Sustainability Landscape for Dummies
When starting a sustainability journey the diverse and dispersed amount of literature, regulations, standards, and frameworks can be overwhelming. This article is conceived as an introductory guide for professionals or enthusiasts who want to learn more about the sustainability landscape, position at square one, and draw their own roadmap to have a sustainability impact.
ESG: UN 2030 Agenda, Paris Agreement, European Green Deal, European Climate Law
ESG is the acronym of three meaningful words: Environmental, Social, and Governance. These three words play singular and significant roles within the Sustainability Development Goals defined by the United Nations member states in 2015. It includes topics to improve health and education, reduce inequality and push sustainable long-term economic growth by 2030. The following UN infographic helps to easily discover the 169 targets commonly agreed upon for these goals, other interesting infographics about SDG can be found here.
The same year, in 2015, EU Member States signed the Paris Agreement, a legally binding global climate change agreement that aims to limit global warming rise below 2ºC (preferably 1.5ºC) above pre-industrial levels [1][2]. In 2019, the European Green Deal was presented: a resource-efficient and sustainable growth strategy to transform Europe into the first climate-neutral continent by 2050. Find here the current EU legislative proposals to achieve the European Green Deal.
To achieve this long-term goal, in 2020, the European Commission established a mid-term goal: reduce net greenhouse gas emissions (after deduction of removals) by 55% compared to 1990 levels by 2030. Long- and medium-term goals are included in the European Climate Law that applies to all economic sectors (energy, industry, transport, heating and cooling and buildings, agriculture, waste, land-use change, and forestry). The EU makes the EU ETS (Emission Trading System) available for these actors as a way for companies to get rewarded by cutting their emissions and transforming into greener businesses.
EU SUSTAINABLE FINANCE: Next Generation Funds, Private Investment, and Regulations
To meet the climate targets to decarbonize the European economy, and increase its digitalization and resilience in front of market turbulences after the COVID pandemic, the EU Council agreed in 2020 on a recovery plan for Europe and to create the Next Generation EU Funds (NGEU). It comprises 750billion€ (loans and grants) issuable between 2021–2026 and distributed in seven programs; the Recovery and Resilience Facility (RRF) is the one fully funded with 672,5billion€ [3][4]. More detailed information about Next Generation funds can be found here [x]. Governments can apply to them by submitting their national recovery and resilience plans. Spain will push its funding (140 billion€) through PERTEs related to the electric vehicle, renewal energy, agrifood, water scarcity, and circular economy, among others [5][6].
But this effort should not come only from public administration, but also from private investment. This is where the EU Corporate Sustainability Reporting Directive (CSRD), Sustainable Finance Disclosure Regulation (SFDR), and Taxonomy Regulation come into play. These are the 3 key elements of the sustainability reporting underpinning the EU’s sustainable finance strategy.
EU Finance Directive, Regulations and Classification System: CSRD, SFDR, and EU Taxonomy Regulation
Businesses should disclose their non-financial information and provide a measurable value of their operations, practices, and assets with data to attract and retain private investment. Financial ESG regulations and non-financial reporting help to make visible the dependencies and impacts of businesses on society and the environment, and therefore the sustainability risks investors assume when market disruptions appear to companies. These regulations, frameworks, and directives also help to avoid investments in greenwashing initiatives. Furthermore, private investment is needed to achieve the objectives of the European Green Deal: support sustainable economic and long-term growth to reduce social and environmental pressures, and contribute to the low-carbon, climate-resilient, and circular economy.
The corporate Sustainability Reporting Directive (CSDR) and Sustainable Finance Disclosure Regulation (SFDR) aim to capture and mitigate sustainable risks, whereas the EU Taxonomy Regulation is a classification system that applies to companies and financial participants included in the CSDR and SFDR. The Sustainable Disclosure Regulations (SFDR) guides financial market participants to disclose sustainability risk information of sustainable investment products. It makes these investment products more comparable and easier to understand for investors. On the other hand, the Corporate Sustainability Reporting Directive (CSDR) requires companies to disclose information regarding environmental matters, but also social and governance ones (i.e., treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards). In November 2022, the EU Council approved the CSDR directive presented in May 2021 which amends the previous Non-Financial Reporting Directive (NFRD). The text can be found here. It extends its application from 11. 700 large companies and groups across the EU (i.e., companies with more than 500 employees, with a balance sheet total greater than 20 million euros or net turnover greater than 40 million euros) to 50.000 companies (large ones and some SMEs listed)[7]. EU Taxonomy Regulation helps to classify business economic activities in sustainability terms. It requires companies and asset managers to disclose specific indicators and avoid greenwashing. Examples of indicators are turnover percentage, capital and operational expenditures by companies and asset managers; or the percentage of the portfolio invested activities aligned with EU taxonomy by asset managers [8].
INTERNATIONAL REPORTING INITIATIVES
The previous chapters cover the European specificities of the Financial Reporting Landscape, but the efforts to transition to a green economy is a worldwide target. Global companies operate around the globe, and international investors need to deal with different country-specific financial sustainable obligations and non-financial reporting to understand the risks of cross-border investments. Foundations like the International Financial Reporting Standard (IFRS) covers this topic through the International Sustainability Standards Board (ISSB), created in November 2021. ISSB provides standards that help to homogenize global financial disclosures and provide investors and capital market participants, with information about worldwide sustainability-related risks and opportunities.
Other International Standards covering ESG purposes coexist with financial ones like the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC), the Climate Disclosure Standards Board (CDSB), the Carbon Disclosure Project (CDP), and the Science Based Targets (SBTi) [9] among others. The following graph, courtesy of Luis Piacenza, draws the European and International Sustainability Reporting Landscape classifying the different frameworks, standards, and directives by their weight on Environmental, Social, and Governance components, and highlights them based on their complexity and audience. Follow the links to navigate to a lower level of detail.
Becoming a Responsible Business and envisioning ESG as an opportunity to create value. UN Global Compact.
ESG is not only about disclosing non-financial information to accomplish European and International regulations but also an opportunity to redefine the purpose, strategy, and core business model from a new environmental perspective. The one that cares about society and the planet. Resources are finite, planetary boundaries and human survivance risks are well-defined, and every individual or group of them, forming organizations or businesses, should behave fairly with the planet, current society, and future generations. Businesses should be able to adapt to changes in consumer behavior to be competitive, integrate diversity, equity, and inclusion policies to attract and retain talent, and manage their direct and extended supply chain sustainable risks to attract and retain investment.
The UN Global Compact organization is a platform that helps companies on their path to becoming responsible businesses. Helps them to integrate four environmental and social core values: human rights, labor, environment, and anti-corruption, within their corporate policies, strategy, and operations following the 10 UN Global Compact principles. The UN Global Compact does it by promoting local networking with different stakeholders (private and public companies, ONG, administration), by establishing working groups where companies can join, exchange experiences, and participate in the definition of responsible business practices, or by publishing sustainable case studies and academic resources, among others. Find here the Global Compact Local networks and here the working groups to take action.
ESG Market Solutions
Many software solutions, rating agencies, sustainability indexes, and benchmarks in the market allow the capture, measurement, and rating of SDG goals and ESG impacts on organizations. It’s out of the scope of this article to explore all of them, and no commercial issues follow this publication, but just to list some solutions in the market to start digging: Sustainalytics, S&P Global, Nasdaq, MSG Global SAP solution, One-Trust [10], Clarity AI, UL Solutions, and RouteZero Anthesis-Lavola. It’s also worth looking at the Sustainability map elaborated by Transcendent [11].
