Sustainable corporate governance, also known by the abbreviation ESG, at first seemed to be a topic that mainly concerned large corporations. However, it has been clear for some time that, beginning in 2025, many medium-sized companies will also have to report on sustainability in accordance with the requirements of the so-called Corporate Sustainability Reporting Directive, or CSRD for short. What exactly will be expected of companies then? Can sustainability be measured at all, and if so, in what form? The enomyc ESG experts Jennifer Höpfner and Carla Dausend answer the most important questions and show how a company‘s ESG conformity can be checked using an example from consulting practice.
Under the Corporate Sustainability Reporting Directive, the list of companies that will be obliged to report on the topic of sustainability is growing. Accordingly, starting from 2025, companies with at least 250 employees and a turnover of 40 million euros or a balance sheet total of 20 million euros must also submit a corresponding report. The first report will concern the 2024 fiscal year, which, as we know, starts in a few weeks. So it is high time we come to grips with CSRD and the associated transparency obligations.
Eemployees, competitors and the media are not the only ones interested in the topic of ESG. Clients and financiers are also focusing on it with increasing regularity. The updated version of the IDW S6 standard also contains a corresponding clarification. This additionally increases the pressure on companies in crisis situations to advance their commitment to sustainability - and to document this through appropriate reporting.
There are - as of yet - no standards for assessing sustainability
ESG reporting should make transparent the activities of companies in the areas of environment, social affairs and corporate governance. To do this, it is not enough to merely add up the consumption saved on water, electricity or tonnes of CO2. Rather, it is about ensuring decent working conditions and responsible business practices along the entire value chain. But how can this be done if there are no universally applicable standards and guidelines?
In order to support our clients in the best way possible, despite these unquestionable deficits, we have developed a tool with which we check companies for sustainable corporate governance. From our point of view, it offers three advantages. First, it currently reflects the most important requirements of CSRD. Second, it provides a solid assessment of the status quo.Third, it can be carried out with comparatively little effort.
In accordance with the requirements of the CSRD, the tool’s 40 total questions cover topics concerning the environment, social affairs, corporate governance and various general cross-cutting issues. The topic of environment is comprised of five categories: climate change, pollution, water and marine resources, biodiversity and the circular economy. Each main category has one to six sub-categories. In the circular economy section, these include resource use, waste management and recycling – with each subject having one to two in-depth questions. The Social section of our Tools looks at four categories: own workforce, value chain workers, affected community and consumers/end users. Governance assesses eight sub-categories, from internal control systems and reporting to risk management and compliance, remuneration policy and transparency. Another section asks for information on general disclosure requirements or a sustainable business strategy.
At the end of each main category, an average value is calculated on a scale from 0 (not relevant) to 4 (fully taken into account), and the whole thing is presented graphically in a visually appealing way. The more data that flows into the tool, the better enabled it is for more detailed evaluations and benchmarks in the future, for example, with regard to sector benchmarks and other key figures.
Case study: Application of the ESG tool in the SME sector
One of our customers, a medium-sized company from the material processing sector, decided to use our ESG tool as part of an IDW S 6 expert opinion.
In order to ascertain the status quo, we first conducted interviews in several departments, for example, with the management and those responsible for the topics of product quality, strategy, HR, corporate management, logistics and packaging management. In addition, we asked for data in order to check the plausibility of the statements made. In this way, we wanted to avoid - not just for us but for the benefit of our customers - presenting connections in an overly positive manner or engaging in so-called greenwashing.
One lesson that companies have to learn in this context is that our tool and the subsequent CSRD reporting looks primarily at the actual state. This means that no matter how impressive and exemplary planned projects are – as long as they are not (yet) part of the company's daily operations – they have no place in the report.
Another important finding was that the procedure described not only provides a good overview in a short amount of time but also gives indications of important fields of action for better scoring in the future. In our example company, for example, we noticed that the business strategy does not yet contain any defined ESG goals and that no responsible function or person has been named for the topic. In contrast, other key requirements, such as those relating to social criteria, e.g. inclusion and equality, were met and the company was already well positioned in terms of collecting data on energy and water consumption as well as CO2 emissions.
Overall, the results have been very positively received, not only by the client but also by the banks involved. In any case, the desired financing has been achieved, and we will support the company with implementing the upcoming measures.
First interim balance: Effort that pays off
Even if the regulatory framework for sustainable reporting and consequently our tool are still in their infancy, in our view, the aforementioned company is a good example of how medium-sized companies can implement ESG reporting requirements and simultaneously provide their investors with important information concerning their long-term performance.
The companies themselves benefit in many ways, from better access to fresh capital (because ESG criteria are playing an increasingly important role in financing), to lower costs and risks as well as a better reputation and higher sales. This is because customers are also giving increased preference to providers with a distinct ESG strategy in their purchasing decisions. And last but not least, good ESG performance also increases attractiveness as an employer, because younger and well-qualified employees in particular prefer companies that cultivate sustainable values and a positive corporate culture.