The topics of ESG and sustainability are now at the top of the list for many companies. Often they treat it really seriously, sometimes unfortunately it is just “greenwashing”. Companies like Apple really seem to take the issue seriously, if you believe the content of their recent promotional video. However, it is not just good manners to give sustainability the importance it deserves. Since January 1st 2024 a significantly expanded sustainability reporting is mandatory in the EU based on the requirements of the Corporate Sustainability Reporting Directive (CSRD). This now applies to all companies with more than 250 employees, more than 40 million Euros in turnover or a balance sheet total of more than 20 million Euros. Over the next four years, further categories of companies will gradually be obliged to report.
The ESG categories
ESG comprises three areas that are evaluated when analyzing a company’s sustainability performance: Environment, Social and Governance. Environment, as the term suggests, covers a company’s impact on the environment, including issues such as climate change, energy efficiency, resource consumption, waste management and pollution. Companies can have both a positive and a negative impact on climate, resources, water and biodiversity through their products or value chains. Social issues include a company’s relationships with its employees, customers, suppliers and other relevant stakeholders. This includes issues such as working conditions, human rights, diversity and inclusion, health and safety in the workplace and community engagement. Hereby companies can demonstrate their added value for the society. Finally, governance is the way a company is managed and controlled. This includes corporate management, ethical principles, integrity, transparency, the structure of the board of directors, independent auditing and compliance with regulations. Companies can thus ensure and promote their sustainable and responsible actions.
Context and assessment criteria
ESG requirements are now gradually being implemented in the corporate world through politics demanding sustainable behavior. The Supply Chain Act has been in force since 2023 for companies with 3,000 or more employees and from 2024 for companies with 1,000 or more employees. This obliges companies to ensure compliance with human rights along the entire supply chain. It is fundamentally all about the use of resources and value chains. This in turn affects the entire company, which of course faces many other major challenges, especially in these times. A large majority of the society, on the other hand, expects companies to comply with ESG requirements and also sees this as an increase in value. The criteria here are specific threshold values for assessing an activity as sustainable (e.g. emission limits for electricity generation from renewable sources), the definition of technical requirements depending on the industry (e.g. technology, efficiency or methods of waste disposal) and specific guidelines and methods.
The Taxonomy Regulation
Environmental sustainability is defined on the basis of six environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and reduction, and protection and restoration of biodiversity and ecosystems. An economic activity is classified as environmentally sustainable if it contributes to at least one of the environmental objectives mentioned, does not significantly harm any of these objectives and complies with certain minimum measures (e.g. the OECD Guidelines for Multinational Enterprises and the United Nations Principles for Responsible Business). The Taxonomy Regulation is intended to encourage companies that label products as environmentally sustainable to disclose to what extent and how they meet the criteria of this regulation. It is intended to create a uniform framework that provides investors and financial market participants with clarity as to which investments are truly sustainable. Above all, however, it is also intended to counter so-called greenwashing, i.e. the misleading presentation of products as ecologically sustainable.
What does this mean for companies?
ESG will require major transformations within companies, but will also lead to selection. Those who are not green will be discarded. Sustainability will have to be developed on the basis of the specified guidelines at all stages of the value chain. Companies will have to identify, assess and manage potential sustainability risks with foresight. And not just for themselves, because as the awareness of ESG issues grows, so will the expectations and concerns of investors, customers and other stakeholders. Furthermore, sustainability reporting is not a one-off process. It is quite the opposite. This process must be regularly reviewed and further developed. However, there is also a high degree of uncertainty due to very general legal terms, the lack of clear rules and the threat of potentially draconian penalties.
ESG guidelines are already established
According to the PwC study “Private Equity Trend Report 2023“, all respondents without exception state that they have a policy for responsible investments and the tools to implement it. In 2021, this proportion was only 77 percent. Almost two thirds (64%) already use ESG-specific KPIs for all their portfolio companies. These include carbon footprint and water consumption, for example, or key figures on diversity and inclusion. In 2021, this proportion was only 17 percent. At the same time, there is a growing conviction that a focus on ESG is also beneficial to a company’s financial performance: 71% agree with the statement that the ROI of ESG exceeds the costs. In the previous year, only 36% of respondents were of this opinion. Start-ups are also already combining sustainability and growth. “Young, innovative companies in Germany are driving the sustainable transformation of the German economy,” says Florian Nöll from PwC Germany in Handelsblatt. This is particularly true for the energy sector. “Two thirds of all start-ups here can be classified as green,” emphasizes Nöll. For a long time, sustainability and growth were seen as incompatible in the political debate. Young entrepreneurs see things differently: “Start-ups combine ecological sustainability and growth. 61% pursue both goals as an important part of their corporate strategy and thus bring the ecological transformation to the wider economy,” says Nöll.
Interim managers can provide a holistic support
There are already countless special consulting services available focusing on ESG and sustainability reporting. But environmental sustainability and growth must be compatible and linked. Interim managers have a view of the big picture and can therefore help to bring the general corporate strategy into line with the new rules and implement the transformation processes that are really necessary. On the one hand, this means driving the implementation of sustainability management and reporting forward, carrying out ESG risk assessments within companies and thus initiating a cultural shift towards ESG. On the other hand, it also means helping companies to continue to grow and sustainably increase EBIT. Externally, the interim manager can provide public relations support in order to positively market the company’s holistically sustainable actions, for example also communicating the benefits of sustainability reporting to banks and investors. Therefore, Interim management can offer great added value for companies also in the context of ESG.