ESG and its impact on the business world

ESG is not just a trend but a new paradigm that is redefining corporate policies and strategies, corresponding to the set of criteria used to evaluate the performance of companies in three essential areas:

• E for Environmental: An area linked to sustainability, the management of natural resources, the reduction of polluting gas emissions and respect for the environment;
• S for Social: Related to the fair/equal treatment of employees (the fight against discrimination based on gender, skin colour, and religion, among other forms of prejudice), the promotion of diversity and inclusion, and respect for human rights, among other issues in this area;
• G for Governance: Involves the management and leadership structures in companies, as well as transparency in operations, the fight against corruption, and promoting ethics in business.

When did the concept originate?

Although the sustainable theme has been around since the last century, the ESG concept was mentioned for the first time in the “Who Cares Wins” report, drawn up by the UN in partnership with the World Bank, to obtain answers from banks on how to integrate environmental, social and governance factors into the capital market. To this end, the former UN Secretary-General, Kofi Annan, invited more than 50 CEOs of major financial institutions to participate jointly in this initiative.

Is there ESG legislation?

The growing relevance of ESG on the global scene has motivated legislators and regulators to promote legislation (or an agenda) that supports sustainable environmental and social practices by countries and specific companies.

As it is an inclusive and increasingly relevant acronym, there are dozens of laws and other national and supranational legal instruments (such as actions, agendas, decisions, regulations and directives of the European Union) that involve ESG-related topics, either exclusively (related to just one of the points) or covering the acronym as a whole (concerning the three pillars).

More recently, on July 31 of this year, the European Commission adopted the European Sustainability Reporting Standards (ESRS) by approving the Delegated Regulation, which will be sent for approval to the European Parliament.

The ESRS are just one of the examples of ESG provisions that the EU and other entities have created in recent months, and the trend is precise to increase European demand and control over the behaviour of companies concerning the environment, the treatment of their workers, and other related issues.

How do I know if my company is subject to ESG obligations?

As mentioned above, numerous laws and other instruments regulate environmental, social and good governance issues for companies. In addition, it is necessary to carry out an analysis of the company’s characteristics, covering specific topics such as:

• Identifying the industry and sector in which the company operates;
• The analysis of the activities carried out by the company and their risks and impacts associated with the ESG pillars;
• The location and jurisdiction to which the company is subject;
• The size and scope of the company, such as its number of employees;
• Industry benchmarking, comparing your company’s ESG practices with those of other companies in the same industry or sector; and
• Monitoring regulatory developments, tracking changes and emerging new ESG-related laws and regulations.

To determine if your company is subject to any obligations arising from ESG practices, it is advisable to consult a qualified lawyer to avoid sanctions for non-compliance with any rules relating to environmental, social and governance practices.

It should be noted that adopting ESG practices is not only limited to legal obligations but also involves the implementation of sustainable and ethical approaches within the company. Even if your company is not legally obliged to follow ESG principles, considering these practices can bring certain advantages to your business.

What are the advantages of companies applying an ESG policy?

For those who think that ESG is just a policy aimed at complying with legal and/or regulatory provisions, it should be noted that there are also economic and strategic advantages to integrating this concept into your day-to-day operations:

• Improving the company’s reputation and image: integrating ESG policy increases a company’s reliability, reputation and image, strengthening its position in the market and attracting new customers;
• Access to capital and investors: based on the company’s reputation, the adoption of ESG practices also brings more significant attraction for investors, who direct their resources towards companies aligned with ESG principles;
• Attracting and retaining talent: employees, especially younger generations, are more likely to work for companies that demonstrate a commitment to ESG values, thus increasing their ability to attract and retain talent.

However, as much as the implementation of ESG policy can bring advantages, the progressive increase and complexity of the new European rules on this matter, for some, make life difficult for companies which are unable to keep up with the vast number of obligations associated with ESG. 

In addition to this difficulty in implementation, there is also the existence of fraud, such as the phenomena of Greenwashing, Socialwashing, Pinkwashing, Bluewashing, and ESG Washing, which certain companies have put into action.

But what are these phenomena?

Greenwashing consists of companies promoting themselves as “ecologically” correct when their services and/or products do not correspond to this. In other words, it’s a misleading perception of support for the environment by certain companies, which call themselves “eco-friendly” but are not. 

Also similar is Socialwashing, which, rather than corresponding to misleading advertisements about the environment (like Greenwashing), concerns advertisements and marketing tactics that exaggerate or distort a company’s social practices.

There are also other similar phenomena, such as Pinkwashing, which refers to false advertisements defending LGBTQIA+ rights (when, in fact, they don’t adopt any practices to do so), Bluewashing, which consists of companies signing up to the UN’s global pact to associate their name with that organization, and ESG Washing, referring to the misleading use of ESG standards and metrics, among other phenomena whose aim is to manipulate the public’s perception of companies’ sustainability, social responsibility and governance practices.

For companies that practice any of these phenomena, but especially Greenwashing, in addition to harming the company’s image and alienating customers and investors, these frauds also entail (social) responsibility for violating legal requirements. By way of example, developing Unfair Commercial Practices such as Greenwashing violates Directive 2005/29/EC of the European Parliament and of the Council of May 11, 2005, which aims to ban deceptive commercial practices (by act or omission) and aggressive commercial practices, thus protecting consumer rights.