My finances, my projects, my life
June 18, 2024

The importance of ESG issues for companies

  Compiled by myLIFE team myCOMPANY May 30, 2024 647

Why are ESG issues important for companies? How can they be incorporated into a company’s strategy to help promote sustainable development? We spoke with Alessandra Simonelli, Head of Sustainable Development at BIL, who explains the importance of incorporating environmental, social and governance concerns into a company’s activities.

Hello Alessandra. Can you tell us which ESG issues companies face?

ESG issues correspond to the impact that a company can have on the environment and on human beings through its activity. It must consider how it influences people and the planet and what action it can take to have a more positive impact. Pollution from an industry, for example, will have repercussions for the environment. But the opposite is also true. I always use the example of farmers who are feeling the effects of climate change; in addition to taking into account their own impact, companies must also manage the impact that the environment or society may have on their activity. These are the issues that must be considered.

Photo: Steve Eastwood

What is the difference between ESG and CSR?

There is often some confusion between the two terms. CSR stands for Corporate Social Responsibility, meaning everything companies implement to have a positive impact on the environment, people and the economy. We refer to a CSR “approach.”

The term ESG – E for environmental, S for social and G for governance – refers to ESG “criteria” or “factors.” These are indicators that make it possible to measure a company’s performance: its carbon footprint, absenteeism, company management, etc. ESG criteria allow us to measure the effectiveness of a company in its CSR approach.

The non-financial impact of a company will, ultimately, be as important as its financial performance.

How are these issues important for a business and why should they not be overlooked?

Nowadays, it is not possible to only look at the financial aspect of a business. Through its activity, it influences people and the planet, which can have long-term effects. Of course, the economic aspect is important; the business must be profitable to progress. But to function well, it must respect the environment in which it operates, the people it hires, and so on. Overlooking these issues would be detrimental. Moreover, these concerns are increasingly being examined by clients, employees and investors. The non-financial impact of a company will, ultimately, be as important as its financial performance.

What do these ESG issues represent for a bank?

Just like other companies, we need to be mindful of our social and environmental impact: ensuring the well-being of our employees, measuring our carbon footprint, and managing our waste, etc. But, as a financial intermediary, we invest in companies and finance their projects. Until now, the main focus has been on economic and governance aspects.

From now on, the good governance of the company and the existence of social or environmental controversies also come into play. We are required to consider ESG factors in order to measure the performance of companies and make our financial decisions, such as whether to invest in certain companies, or to grant loans.

Our role is to support the transition and encourage our clients to ensure that their performance improves. This is a new dimension to the work we do. We undertake training to be able to properly advise our clients. That’s a whole lot of expertise to acquire that we didn’t have until now.

Which companies are affected?

For the moment, this mostly affects big companies. From 1 January 2025, the Corporate Sustainability Reporting Directive (CSRD) will require organisations with more than 250 employees to publish a series of environmental and social indicators in a non-financial report. While companies currently report on their results and debt, etc. in future, they will also have to report on indicators including greenhouse gas emissions and employee sickness. These indicators will make it possible to determine how well companies are performing. Although small businesses do not yet have to comply with these regulatory obligations, in future, this will become an area of focus for everyone.

How can companies incorporate these issues into their strategy?

Companies must start by identifying any material issues by looking into whether their activity has an influence on the environment or on social issues. Then, they can determine the subjects that are most important to them and can begin to measure their impact in order to identify concrete action to put in place. They must not forget to involve their stakeholders (employees, clients, suppliers, etc.) by asking them which areas they want the company to take action in. They will then use this to define the CSR strategy.

You talk about measuring impact. What can companies actually evaluate?

At bank level, for example, in terms of the environment, we measure our energy and water consumption, our carbon footprint, and the weight of the waste we produce, among other factors. Regarding the social aspect, we look at the rate of absenteeism, illness, the rate of diversity, and the number of part-time workers, etc. There are many indicators, which vary depending on the company’s business sector. In the construction industry, serious incidents and accidents will be evaluated, while IT companies will focus their controls on the security of client data. On the other hand, all companies must ensure good governance: respect the laws, pay taxes, have clear policies and an independent board of directors, etc.

