than 500 employees, a balance sheet total greater than 20 million euros or net sales of more than 40 million euros in a fiscal year, as well as listed companies. Listed micro-enterprises are excluded. However, no one is likely to be spared in the future, which is why it is best for smaller companies to address this issue now. For example, Asset Management at Landesbank Baden-Württemberg (German only) refers to independent studies that show the connection between ESG criteria, a possible reduction of risks, and the success and further development of a company. The German Economic Institute (Institut der deutschen Wirtschaft, IW) makes it clear that under the heading of corporate social responsibility (CSR) alone, additional demands are being made by politicians, despite the voluntary commitment that has long been made in the business world. For example, the German Federal Ministry of Labor and Social Affairs has announced that it will hold the business community more accountable than before in connection with CSR. And at the EU level, there is talk of mandatory standards and regulated social and environmental reporting.
Green Deal with big goals
With the Green Deal, the EU has set itself big goals: By 2050, it wants to be modern, resource-efficient and competitive. There are to be no more net greenhouse gas emissions by then. In the future, the protection of nature is to protect people from environmental risks and their effects. The social market economy is to be entirely at the service of people and guarantee stability, jobs, growth and investment. This is also the context of the Principles for Responsible Investment (PRI) investor initiative launched in 2006 in partnership with the UN Environment Programme (UNEP) Finance Initiative and the UN Global Compact. The aim of the initiative is to develop principles for responsible securities management and to take into account the increasing importance of environmental, social and corporate governance issues.
EU Commission seeks clarity
To this end, the EU Commission specifically adopted a directive for large public interest entities on the disclosure of non-financial information back in 2014, but stakeholders have struggled with its implementation In turn, Brussels followed up with non-binding guidelines on corporate reporting in 2017 and also provided guidelines on climate-related reporting in 2019 without, however, achieving any qualitative improvement in the reports submitted by companies. This is now to be remedied by a proposal from the Commission in April 2021 to amend the previous directive.
Magility ESG Management, Sustainability and ESG Rating
At magility, we define a sustainable business ecosystem as a cross-industry, interconnected value network whose members collectively contribute to the creation and delivery of products and services and sustainable innovation based on the Sustainable Development Goals (SDGs). We support our customers in their sustainability transformation, e.g. by implementing the comprehensive Magility ESG Management System. In doing so, we help companies achieve sustainable and responsible corporate governance with sustainability reporting and ESG ratings.