ESG stands for Environmental, Social and Governance. It's a selection of criteria or standards that tells you something about the social and environmental performance of a company.
Examples of these criteria are how a company safeguards the environment, including policies on tackling climate change. As for the social criteria, one might look at how a company manages relationships with employees and suppliers. Governance criteria deal with a company’s leadership and shareholder rights, for example.
External pressure on ESG is increasing, so is awareness. And although ESG opportunities are being recognized, its performance lags behind.
ESG problems
Unfortunately, ESG has an image problem. It has been under scrutiny for some time now, mainly because there seems to be a lack of transparency. It is often unclear how to objectively and uniformly assess the sustainability of a company. This makes ESG vulnerable to greenwashing claims. This doesn't mean however that the whole concept of ESG should be thrown overboard.
The demand for reporting on sustainability is increasing. There is a need for a uniform and structured way to report on ESG performance. Still, most companies lag behind when it comes to measuring their impact on the environment. More specifically, even measuring their energy consumption is often overlooked. Not coincidentally, both criteria are also required by the upcoming CSRD, and are essential in every ESG communication with stakeholders.
The risk is that ESG is limited to compliance - where companies just tick the ESG boxes. Often, compliance is an administrative task that requires coordinated resources. This means larger companies perform better at ESG compliance, simply because they have the resources. But when ESG is limited to compliance, a lot of potential is lost.
Neglected issues with ESG
There are a few common challenges to overcome in order for ESG to go from simply compliance, to an actual sustainable strategy and implementation.
Value chain
Most ESG-related risks arise from a company's supply chain. Issues in supply chains cause many adverse impacts on all three aspects of ESG. Mapping your suppliers and assessing their environmental performance is key. The emissions that occur in your supply are called scope 3 emissions and affect your business as well.
Operations
Within your own company, there are numerous measures that you can take to reduce your environmental impact. The emissions coming from your own operations are grouped as scope 1 emissions. The actions to improve your environmental performance here are low-hanging fruits.
Products
Even though sustainability allows for many new business models and products, its performance still lags behind. Increasingly, both internal and external stakeholders demand circular and greener products. However, companies not yet tap into this demand.
Measurements
Currently, there is no robust and uniform way to measure ESG on company level. With many companies, it can be seen that measuring their impact on the environment is still below average. This becomes even more important considering the advent of the CSRD. This reporting regulation demands comprehensive insights into a company’s sustainable and social effects.
Road to success: from product to company footprint
The approach in this section tackles the issues mentioned previously, and can increase your company’s environmental performance. Read here how it helped one of our clients: Trust.
The approach entails three steps:
- Start small, start with a product footprint
- Extrapolate to map your whole product portfolio
- Add scope 1 and 2 to get a full company footprint
An easy step to start with is focussing on a single product.
“By mapping the environmental impact of a single product, you’re automatically forced to look at for example its supply chain and production processes. It stimulates you to approach suppliers and look for sustainable opportunities within your value chain”.
Furthermore, it gives insight into the environmental impact of your own production processes. This allows you to gain insight in the environmental hotspots of your own operations. Also, it uncovers potentially new business models and product designs to meet customer demand.
When these results are extrapolated to a product group, it can tell you more about the impact of materials and components purchased on company level. Your products consist of different materials and components, which have to be purchased for other products as well. When you know how much of each product you’ve sold annually, you know how much of each material you’ve purchased annually.
This forms your ‘purchased goods and services’ category within scope 3. Since with most companies this is the category with significant environmental impact, adding scope 1 and 2 already gives you a complete and clear view on your company footprint. Scope 1 and 2 are about your own direct environmental impact and are relatively easy to map. Hence, by taking these three steps, you’re ahead of regulations and gain active ownership of your sustainability journey.
