Introduction to ESG
ESG (Environment, Social and Governance) is becoming more and more important in business and has become a concept that companies must master in order not to be overtaken by their competitors.
Introduction to ESG
ESG (Environment, Social and Governance) is becoming more and more important in business and has become a concept that companies must master in order not to be overtaken by their competitors.
Companies with more than 250 employees must report on non-financial data within climate and environment, social responsibility and corporate governance (ESG) from the 2025 financial year. All from a value chain perspective.
This is partly due to the fact that the EU Commission has tightened the requirements for larger companies' work with ESG and social responsibility with a new reporting directive called the Corporate Sustainability Reporting Directive (CSRD).
Part 1: Get to know your value chain
What is ESG and what are the new reporting requirements?
Let’s start by reviewing the 3 letters and what they mean for your business. ESG stands for Environment, Social and Governance.
E, S and G
The E is about, among other things, how and to what extent a company takes into account the protection and use of natural resources. This applies, for example, to CO2 emissions, resource consumption, pollution, and footprints on ecosystems and the resulting impact on biodiversity.
The S is about, among other things, how and to what extent a company treats people and interacts with surrounding and affected communities. Employee health, safety and well-being as well as diversity, inclusion, and equality are important areas within the S. But customer satisfaction, product safety, and compliance with human and labor rights in the value chain also belong to social responsibility.
Finally, we have the G. The G stands for governance and is about responsible business operations and management. This applies, among other things, to internal controls, policies, and procedures that support compliance and transparency. Anti-corruption, bribery, and whistleblower schemes are examples of themes that fall under the G.
Reporting requirements (not updated according to Omnibus)
The CSRD reporting rules will be phased in for financial years beginning:
- January 1, 2024 for listed companies with more than 500 employees
- January 1, 2025 for listed and unlisted companies with more than 250 employees
- January 1, 2026 for small listed companies
The requirements will affect your entire value chain, so it is a good idea to make partners, subcontractors and the like aware now that you will soon be requesting more data.
Part 2: Meet the CSRD – the upcoming EU reporting directive
In Part 1, we introduced ESG. Now we'll dive into what the new EU CSRD is all about and what it means for your business.
CSRD and ESRS
CSRD stands for Corporate Sustainability Reporting Directive and replaces the previous NFRD, Non-Financial Reporting Directive. In practice, this means that reporting on non-financial key figures will become more comprehensive.
CSRD consists of a backbone of 12 standards that must be reported on. The twelve standards are called ESRS, which stands for European Sustainability Reporting Standards.
CSRD is a reporting requirement for all companies with more than 250 employees, and applies from the financial year 2025 (from 2024 for companies already subject to the NFRD).
The reporting directive, CSRD, is made up of 12 standards, ESRS, and they are divided into 4 main categories:
- General strategy and risk management
- Climate/environment
- Social/society
- Corporate governance
Double materiality
You may have started reporting on your climate footprint or diversity among your employees, but it is one thing to report on your company's positive and negative impact on the world and the people around it. Now, as part of the new directive, CSRD, you must also report on how the world around your company affects the company from a financial perspective. External impacts can, for example, be about how the effects of climate change affect the company's operations and management. Or what an upcoming CO2 tax means for the bottom line.
The advantages of reporting based on the principle of 'double materiality' or dual materiality are that the company can strengthen its strategy and risk management in a dynamic environment. At the same time as meeting the upcoming requirements in CSRD on non-financial reporting.
Part 3: Meet ESRS – the 12 sustainability standards under CSRD
In Part 2, we introduced the new CSRD reporting directive, which all large companies with more than 250 employees will have to report on from the 2025 financial year.
Now we will delve into the 12 European Sustainability Reporting Standards, ESRS, and look at what they mean for your business. CSRD is the framework. ESRS is the backbone.
The 12 ESRS standards
The ESRS is a comprehensive set of sustainability standards developed by EFRAG, the European Financial Reporting Advisory Group, a group established as a technical advisor to the EU Commission. In 2021, EFRAG established a task force to develop drafts of the 12 standards. After involving business and experts in the EU member states, the standards were adopted in the summer of 2023. The standards apply in all EU member states.
The standards are divided into four main categories with a number of subcategories:
- General strategy and risk management
- E – Environment
- S – Social
- G – Governance
Information requirements and data points
In total, the standards cover 82 disclosure requirements and more than 1,100 data points that companies subject to the CSRD must report on from a materiality perspective – in other words, the company must systematically and annually assess which ESG areas are particularly relevant to the business and to the company’s stakeholders and report adequately on these.
Therefore, dialogue and involvement of stakeholders internally as well as externally are the alpha and omega of successful and fair ESG reporting. It is about understanding your company from a value chain perspective. You cannot see your business as a single car on a linear highway, but should rather see yourself as a train carriage in a much larger connected network, where the individual train carriages either push forward or slow down the train’s progress towards sustainable transformation for an entire society.
Part 4: Get to know the E in ESG – Environment
In Part 3, we introduced the 12 ESRS standards that the new CSRD reporting directive is built on, and that all companies with more than 250 employees must report on from the 2025 financial year.
Now we will delve further into the ESG categories, starting with the E in ESG.
E - Environment
The E deals with the reporting standards and requirements that apply to climate and environmental sustainability. Today, sustainability is the ideal, and working in this area should be seen as your ‘license to operate’. It matters for your reputation, for consumers, in the value chain and for access to capital.
Under the new EU reporting directive, CSRD, the E as a main category is divided into five subcategories that companies must report on:
- Climate change
- Pollution
- Water and marine environment
- Biodiversity and ecosystems
- Resource consumption and circular economy
Know your climate-related key figures
When you are about to start your ESG work, we recommend that you start preparing climate-related key figures. Including reporting on energy consumption, share of renewable energy, energy intensity per turnover kroner and CO2 scope 1, scope 2 and scope 3 emissions. The preparation of climate-related key figures makes it possible for companies to begin work on climate action plans and objectives, as stated under one of the twelve ESRS standards under CSRD, E1 Climate Change.
Companies that do not have policies for social responsibility or do not have policies in all areas must disclose and provide a reasoned explanation for why in their report. The company cannot simply state that it does not have a policy for social responsibility for, for example, environmental matters.
Also listen to our podcast about the E in ESG (only in Danish)
Part 5: Get to know the S in ESG – social/society
In Part 4 lesson we delved into the E, i.e. how your company works with environmental and climate impact.
The S is about how your company manages its responsibility with social sustainability.
S - Social conditions
Without people, there is no business. The S – the social/society part relates to the 4 subcategories:
- Own employees
- Employees in the value chain
- Impact on surrounding communities
- Consumers and end users
Social sustainability is about people and their well-being and rights from an individual and societal perspective.
The S is, like the E, based on well-known UN Sustainable Development Goals, and reporting data is centered on:
- Equality
- Diversity
- Inclusion
- Human rights
- Health, well-being and safety
The S, sustainability for people
The important thing in relation to the S in ESG is to become aware that sustainability is also a concept for us humans. That companies can both create conditions that harm social sustainability and promote it. The S has an impact, for example, on your employees' well-being and sick leave at work. That it is possible to attract them and retain them.
Like the E, the S has an impact on your company's reputation for consumers, employees and customers.
It is now a requirement that you report on your work with social parameters. This could be a goal of having an equal gender distribution in all layers. Or working for a more diverse employee composition in relation to age, race, gender, sexualities and religion.
A problem is best solved if you look at it from several different perspectives.
Also listen to our podcast about the S in ESG (only in Danish)
Part 6: Get to know the G in ESG – Governance
In parts 4 and 5, we looked at the E and S of ESG – i.e. the impact your company’s activities have on the environment and climate as well as on people and society. These are areas that companies must report on under the EU’s new CSRD (Corporate Sustainability Reporting Directive), which will come into force in 2024 and will be implemented in phases in EU member states.
Now we will look at the areas that deal with management, internal controls, corporate behavior and culture. This applies to the G, which stands for governance, or in Danish corporate governance.
G - Business relations
Governance is one of the 12 standards under the CSRD, and this standard contains 6 of the 82 cross-cutting disclosure requirements that the directive sets out.
Under the G, the focus is largely on the practices and activities of the board of directors and the executive board. This includes board composition, diversity in senior management and the pay gap between the CEO and employees. However, it is also the general culture and code of conduct that is highlighted, including focusing on policies, controls and the involvement of employees in decision-making processes.
Transparent business practices
For many companies, governance is a new area to work strategically and not least transparently, because it also deals with matters that have not necessarily been shared publicly until now. But that is changing with the introduction of CSRD. And just like with the E and S, value chain responsibility and insight is also an important discipline in the work with governance.
In general, governance covers a wide range of corporate relationships and behavior that must be supported by transparent and responsible business practices for the benefit of internal and external stakeholders. Therefore, the G is also your opportunity to learn more about the company's activities from a holistic perspective - from compliance with legislation and regulation to work with social responsibility and sustainability.
Also listen to our podcast and the G in ESG (only in Danish)
