ESG
contributes to approximal 23% of direct carbon emissions ’ (Buchholz, 2022). Therefore, by engaging with ESG targets, manufacturing companies can have a huge impact on improving climate change. These projects also lead to improved innovation in technology which can be adopted across multiple industries which further amplify the impact on sustainable development. Companies are also prepared and ready for any future regulations that get introduced as governments start to impose stricter regulations in the hope of further encouraging sustainable development as well as protecting the environment and reducing the impact of climate change on our society. It is important to note there is no regulator when it comes to deciding the ESG score of an organization, which is instead set by a third-party organization based on current objectives and policies, and future ambitions . Because there is no current regulator, there’s no standardization in methods generating an ESG rating which can lead to inconsistencies. This makes it difficult to evaluate how sustainable a company is and will lead to a misallocation of resources as investors may be injecting their funds inefficiently into a less sustainable company despite its high perceived ESG score. ESG ratings are also based on the data you put out as an organization. For example, if you are an energy firm, by publishing data on how you are improving your green energy by investing in renewable energy, this will benefit your ESG. The more data you publish, the more evidence there is to think that you are engaging in sustainable practice, hence, a higher rating. However, some companies keep their sustainability practice private. This means that they publish less data: they are thus perceived as worse and receive a lower ESG rating. This will affect small SMEs (small and medium sized enterprises), as they will have limited resources for reporting and therefore will produce fewer comprehensive data, meaning they will be unfairly rated despite potentially having positive and sustainable practices. However, things are changing. The Corporate Sustainability Reporting Directive (CSRD) was introduced on the 5 th of January 2023 as a new EU regulation designed to improve how companies report ESG data and set a minimum standard which eliminates the current issue of a lack of standardization and comparability. The CSRD’s new requirements should make comparisons easier, and the more detailed disclosure of company practices are also designed to improve transparency, which is crucial in order to be able to assess sustainability and to allow investors to make more informed decisions. This benefits sustainable development in the long term, as companies become increasingly incentivized to engage with sustainability, as investors have increased confidence in ESG ratings, it becomes more profitable. The CSRD affects nearly 50 000 companies and SMEs which are all required to report on their ESG factors. This large range means that there is an improved accountability within the EU economy in relation to sustainable development, which makes ESG a successful tool in driving positive change. Despite CSRD only being enforced in EU countries, large TNCs (transnational corporations) who want to do business in these countries are likely to adopt sustainable practice across their whole organization, meaning this not only is affecting the EU, but it also has a positive effect globally. Companies are also required to report on an even greater range of factors such as human rights and climate change. This further improves transparency, as well as ensuring that companies are engaging with ESG and positively contributing to sustainable development rather than ticking ESG checkboxes for the sake of it. While Scope 3 emissions are also considered as part of the ESG rating, these are emissions caused by the production of goods rather than total emissions of a good for its lifetime. For example, Tesla manufactures electric vehicles which, despite being marketed as green transportation, negatively impact the environment as they use lithium batteries that, in the necessary
115
Made with FlippingBook flipbook maker