ESG criteria: success factors for sustainable companies

29. July 2024 | Author: Lena Reuter | Reading time: 7 min

Sustainability is one of the key issues for companies. But how can sustainable business be made quantifiable and measurable? This is where the ESG criteria come into play, which originally come from the financial sector. The abbreviation stands for “Environmental Social Governance ” . The criteria can be used to review and evaluate the three sustainability areas of environment, social issues and corporate governance. Together they form an important basis for a sustainable corporate strategy.

We will give you an overview of which company aspects the ESG criteria cover and what significance they have for your company. You will also learn how monitoring and reporting of the ESG criteria can be solved digitally. You can find more detailed information specifically for the environment in our free white paper “Environmental management – the basics for more sustainability in companies”. We hope you enjoy reading it.

What exactly does ESG stand for?

The three letters of the ESG criteria – which are also known as ESG ratings – stand for three sustainability-related areas of responsibility of companies. The abbreviation “E” stands for the Environment aspect , which bundles the company’s activities relating to the environment and climate. In the area of Social – “S” for short – covers occupational health and safety as well as the social commitment of companies. Finally, “G” stands for governance , which focuses on compliance with the law and the management and control processes. Verifiable criteria can be derived for each dimension .

Below we present the individual ESG areas in more detail:

E – Environment

When it comes to sustainability, many entrepreneurs first think of environmental protection . In fact, corporate responsibility for the environment is a relevant ESG component. The main focus here is on reducing environmental pollution and greenhouse gas emissions, using resources efficiently and producing in an environmentally friendly way. In addition, strategies and plans in the context of climate change must also be taken into account. Criteria that need to be analyzed in the Environment sector include (excerpt):

• Use of renewable energies, e.g. solar or wind energy
• Reduction of CO2 emissions
• Improving energy management for greater energy efficiency
• Preservation of natural resources within the value chain
• Use of sustainable products and technologies
• Ecological building management
• Measures to protect air quality
• sustainable water management and environmentally friendly wastewater treatment
• Optimizations in logistics, mobility and infrastructure
• Protecting biological diversity

S – Social

In addition to occupational health and safety, the social dimension also includes aspects such as social commitment and diversity . The focus here is always on respect for human dignity . On the one hand, social responsibility concerns the employees in your company. On the other hand, you must also think beyond the boundaries of your own workforce and take the entire value chain into account. This includes , for example, the prohibition of child labor or the observance of human rights by partners and suppliers. In addition, social commitment is also an essential component of social sustainability.

The S factor must therefore be linked to both the company’s business and corporate communications, and internal and external effects must be taken into account. The social aspect is becoming increasingly important, especially for customers and investors, and has an impact on purchasing decisions for your company, for example. The following criteria are particularly important here (excerpt):

• Respect for human dignity and workers’ and human rights
• Enforcement of occupational health and safety standards and sustainability standards throughout the entire supply chain
• fair treatment and payment of employees
• Respect for freedom of assembly and freedom of association
• data protection
• Design of safe and ergonomic workplaces
• Offers for further development and training of employees
• Responsibility for the product and possible consequences of its use
• Assuming social responsibility, e.g. through donations and sponsorship

G – Governance

Sustainable corporate management is also crucial within the framework of the ESG criteria . After all, this is the basis for core corporate values as well as management and control processes – known as corporate governance for short . It is also important that sustainability management affects not only the management level but also the board and supervisory board levels. Independent control bodies and compliance with laws and regulations through clear compliance guidelines are essential for this. The following topics are therefore relevant for governance (excerpt):

• Consistently communicated corporate values, regulations and codes
• Clearly defined compensation guidelines
• Transparent complaint mechanisms
• Fairness in competition law
• Equal opportunities for positions
• Open communication with employees
• Independent Supervisory Board
• Risk and reputation management
• Concrete measures to prevent corruption, bribery and fraud
• Tax payment in accordance with the law

Criteria and standards for ESG assessment

In order to make the sustainability performance of different companies and industries comparable, general criteria are used in ESG ratings. Gebhardt and Kefer (2019) examined frequently used assessment criteria in practice (see figure). It was found that social aspects such as occupational safety and human rights are particularly frequently used in the assessment, alongside environmental aspects such as climate change and emissions.

Importance of ESG criteria for companies

Sustainable Development Goals by 2030. In addition , there is the already mentioned expanded obligation to report in accordance with the CSR Directive, which will affect more and more companies in the coming years. The ESG criteria are therefore becoming increasingly important.

In addition, the topic of sustainability is becoming increasingly important in society. Not only is environmental awareness increasing, but global responsibility is also becoming increasingly important. It is only a logical consequence that the demands on companies in the areas of environment, social and governance are growing.

This is where the ESG criteria come into play, because as a classification system they serve as a tool for companies to build an ecological and social foundation. The direct connection between ESG and competitiveness is obvious. The positive influence of sustainability criteria was particularly evident in the areas of risk and reputation management as well as innovation . Factors such as openness and compliance with human rights not only minimize operational risks, but also prevent damage to the company’s image. Ultimately, this also increases the company’s value.

ESG criteria therefore not only ensure sustainability and transparency in companies, but are also a demonstrable value driver. In other words: If ESG criteria determine your corporate strategy, you act with less risk and increase your probability of success.

Digital overview of ESG criteria

If you want to maximize your company’s success with the help of ESG criteria, you must not only comply with and implement the associated requirements, but also measure their concrete performance. To ensure that this is done transparently and in an audit-proof manner , we recommend using a software solution . This should support you in reporting on the three areas of responsibility: environment, social and governance . You can centrally view all relevant key figures, record responsibilities and derive necessary measures.

With the help of the monitoring and reporting function, you can simultaneously assess progress in each ESG area. The data collected also forms an optimal basis for your next sustainability reports. With HSQE compliance management software such as iManSys ESG criteria can ultimately be integrated centrally into your company’s risk, strategy and compliance processes.

Digitalization is also an important sustainability factor for companies . The use of a software solution therefore offers numerous advantages: You save valuable resources such as paper, time, money and space. In addition, the digital form simplifies and automates numerous company processes.

Our conclusion: Successful companies rely on ESG criteria – preferably digitally

Let’s summarise again: The ESG criteria make areas of responsibility in sustainability management measurable. Key performance indicators or KPIs are particularly suitable as an effective tool for assessing operational sustainability. It is often a good idea to use standards in the areas of environment, social issues and management to create criteria .

It has become clear that ESG criteria promote the transparency and credibility of assessments in corporate sustainability management. In this way, they increase the company’s competitiveness and reputation and reduce risks in everyday work. Digital solutions centrally link all ESG areas and make associated processes even more sustainable.

We explain how the “E” factor in particular can be made sustainable with the help of environmental management in our free white paper . It’s best if you take a look right now: