ESG for beginners

Even if you haven’t yet started focusing on sustainability in your business, chances are you have come across the term ESG. If you’re not familiar with it, you’re not alone. A survey conducted in June 2023 showed that only one in ten respondents in Croatia had heard of the term ESG. Here is a brief guide to this concept and why it is important to familiarize yourself with it as soon as possible.

 

What is ESG?

 

ESG, an acronym for Environmental, Social, and Governance, is a set of factors relating to environmental, social, and governance issues that companies address in their operations. Investors consider these factors when assessing risks, impacts, and opportunities related to their investments. The three key areas that should be considered for measuring business and environmental sustainability, ethics, and relationships with employees, customers, suppliers, shareholders, public authorities, and the local community.

 

Three ESG Areas

 

Different factors and impacts that companies need to measure and analyse within these three areas, and about which they need to report to stakeholders, include the following:

  • Environmental factors (E) – climate change, CO2 emissions, energy efficiency, water and air pollution, waste management, resource availability, deforestation, and biodiversity.
  • Social factors (S) – working conditions, health and safety, human rights, diversity and inclusion, data protection and privacy, customer satisfaction, and community relations.
  • Governance factors (G) – executive management, board structure, risk control and management, executive compensation, bribery and corruption, political influence, lobbying, shareholder interests, ethical code, transparency, and reporting.

Although the term ESG may not be widely known among Croatian citizens, some ESG factors do reach them. According to the survey, 21 % of respondents noticed environmental protection and community care-related topics in the media, 28 % acknowledged good treatment of employees, and 24 % recognized efforts to protect private data.

 

Why Understanding ESG Principles is Essential

 

The European Union’s Corporate Sustainability Reporting Directive (CSRD) has been in effect since January 5th 2023, requiring companies to provide comprehensive and detailed sustainability reports and related strategic implications. From January 1st 2024, it applies to companies with more than 500 employees listed on the stock exchange, and from 2025, it will apply to all large companies. Two years later, small and medium-sized enterprises will also have this obligation.

As mentioned earlier, a Medianet survey on ESG awareness and a recent Dialog VoxPopuli survey conducted on social media platforms suggest that we have only scratched the surface when it comes to sustainability. Only half of the respondents on Instagram were familiar with the meaning of ESG reporting, and even fewer implemented it in practice (less than a quarter of respondents). It is evident that there is still much room for familiarizing oneself with various terms and phenomena in the field of sustainable business, both positive and negative, and time for adaptation is running out.