🌎ESG criteria

The impact of sustainability

ESG criteria are gaining increasing importance in business decision-making. These criteria assess how organizations manage environmental, social, and corporate governance issues, and can have a significant impact on a company's long-term financial performance.

What is ESG?

ESG criteria (Environmental, Social, and Governance), known as ASG (Ambiental, Social y de Buen Gobierno) in Spanish, are three key criteria that companies must consider to ensure long-term sustainability.

In recent years, the focus on ESG has gained increasing importance due to the growing demand from investors and consumers for companies committed to environmental and social impact. These criteria have gained unexpected prominence since sustainability became a new organizational paradigm in the 21st century.

In 1994, John Elkington published the book 'The Triple Bottom Line,' which highlighted the importance of companies being accountable not only in economic terms but also in terms of their environmental and social impact, known as the triple bottom line. In 1997, the Global Reporting Initiative (GRI) was established, the leading global standard for sustainability reporting, and in 1999, the UN launched the Global Compact, the largest voluntary Corporate Social Responsibility (CSR) initiative, promoting the Ten Principles of the Global Compact related to human rights, labor, environment, and anti-corruption.

Since then, the ESG concept has gained relevance alongside sustainability, particularly in the field of sustainable investment or SRI.

What does ESG measure?

ESG measures an organization's long-term resilience to sector-specific risks in the environmental, social, and governance domains. Within each of these criteria, various aspects are taken into account:

• Environmental (E): It assesses the management of both direct and indirect environmental impacts of companies, including environmental care, biodiversity, reduction of greenhouse gas emissions, and their contribution to a decarbonized economy.

• Social (S): It analyzes the management of people within companies, including decent employment, equal opportunities, work-life balance, training, respect for human rights, and the prohibition of child labor.

• Governance (G): It evaluates companies' commitment to good governance, including ethical codes and conduct, transparency, and anti-corruption within the board of directors and the executive team.

These criteria are compiled in an ESG report that gathers all the non-financial information of the organization. This is relevant because it allows for the assessment of companies' sustainability and social responsibility in key areas beyond their financial aspects.

Why is ESG important?

The ESG criteria have gained increasing importance because investors and consumers are seeking companies that care about the environmental and social impact of their operations. Companies that effectively manage environmental, social, and governance challenges can gain competitive advantages and achieve better long-term financial performance. This is because considering these criteria allows them to mitigate legal and reputational risks and attract investors and consumers who are mindful of environmental and social impact.

The relevance of ESG has grown with legislation related to Corporate Social Responsibility (CSR), especially since 2015 with the Paris Agreement on climate change and the United Nations Sustainable Development Goals. There are two main factors that have contributed to the increased importance of ESG criteria:

1. Greater need for transparency: Society and various stakeholders demand increased transparency from organizations, not just shareholders. The Edelman Trust Barometer 2021 revealed that 86% of the population believes CEOs should engage with social and environmental issues.

2. Legislative momentum: Legislation at both the national and European levels has driven corporate accountability in ESG matters. The EU Non-Financial Reporting Directive of 2014 and Spain's Law 11/2018 have mandated reporting on non-financial information and diversity for companies of a certain size. Additionally, companies with strong ESG performance are perceived as more sustainable and lower-risk, attracting long-term investors.

In summary, the importance of ESG stems from the growing demand for transparency, legislative momentum, and the benefits it provides to companies in terms of competitive advantages, financial performance, and risk mitigation.

ESG Risks

ESG risks, also known as sustainability risks or non-financial risks, encompass everything from climate change to human rights compliance, labor relations, and tax management. Inadequate management of these risks can have serious economic and reputational consequences for organizations.

Stakeholders are increasingly attentive to corporate social responsibility, so proper management of ESG risks is crucial to maintaining a strong reputation. While not mandatory, Law 11/2018 establishes the need to report on these risks in the non-financial information statement. Their omission must be justified in the report.

In terms of environmental risks, waste management, carbon footprint, climate change, and pollution must be considered. In relation to social risks, the management of human capital, equal treatment, diversity, and labor risks must be taken into account. As for governance risks, corruption, bribery, executive compensation, tax management, and equality in boardrooms should be considered.

It is essential to note that these risks are interconnected, and effective management of them is crucial for any company committed to sustainability.

Importance and Benefits of ESG

The integration of ESG criteria into a company brings a series of short and long-term benefits. Here are some of the key benefits:

1. Competitive Advantages: Managing ESG criteria provides a differential advantage over the competition.

2. Risk Mitigation: Considering ESG aspects helps mitigate risks associated with environmental, social, governance issues, as well as people and supplier management.

3. Talent Attraction: Employees prefer to work for companies committed to society and with a clear purpose. Adopting ESG criteria becomes appealing for talent attraction.

4. Investment Opportunities: Investors are demanding greater commitment from companies in fighting climate change, transitioning to a sustainable economy, and reducing social inequality.

In summary, ESG criteria are crucial to ensuring the long-term sustainability of companies. It's important for companies to understand the environmental, social, and governance challenges and develop effective strategies to address them.

How to integrate ESG criteria into a company

The integration of sustainability and ESG criteria is not limited to large companies, but is a differential value for any organization, including SMEs. Here are some tips to start managing ESG:

1. Team and Resources: Appoint a responsible individual or team to coordinate sustainability or ESG efforts within the company. Allocate a budget for executing a sustainability plan, its implementation, monitoring, and the creation of non-financial reports.

2. Materiality Analysis: Prioritize the most significant aspects for your organization through materiality analysis. Identify relevant ESG aspects based on your industry or global trends, and establish clear ESG objectives.

3. Technology: Utilize technological solutions like APLANET to have a tracking and measurement system for ESG performance. This will enable you to measure progress and make informed decisions for continuous improvement

The successful integration of ESG criteria requires a strategic approach and ongoing commitment from the company. By adopting these practices, any organization can move towards sustainability and benefit from its long-term outcomes

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