ESG: meaning and importance for companies

The acronym ESG embraces three fundamental factors: the Environment (Environmental), the Society (Social) and the Governance. Each area reflects a specific set of criteria, such as environmental impact, social involvement and integrity of corporate governance. In essence, ESG criteria form a kind of social behaviour assessment, where each of the three categories helps to outline a company's risk profile for investors. This assessment, usually based on data and metrics related to an organisation's intangible assets, goes beyond simple financial performance, considering values such as environmental sustainability and effective governance.

In recent years, there has been an evolution of ESG issues becoming a key element of business operations. In addition to influencing decisions regarding mergers, acquisitions and divestments, the study "ESG and Financial" demonstrated a positive correlation between ESG practices and financial performance, as well as the ability to generate added value. Environmental, sustainability and governance factors have become increasingly important to investors, who use corporate social responsibility scores as a guide to avoid high financial risks or questionable business practices.

In the past, investors were mainly interested in profitable economic opportunities, but today a new generation of aware investors has emerged, eager to support companies that share their moral and social values. A recent study on sustainability conducted by EY "Seize the Change" showed that despite the uncertain geopolitical environment, more than 60 per cent of companies continued to activate sustainability plans and about 15 per cent accelerated their transition to more sustainable business models. Furthermore, ESG scores also influence a company's ability to attract and retain top talent.

Socially responsible investing, also known as Socially Responsible Investment (SRI), is an investment approach that carefully considers environmental, social and corporate governance (ESG) criteria. The environmental criteria reflect the actions of companies that can have a positive or negative impact on the environment (greenhouse gas emissions, adoption of renewable energy, energy efficiency, natural resource management, pollution control, water management and support for biodiversity). The social criteria encompass a wide range of community-related issues, from education to health. The governance criteria focus on the quality of the board of directors and corporate leadership, corporate culture, risk profile and other related characteristics.

It is crucial to distinguish ESG criteria from socially responsible investing: SRI is usually based on moral judgments and excludes companies on the basis of specific criteria, while ESG criteria consider environmental, social and governance impacts along with company performance. A survey by the CFA Institute in 2020 revealed that about 85 per cent of financial professionals consider ESG factors in investments. An overview of the situation towards ESG investments is summarised in PwC's report that highlights the importance of ESG factors in corporate investments. It also states that companies with sound ESG principles tend to perform better.

A study by Reuters showed that ESG standards activities are closely linked to an organisation's core values, creating a strong link to regulatory compliance and contributing to corporate trust and reputation, crucial factors in meeting future challenges. ESG compliance has become an essential priority for organisations and will continue to be so for the foreseeable future. Many companies are now measured by their ESG performance, with specific reporting requirements in the company's financial statements. Therefore, it is crucial that companies integrate an ESG strategy into their decision-making process. Governance has been identified as an ideal starting point for the introduction of an ESG framework.

The use of technology can be extremely beneficial in addressing business challenges in the adoption of ESG criteria. Compliance teams are already benefiting from technologies such as digital compliance automation and machine learning. 3Bee, the naturetech that develops technologies for monitoring, protecting and regenerating biodiversity, fits into this context. 3Bee has developed XNatura, the innovative biodiversity monitoring protocol based on bioacoustics and remote sensing, which allows companies to monitor and quantify, also thanks to artificial intelligence, the impact of regeneration projects developed in accordance with the new European regulatory framework, which requires companies to assess their impact for ESG reporting.

In the context of the European Green Deal, Directive No. 2022/2464 concerning Corporate Sustainability Reporting Directive (Corporate Sustainability Reporting Directive - CSRD) was approved and published on 16 December 2022 in the Official Journal of the European Union. The CSRD amends Directive 2013/34/EU, which concerns the non-financial reporting obligation for large companies. Companies are called upon to integrate ESG (Environmental, Social and Governance) objectives into their business strategy. It is important to include information that enables an understanding of how sustainability initiatives influence company performance, financial results, the overall economic situation and the structure of the business model.

Adopting a proactive ESG strategy in line with corporate objectives communicates to consumers that sustainability is a priority for the organisation in all its aspects. The evolution towards greater awareness of the impact of organisations has led to an increasing focus on sustainability actions and a greater accountability in reporting. A well-defined ESG strategy can confer a competitive advantage by fulfilling contractual requirements and demonstrating a responsible commitment to climate change, stakeholder welfare and governance practices. In addition, a sound ESG strategy can lead to cost savings through improved process efficiency, helping to counter rising operational costs and reducing business risk through more effective identification and risk management processes.

The implementation of an ESG strategy can also align the organisation with the requirements of the ISO 14001 and ISO 50001 standards, offering the opportunity to obtain external validation by an independent body. This improvement of risk management processes can reduce regulatory pressure on organisations, enabling them to plan and adopt future legislative requirements more easily. An effective ESG strategy provides a solid foundation for developing policies and procedures that comply with legislative and mandatory reporting requirements, facilitating the management and submission of performance data for annual reports and other regulatory requirements.