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Blog: ESG Explained

Posted: 27 Oct. 2021

 5 min. read

#1 What is ESG?
ESG Explained | Article series exploring ESG from the very
basics

 Réka Szücs

    

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Background

 
On April 21st 2021, the European Commission adopted the sustainable
1
finance package which includes the proposed CSRD  which reforms and
greatly increases the scope of reporting required compared to the
2
NFRD  disclosure requirements. The increase in scope means that
3
from2023 almost 50,000   companies in the EU will now have to report
on ESG issues

The Hungarian Stock Exchange (BÉT) has issued a recommendation to all

issuers that they develop an ESG reporting roadmap by the end of the
year. In order to assist with this task we have decided to publish a series
of articles exploring the topic of ESG and how to approach it. 

What is ESG?

ESG stands for environmental, social and governance. These are called
pillars in ESG frameworks and represent the 3 main topic areas that
companies are expected to report in. The goal of ESG is to capture all
the non-financial risks and opportunities inherent to a company's
day to day activities.

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Why is ESG here to stay?

 
Our world faces a number of global challenges: climate change,
transitioning from a linear economy to a circular one, increasing
inequality, balancing economic needs with societal needs. Investors,
regulators, as well as consumers and employees are now increasingly
demanding that companies should not only be good stewards of capital
but also of natural and social capital and have the necessary governance
framework in place to support this. More and more investors are
incorporating ESG elements into their investment decision making
process, making ESG increasingly important from the perspective of
securing capital, both debt and equity. 

What falls under the Environmental Pillar?

 
Emissions such as greenhouse gases and air, water and ground pollution
emissions. Resources use such as whether a company uses virgin or
recycled materials in its production processes and how a company
ensures that from cradle to grave the maximum material in their product
is cycled back into the economy rather than ending up in a landfill.
Similarly, companies are expected to be good stewards of water
resources. Land use concerns like deforestation and biodiversity
disclosures also fall under the Environmental Pillar. Companies also
report on positive sustainability impacts they might have, which may

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translate into long-term business advantage. From a reporting
perspective this is the most complex pillar. 

What falls under the Social Pillar?

 
Under the Social Pillar companies report on how they manage their
employee development and labour practices. They report on product
liabilities regarding the safety and quality of their product. They also
report on their supply chain labour and health and safety standards and
controversial sourcing issues. Where relevant companies are expected to
report on how they provide access to their products and services to
underprivileged social groups.

What falls under the Governance Pillar?

 
The main issues reported under the Governance Pillar are shareholders
rights, board diversity, how executives are compensated and how their
compensation is aligned with the company’s sustainability performance.
It also includes matters of corporate behaviour such as anti-competitive
practices and corruption. 

What is relevant from all this for your company?

 
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Of course, not all sectors of the economy face the same ESG issues. For
example in the case of banks, greenhouse gas emissions (more precisely
scope 1 and 2) are not as important as they are in the case of energy.
These differences in what matters to a particular sector from an ESG
perspective is called materiality.  Companies report on issues that are
material to them. Typically materiality is determined based on what ESG
issue is considered financially material in a given industry. Financially
material issues are those that can impact a company's financial
performance (e.g.: unexpected surplus costs, fines, loss of brand value,
loss of revenues due to consumers choosing more sustainable
alternatives). Increasingly double materiality is being recognised as an
important concept in choosing what is considered material by a
company. Double materiality means alongside financially material issues,
socially material issues are also treated as material. 

How do you report?

 
ESG today is broadly thought of as a reporting framework, however
originally it was a framework developed for evaluating the sustainability
related disclosure of listed companies for investors. Now with demand
for ESG related information on the rise, the ESG framework has become
synonymous with reporting. There is no standard ESG framework (yet),
only a broad consensus on the issues covered by it; there can be
numerous differences at the data point level. For this reason, companies

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rely on sustainability reporting standards to determine how and
what they report.

Reporting is typically done by applying one or more frameworks. The 2

most commonly used reporting frameworks are the Global
Reporting Initiative (GRI) and the Sustainable Accounting Standards
Board’s standards (SASB). ESG reporting is typically done by publishing
a sustainability report although more and more companies are disclosing
data through webpages that showcase the companies ESG performance
in addition to a more standard report.

Want to know more? Read the rest of our

article series:
 
#1 What is ESG?

#2 Where do you start with ESG reporting?

#3 What are the challenges in ESG reporting?

#4 Integrating ESG into your company’s value creation narrative

#5 Materiality Matters

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Footnotes

1: Proposal for a Directive of the European Parliament and the Council amending Directive

2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as

regards corporate sustainability reporting, source: https://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX%3A52021PC0189

2: Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014

amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information

by certain large undertakings and groups. Source: https://eur-lex.europa.eu/legal-

content/EN/TXT/?uri=CELEX%3A32014L0095

3: Deloitte Luxembourg CSRD: cornerstone of EU’s sustainable finance strategy for quality investor

ESG data. Source: https://www2.deloitte.com/lu/en/pages/investment-management/articles/csrd-

cornerstone-eu-sustainable-finance-quality-investor-esg-data.html

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Contact
Get in touch with our expert

Réka Szücs
Service Line Leader

rszucs@deloittece.com

Réka joined Deloitte's Sustainability & Climate Services team in 2017 and took over in 2022. In addition to her
degree in Environmental Engineering, she holds an LLM, Master of Laws in International Law and Sustainable
Development. She has cross-industry experience in...

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Further entries
Read the upcoming article of our ESG Explained article series.

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ESG Explained | Article series exploring ESG from the very basics

Deloitte Hungary has decided to publish a series of articles exploring the topic of ESG and how to approach it.

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