The Environmental Component of ESG
Last Updated: May 12, 2021| 2 mins
The Environmental component of ESG is also addressed within legally binding requirements, as provided by national laws and regulations around the world.
For example, in the EU, the Non-Financial Reporting Directive provides for disclosure requirements in relation to non-financial information, requiring large companies to submit an assessment of their business model, policies, and key performance indicators on environmental matters, among others.
Likewise, the EU Taxonomy Regulation aims to establish a framework to facilitate sustainable investment. The Taxonomy Regulation entered into force on 12 July 2020, and sets out four overarching conditions that an economic activity has to meet in order to qualify as environmentally sustainable.
The Taxonomy Regulation establishes six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
The EU is also looking at implementing renewed frameworks for the reporting of environmental issues. In addition to the Non-Financial Reporting Directive currently being under revision, the European Parliament adopted a resolution with recommendations to the European Commission for a Directive on corporate due diligence and corporate accountability, calling for the urgent adoption of a binding EU law that ensures companies are held accountable and liable when they harm or contribute to harming, among other things, the environment. It is expected that the Commission will present its legislative proposal later in 2021.
In addition, laws and regulations addressing environmental disclosures exist already within legal systems around the world.
In the UK for example, laws such as the Companies Act 2006, its Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, and the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018, require organizations to report on a wide range of environmental matters through the use of key performance indicators.
The UK Government has produced further specific guidelines on environmental reporting, aimed to help companies comply with the applicable legal requirements for environmental disclosures, but also to act as best practice for any organization adopting a voluntary approach to reporting, and recognizing the relevant and direct benefits of environmental reporting: companies will be able to benefit from lower energy and resource costs and gain a better understanding of their exposure to climate change risks, which will help strengthen their green credentials in the marketplace, as investors, shareholders and other stakeholders are increasingly requesting better environmental disclosures in annual reports and accounts.
Although many organizations focus mostly on the environmental impacts, the issues around Social are increasing and in the last year, many organizations have moved to include these metrics also.