“ESG criteria make it possible to assess the extent to which sustainable development and long-term issues are taken into account in the strategy of economic players (companies, local authorities, etc.).”
Source: Autorité des Marchés Financiers (AMF)
What are the ESG criteria?
They are based on 3 pillars:
Environment
- Waste recycling
- Energy and water consumption
- CO2 emissions
- Sustainable prevention of risks related to industrial disasters (oil spills, soil contamination, etc.)
Social
- Quality of social dialogue
- Employment of disabled people
- Improvement of working conditions
- Employee training
- Combating inequality
- Respect for employees' rights
- But also quality of the subcontracting chain
Governance
- Transparency of information
- and of executive remuneration
- Fight against corruption
- Women on boards of directors
What are the objectives of ESG criteria?
There are 3 objectives to the use of ESG criteria:
⇒ Enable investors to study the responsibility of a company before including it in their portfolio
⇒ Request an assessment to find out where you stand
⇒ Measuring corporate social responsibility
Few numbers...
billion$ Is the amount invested in ESG funds in 2021 worldwide, compared to 285 billion in 2019.
is the number of sustainable funds in the world at the end of 2021.
%
of these funds are in Europe.
%
of CFOs of large groups have been participating in the "Green Taxonomy" project since 2020. The project has been partially implemented since 1st January 2022.
Where did these criteria come from? What has become of them?
1995 : John Elkington created the concept of the "three Ps" ("people, planet, profit").
2015 : The Energy Transition for Green Growth Act was adopted in France, requiring large companies to publish a non-financial report.
2017 : A Non Financial Reporting Directive (NFRD) has been adopted by the European Commission. It requires large companies with more than 500 employees to publish a non-financial report.
2022 : The European Commission proposed a new directive, the Corporate Sustainability Reporting (CSR), to replace the NFRD. It will require listed SMEs, and all large companies (whether listed or not), to publish an even more detailed non-financial report.
...But how, overall, will this impact the finance departments?
The impact of this CSR approach on financial management
Post-pandemic, companies are (finally) becoming more aware of environmental and social issues. Indeed, 85% of the financial directors questioned believe that the health crisis has been a driving force behind the integration of ESG issues into corporate strategy.
But this awakening is also caused by the increased demand from investors to retrieve ESG data from the companies they invest in. Between 2009 and 2019, there was a 69-point increase in investor demand for ESG reports, according to a study published by Gartner in 2021.
The role of the CFO in an ESG strategy
Be the "guardian of non-financial reporting" (Daf-mag.fr)
In fact, the higher a company's rating on its ESG and social responsibility factors, the lower its cost of capital, both in terms of debt and equity.Ensure that ESG criteria are properly maintained
This means preparing your company for scrutiny by all stakeholders: investors, regulators and the public.
How does this impact finance departments?
Not only does a good rating in the ESG report make it possible to legally avoid the worst, but, according to several studies, it can also affect a company's growth, profits and financial performance. But it also raises its profile with investors. Few examples:
Growth
Unilever reports 50% faster growth for its eco-friendly brands than for its other brands.
Profits
Microsoft reported in 2015 that it had saved more than $10 million a year through its carbon neutrality model. This money saved has helped several associations in the fight against climate change.
Financial performance
Companies that respond to the Carbon Disclosure Project report a 67% higher return on equity than those that do not. Organisations participating in the CDP have identified $53 billion in savings as a result of the reporting process.
Reputation of the company among investors
As a reminder, only 85% of investors in 2019 take ESG criteria into account in their strategic decisions.
According to DeloitteThe CFO has ‘4 roles’ that are necessary for the successful pursuit of an ESG strategy: the steward, the operator, the strategist and the catalyst.
Written by Eléonore Berne, on 07/09/2022.
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