ESG Policies: What are they and why does your company need them?

Many may think of Environmental, Social and Governance (ESG) as the latest ‘buzz word’. Nevertheless, society has acutely become more aware of business practices, companies’ impact on the environment and corporate governance, with regulations worldwide following suit. Therefore, ESG should not be seen as just another trend, but as a crucial ingredient to ringfence a company’s risk and opportunities to ensure its long-term success.

However, as we usher into an era defined by many global challenges and evolving societal expectations, the regulatory and societal landscape surrounding ESG has become increasingly more complex. Many companies striving to align with responsible business practices find themselves lost in keeping up with ESG-principles while maintaining a solid grasp on the continuously changing regulations surrounding them.

Despite this, it remains crucial to recognise that ESG considerations are pivotal in shaping a company’s operations and global impact. UN’s “who cares wins” report of 2004 predicted that adhering to ESG risks and opportunities can have a material impact on investment value.

Developing an ESG policy can constitute an important first step in a company’s ESG journey. In this article, we provide key insights into the benefits of implementing an effective ESG policy.

What is an ESG Policy?

ESG stands for Environmental, Social and Governance. It refers to a set of criteria or standards that are used by investors, consumers, workers and other stakeholders to evaluate a company’s performance in those key areas. Whereas a company is traditionally assessed by financial metrics such as turnover, profit and cash flow, ESG encourages us to look further. It asks whether a company’s practices are impacting the environment, people and society as a whole, other than in a purely financial manner.

A comprehensive and effective ESG policy (or code of conduct) covers, inter alia, the following topics:

• Environmental

The environmental element of ESG is geared towards a wide array of topics such as climate change, pollution, biodiversity, circular economy and marine resources. By establishing firm-wide environmental policies, companies display their focus on reducing their ecological footprint and managing their environmental impact.

• Social

The social aspect of an ESG policy focusses on the company’s ability to manage its relationships with various stakeholders. The main focal points include not only workers, but also affected communities, consumers and end-users.

• Governance

Finally, the governance aspect of ESG demonstrates the need for responsible business conducts. Policies related to governance may include mechanisms for identifying, reporting and investigating concerns about unlawful behavior within the company.

ESG policies are the way in which companies express their commitment to improving their ESG efforts. They are set of guidelines and practices implemented to integrate ESG elements such as sustainability and responsible business practices into business activities and further decision-making processes. An effective ESG policy helps a company thrive in its usual business activities while taking environmental, societal and ethical considerations into account.

Why does my company need an ESG Policy?

As companies have always been assessed by financial metrics, many underestimate the importance of having an effective ESG policy. However, there are several key reasons why adopting an ESG policy will be crucial for your company, especially in the long run.

Building a trustworthy brand

Both consumers and investors are becoming increasingly more conscious of their choices and are, therefore, continuously seeking accountability and transparency from the businesses they decide to support. Displaying a strong commitment to ESG principles will foster long-term loyalty and trust.

Compliance with EU regulations

In recent years, the regulatory landscape concerning ESG has witnessed significant growth. With the Corporate Sustainability Reporting Directive (CSRD) already in force and the imminent implementation of the Corporate Sustainability Due Diligence Directive (CSDDD), it becomes exceedingly crucial for companies to proactively stay ahead of these regulatory changes and initiate the implementation of ESG policies without delay. For example, under the CSRD, companies will have to report on ESG policies, sometimes subject to materiality, that they have (or have not) implemented. It is to be expected that companies which do not have certain ESG policies in place, will be under scrutiny. 

Positive employee-engagement

No company is successful without its workforce. Therefore, a positive workplace culture is crucial for any company’s long-term success. Demonstrating that your company commits itself to ethical business practices and a sustainable future will attract top talent and enhance overall employee engagement and satisfaction.

How to implement an effective ESG policy?

Creating an effective ESG policy is not an easy task. It requires a deep understanding of the company’s operations in relation to the different ESG principles, the dynamic regulatory landscape and the company’s impact on various stakeholders. In addition, it requires companies to perform the balancing act of aligning their ESG goals with overall business objectives. Finding the right equilibrium can be difficult.

Some key steps include:

• Set a vision
• Define the company’s mission
• When drafting the policy
  • write with precision
  • adapt to the regulatory landscape
  • monitor, collect and track data
  • engage with stakeholders
  • train and create awareness
  • review and reassess regularly
  • do not overpromise
  • state a clear message
• Communicate openly

Conclusion

The need for an effective ESG strategy is at an all-time high. Regulatory pressure is rising and societal awareness around environmental impact, social responsibility and ethical business conduct continues to grow. ESG is no longer a fleeting trend, it is a serious consideration, vital to long-term success.

However, navigating through the inherent complexities that come with adopting a genuine and effective ESG policy in compliance with current and pending EU regulations, may pose some challenges. At Deloitte Legal, we have ample experience with preparing ESG policies across multiple business sectors and can help you to navigate the ESG maze from strategy to implementation.