If everyone participates by making even small changes, the result will be more impactful than taking a plane out of operation. All of these measures combined make it possible to have a real impact.

Can you give us examples of actions to put in place?

Companies will primarily tackle their energy consumption and their social impact.

Actions can be environmental: sorting, recycling and reducing waste by eliminating packaging; using renewable energy by installing photovoltaic panels; replacing a fleet of combustion-powered cars with electric vehicles; reducing energy consumption by turning off computer screens each evening, installing low-energy bulbs, and limiting the number of electronic devices, etc.

On a social level, companies can organise training, establish a teleworking policy, offer a gym to employees, and implement accident prevention plans, etc.

Most often, there is nothing extraordinary about the steps to be taken, except for example, in certain sectors such as the automotive industry which is required to modify its entire production chain. However, if everyone participates by making even small changes, it will be more impactful than taking a plane out of operation. All of these measures combined make it possible to have a real impact.

Obtaining certification is a way for companies to show that they have a positive approach, that their performance has been assessed externally and that they have a desire to improve.

How can commitment be shown to sustainable development?

Companies can obtain sustainable certifications that promote CSR approaches. For example, the National Institute for Sustainable Development and Corporate Social Responsibility (INDR) in Luxembourg offers the ESG label, but there are many other national and international labels. In the banking sector for example, there are the United Nations Principles for Responsible Banking (UNPRB), the Principles for Responsible Investment (UNPRI), the Net Zero Banking Alliance (NZBA) and the LuxFLAG labels for banking products.

Obtaining certification is a way for companies to show that they have a positive approach, that their performance has been assessed externally and that they have a desire to improve – especially since this represents a cost and requires an in-depth audit.

It is of course possible to take steps towards sustainable development without obtaining such labels, but joining a label shows that we are ready to be challenged by an expert outside the organisation.

What are the main obstacles to taking ESG issues into account?

One of the main difficulties is the newness of the process. Companies must measure, calculate and monitor data that they have not previously collected. What needs to be measured and by what means? They are forced to develop entirely new expertise and that represents a financial investment. However, it is unavoidable and even the smallest organisations will have to come to grips with it.

What can incorporating ESG issues bring to a company?

In addition to the impact on the climate and the well-being of employees, introducing social and environmental concerns into company strategy allows for reduction in costs. Cutting down on waste, optimising energy consumption and even training employees will help to improve operational efficiency.

In addition, demonstrating commitment to sustainable development has a positive effect on a company’s reputation, on its attractiveness to clients and on the sense of pride of its employees.

Finally, incorporating ESG issues opens up market opportunities. The bank can, for example, offer additional services to its clients: supporting companies in their CSR initiatives, helping them to produce their non-financial reports, and offering energy retrofitting solutions to individuals, etc.

Do you think that companies in Luxembourg feel concerned by issues related to sustainability?

According to the Panorama 2022 du développement durable, CSR is applied by 40% of companies in Luxembourg. We sense an awareness, but for the moment, this is mainly among big companies. For smaller structures, this still remains conceptual, especially in light of the current economic situation. It is not a priority for them. Before paying out on a heat pump, they will make sure that their main business is operating well.

Despite the many good intentions in this area, ultimately there is still relatively little concrete action being taken due to a lack of resources and budget. It really depends on the size of the company, the sector of activity, the financial means and the manager’s awareness of the subject.

Everyone has the capacity to act for sustainable development. With more information and training, we can inspire everyone to get involved!

Lastly, can you tell us where companies can look for help with their energy transition?

Companies can of course contact their bank, since the energy transition requires investment. But above all, they can consult the House of Sustainability which is responsible for raising awareness, training and supporting companies in their sustainable development approach. It can inform them about the various forms of financial aid offered by the Luxembourg government, as well as about existing certification labels.

I would conclude by saying that everyone has the capacity to act for sustainable development. With more information and training, we can inspire everyone to get involved!