Keeping up with the rapid changes in ESG regulations, which will soon impact Hungarian companies, is difficult.
What is ESG about? It’s a general and gradually introduced approach that has become increasingly significant over the past two decades. While we have previously written about regulations, it’s worth revisiting the meaning behind the abbreviation.
ESG stands for Environmental, Social, and Governance criteria, which help ensure the transparency of a company’s sustainability performance.
Environment (Environmental): This pillar deals with the company's environmental impact. It includes reducing carbon emissions, minimizing waste production, conserving water, using sustainable energy sources, and preventing environmental pollution. Companies must provide information on their positive and negative environmental impacts.
Society (Social): This pillar encompasses topics such as respecting human rights, ensuring workplace safety and health, adhering to employee rights, and supporting local communities.
Governance: The governance aspects in the ESG framework examine a company's governance practices and ethical standards. This includes effective risk management, transparent operations, accountability to investors and shareholders, combating corruption, responsible procurement policies, ethical behavior in leadership, and diversity in governing bodies. Good corporate governance builds trust among investors and partners and provides a stable foundation for a company's long-term success.
CSRD: Directive, ESG: Framework
In November 2022, the Corporate Sustainability Reporting Directive (CSRD) was adopted, aiming primarily at directing financial resources towards sustainability and reporting transparent and comparable environmental, social, and corporate information. The directive encourages long-term sustainable operations, which will be crucial for investment decisions.
Mandatory sustainability reports must be prepared according to the standards specified in the ESRS framework. According to this standard, not only past information must be shared, but the report must also include short-, medium-, and long-term prospects. The standards should be reported according to the principle of double materiality.
The CSRD is part of the EU’s sustainability efforts and contributes to the transition to a green economy. Incorporating ESG factors into reporting helps companies comply with regulatory expectations and market demands.
The connection between the CSRD and ESG means that mandatory sustainability reports for companies focus on the elements of the ESG framework, ensuring transparency and data quality.
Who are the target audiences for ESG reports?
Investors: Investors are the primary target audience, using the sustainability report to assess a company’s long-term sustainability risks and opportunities. This helps them make informed investment decisions and avoid companies with significant ESG risks.
Lenders: Lenders use ESG reports to evaluate the creditworthiness of companies. In the future, the presence of a sustainability report will be decisive in setting loan interest rates.
Customers: Customers use ESG reports to learn about companies’ sustainability performance and practices. This can influence their decisions and encourage them to buy from companies committed to sustainability.
Policy Makers: Policy makers monitor trends from sustainability reports. They can use this information in their decision-making processes.
Employees: Employees use ESG reports to assess a company’s commitment to employee well-being and workplace safety. This can influence their job selection decisions and encourage them to work for companies that provide good working conditions.
Local Communities: Local communities use ESG reports to learn about a company’s environmental and social impacts and its corporate social responsibility actions.
How to prepare in time for ESG obligations?
Review Regulatory Documents: It is important to keep track of changes in international and domestic regulatory environments. It is advisable to involve experts and consultants who can consolidate regulatory changes.
Prepare a GAP Analysis: GAP analysis helps the company make its performance transparent and identify deficiencies in regulations. This method offers a structured approach to uncovering and addressing the differences between the current and desired states.
Prepare a Materiality Analysis: Involving external and internal stakeholders, the company identifies relevant sustainability topics during its operations. It is essential to identify and evaluate risks in the company’s operations and supply chain. The materiality matrix then prioritizes the most significant topics the company should focus on.
Besides the above, an ESG system must be established. Not only must the requirements in the standard regarding sustainability topics (employees, energy, circular economy, business ethics, etc.) be met, but a framework must also be developed. This system includes data collection mechanisms for ESG data, guidelines, action plans, and objectives.
We deliver a summary of the latest developments in ESG regulations, news related to implementation, tips, and guides to our subscribers in our ESG newsletter. Don’t miss out, subscribe HERE!
