ESG – Environmental Social Governance

Part 1 - The ESG basics

This article is the first in a series of insights on the topic of ESG. With these articles we want to

• explain what is meant by terms such as green washing or sustainability or abbreviations such as ESG, CSR, SFDR or LkSG,
• outline the legal framework,
• raise awareness of the need for ESG implementation in your company and, above all
• show that sustainability has changed from being a "nice-to-have" for major international corporations to a "must-have" and at the same time a value driver for domestic SMEs.

For you and other companies, it is now about nothing less than maintaining your license to operate.

Environmental Social Governance - Definition

In general, sustainability means the preservation of the natural foundations of life. Sustainable action in the corporate sense therefore means reconciling economic, ecological and social goals (the so-called sustainability triangle) in equal measure for the benefit of present and future generations. Today, this usually is summarized under the abbreviation ESG, which originally comes from the financial sector. ESG stands for Environmental Social Governance and includes the following aspects:

• Environmental:
  • Sustainable management and investment,
  • ecological commitment of the company and its employees, in particular through
    • waste management and circular economy,
    • more regeneration and biodiversity and
    • improving our own ecological balance sheet through energy and water efficiency, reducing CO² emissions and avoiding land sealing.
• Social:
  • Better working conditions, health and safety,
  • employee recruitment and management,
  • new working time models and work-life balance,
  • equal opportunities, diversity, equity and inclusion,
  • safeguarding human rights (especially in the supply chain) and
  • product responsibility and supplier management.
• Corporate governance:
  • Compliance, tax transparency and anti-corruption measures,
  • corporate ethics and sustainable corporate management,
  • risk management and independence from supervision and shareholders.

ESG and CSR - the subtle difference

Even though the terms ESG and CSR are often used interchangeably, ESG is the further development of what has been known as Corporate Social Responsibility (CSR) for many years, i.e. the evaluation of corporate social responsibility. However, the key difference between ESG and CSR is that CSR is more of an "add-on" in the sense of a desire, not to forget corporate responsibility towards others in addition to the actual corporate objective. In the past, this has led to rather selective actions, such as equipping the local soccer club with a few jerseys (without the intention to diminish this commitment!). ESG, on the other hand, goes further than CSR and is above all intrinsic. It targets the heart and soul of the company and is characterized by an internalized corporate culture that acts according to ecological and social criteria. Therefore, if CSR is the sponsorship of a tree-planting project, ESG is the achievement of net-zero emissions by the company itself and its customers and business partners. In other words, the difference between CSR and ESG is the difference between selective projects to combat individual grievances and creating the conditions for a future worth living for all.

ESG - climate change and inclusion as an incentive

Climate change and the changing realities of life are forcing every individual and companies in particular to build resilience, to constantly develop and to act more sustainably in many areas - and thus to take responsibility for their own actions. Almost every company now has social and ecological responsibility on its banner or website. However, if you are serious about corporate responsibility and do not just want to adorn yourself with planted trees, you have to go further than just soothing your guilty conscience with a few selective actions. Integrating ESG into all areas of a company means aligning its own product development, technology strategy, business models and the entire corporate culture with ESG values. Even if this reorientation does not come without considerable effort in the beginning, valuable potential and unique values for your company, its employees, the environment and the society can be unleashed in the medium and long term.

It should already be obvious: if your company does not meet the ESG criteria in the future, or only meets them insufficiently, you will no longer be able to be economically successful in the long term. After all, not only legislators are increasingly focusing on the topic of ESG. Consumers, business partners and investors are also increasingly giving preference to sustainable companies.

Sustainability has therefore become a decisive factor for companies to ensure long-term success and assume social responsibility.

Dr. Thomas Hausbeck. LL.M. and the ESG team at SKW Schwarz will be happy to support your company in effectively pursuing its sustainability goals.