The ESG criteria (environmental, social, and governance) are a fundamental tool for the new paradigm of finance and investments in large companies. These criteria are used to assess a company's sustainability and responsibility in terms of its environmental, social and governance impact, helping investors make informed and ethical decisions when choosing where to invest their capital.
What is ESG?
The term "ESG" has become the comprehensive approach to measuring a company's environmental and social impact in relation to the environment, society and governance. ESG criteria help investors to identify risks and opportunities in their investments and to assess the long-term potential of a company. Therefore, ESG criteria assess the value of a company beyond traditional financial indicators.
ESG criteria in detail
The term ESG is an acronym for the English terms: Environmental, Social and Governance. In Spanish, it is also known as ESG (environmental, social, and governance). Each of these letters corresponds to the different factors that comprise the criteria:
- Environmental criteria (E): these refer to the way in which a company affects the environment, including issues such as waste management, pollution, climate change and conservation of natural resources. In the case of sustainable building, this is the type of criterion that affects most directly.
- Social criteria (S): focus on the relationships a company has with its employees, customers, suppliers and the community at large. Include factors such as diversity and gender equality, occupational health and safety, human rights, and corporate social responsibility or CSR.
- Governance criteria (G): refers to the way a company manages itself, including its corporate governance structure, business ethics and financial transparency.
ESG in the international context: its origin
The ESG criteria grew out of international agreements to mitigate climate change, such as the Paris Agreement and the European Green Deal (Green Deal).
The Paris Agreement, signed in 2015 by 196 countries, established the goal of keeping the increase in global temperature below 2°C compared to pre-industrial levels and working to limit the increase to 1.5°C. For its part, the Green Deal, presented in 2019, constitutes the plan to make Europe the first carbon-neutral continent by 2050.
These two milestones trigger EU action plans, such as the European Commission's Sustainable Finance Action Plan. This plan includes the different regulations that govern ESG criteria, which we discuss below.
ESG Regulations
There are 3 main regulations governing the ESG criteria: the Taxonomy regulation, the SFDR regulation and the CSDR regulation, as well as country-specific regulations.
The Taxonomy Regulation
The Taxonomy Regulation (EU) 2020/852(EU Taxonomy) establishes a framework for the creation of a common classification of sustainable activities, i.e. to define which economic activities are considered sustainable and which are not.
The purpose of the taxonomy is to help investors identify sustainable investment opportunities and promote the transition to a more sustainable economy. To this end, it sets environmental objectives that an economic activity must meet in order to be considered sustainable.
The SFDR Regulation
The SFDR Regulation (EU) 2019/2088 (Sustainable finance disclosure regulation) is another key piece of legislation in the regulation of ESG criteria in the European Union. In Spanish, it is known as the Regulation on Disclosure of Information on Sustainable Finance and focuses on sustainable investments. It aims to provide transparency to investors and avoid greenwashing.
Specifically, it establishes harmonized standards on transparency in the integration of sustainability risks in financial processes and in information on financial products.
According to the regulation, which entered into force on 10 March 2021, sustainable investments are those that are made in an economic activity that contributes to environmental or social objectives, provided that such investments do not significantly harm either of these objectives (DNSH) and that the beneficiary companies follow good governance practices.
The CSRD Regulation
Lastly, the CSRD regulation (EU) 2022/2464 (Corporate Sustainability Reporting Directive) promotes the disclosure of non-financial information by certain companies. This regulation seeks to improve the transparency and comparability of corporate sustainability reports, as well as facilitate the integration of ESG criteria in business decision-making.
The regulation sets out how public companies must report and publicly disclose their compliance with ESG criteria, such as their environmental impact, social policies, respect for human rights, diversity and other issues relevant to sustainability.
Ultimately, the Taxonomy, SFDR and CSRD regulations establish a legal framework for applying ESG criteria correctly, thus promoting sustainable and responsible investment in the EU.
National regulations
On the other hand, it should be noted that some EU countries have created specific criteria and regulations that complement the ESG criteria.
In Germany, for example, a regulatory framework known as GEG has been introduced, which requires financial services companies to disclose information on how they integrate ESG criteria into their investment decisions.
In France, the Tertiary Decree (Décret tertiaire) requires companies with buildings larger than 1,000 m² to reduce their energy use by 40% by 2030.
In the case of the Netherlands, the BENG (Bijna Energie Neutrale Gebouwen) regulation sets stricter energy requirements for new and renovated buildings, such as criteria for energy efficiency, use of renewable energy and indoor air quality.
Tools to measure ESG
The measurement of the implementation of ESG criteria is essential to adequately report the progress made and to establish new improvement objectives. There are a number of tools for measuring ESG in companies and investment portfolios, including:
- GRESB (Global Real Estate Sustainability Benchmark) is a comparative ranking that evaluates ESG criteria of companies and assets worldwide. It is used by pension funds and public and private institutional investors as a barometer to decide where to invest. In 2022, more than 1,800 entities worldwide participated in the ranking. Participants receive a comparative indicator or benchmark that informs them of their position in relation to other similar companies, as well as a roadmap for improving their ESG performance in the future.
- The SRI or Socially Responsible Investment label, created in 2016, allows investors to identify funds that support companies that contribute to the sustainable economy by meeting ESG criteria.
- CRREM (Carbon Risk Real Estate Monitor) is a tool that defines Science Based Targets(SBT) for decarbonisation in the real estate sector. It evaluates the risk of assets and the financial implications and loss of value caused by poor energy efficiency and greenhouse gas emissions.
Importance of implementing an ESG strategy
Implementing a sound, long-term ESG strategy is critical to ensure a company's long-term sustainability and its ability to adapt to regulatory and market changes.
Without a clear ESG strategy, companies run the risk of suffering from the so-called "Brown Discount", which refers to the decline in value of assets that do not meet sustainability criteria, which can negatively affect the ability to attract investors. Conversely, buildings with a high level of sustainability can receive a premium in value, known as a "Green premium".
To implement a solid ESG strategy, it is essential to have accurate and reliable data to understand the starting point and measure progress over time.
The ultimate goal is to achieve a comprehensive and transparent ESG report that shows the company's commitment to sustainability. This will allow companies to show their commitment to their stakeholders, including investors, customers and society at large.
At Zero Consulting, as an integral consulting firm in sustainability and energy efficiency, we carry out all the necessary calculations to evaluate and justify compliance with the requirements of the ESG criteria, implementing a solid and effective long-term sustainability strategy.
