Decarbonation

Do you have a handle on your ESG criteria?

• Reading time: 2 min

Environmental, social, and governance (ESG) criteria are increasingly influential in determining a company’s value. As key pillars of non-financial reporting, these ESG criteria serve as valuable strategic tools for any company looking to perform responsibly and sustainably. However, it is essential to choose the right criteria and measure them appropriately.

ESG Criteria – Why Your Company Should Care

Financial profitability is no longer the sole criterion for measuring a company’s performance and value. For investors, performance is now understood in a broader sense, encompassing, in addition to financial aspects, environmental, social, and governance factors, represented by ESG criteria. According to a 2023 PwC study, 56% of investors have already halted a transaction for reasons related to ESG criteria, and 69% consider these criteria to be a priority for creating value in their investment strategy. Beyond investors, ESG criteria are becoming increasingly important in how NGOs and trade unions evaluate companies. Reflecting the company’s commitment and ethical behavior, they also impact its ability to attract and retain top talent.

Since 2017, as a result of the 2014 European directive, France has required companies to publish a non-financial performance statement (NFS), which applies to:

  • Listed companies with revenue exceeding 40 million euros and/or more than 500 employees;
  • Non-listed companies with revenue exceeding 100 million euros and/or more than 500 employees.

The Corporate Sustainability Reporting Directive (CSRD), which came into effect on January 1, 2024, strengthens the framework for non-financial reporting, aiming to standardize sustainability disclosures across European companies for transparency and comparability purposes.

While the regulation directly targets companies with 250 employees and listed SMEs, it indirectly affects many SMEs, as companies within its scope must provide information about their entire value chain. In other words, if you’re an SME, your clients, contractors, and suppliers are increasingly likely to request data to calculate ESG indicators.

  • Whether you’re an SME, an intermediate-sized company, or a large enterprise, the ability to produce data demonstrating that your company operates responsibly and sustainably is becoming a requirement for accessing certain markets.
  • Having this data allows companies to shape their strategy to balance economic, environmental, and social challenges.

Choosing Relevant ESG Criteria

It is not necessary for every company to account for all ESG areas, but rather to select relevant topics based on the nature of its activities and the environmental, social, and economic impact of its practices.

Determining relevant criteria for each company requires a double materiality analysis. Simple materiality analysis (or financial materiality) evaluates the impact of ESG issues on the company’s financial performance and economic value. However, this is considered insufficient by legislators as it does not account for the company’s impact on the environment, stakeholders, and society at large. That’s why simple materiality analysis is complemented by impact materiality analysis, which aims to identify ESG issues that have significant, real, or potential consequences for people and the environment, both within the company itself and along its value chain.

In the European legislator’s view, the criteria identified through this double analysis should enable a company to explain in its non-financial performance statement:

  • How its financial value may be affected by environmental, social, and/or governance factors;
  • How its activities impact or may impact the environment and society;
  • The actions taken to reduce negative impacts and maximize positive contributions to the “socially just transition to a sustainable economic system” promoted by the European Green Deal.

Translating ESG Criteria into Indicators: The Crucial Role of Data

To provide the most relevant information regarding their activities and meet stakeholder expectations, companies subject to non-financial reporting obligations use international reporting frameworks. The guidelines and standards provided by these frameworks help ensure the standardization of the information disclosed, which is essential for comparing companies. According to a 2023 Medef study, the most commonly used frameworks are the Global Reporting Initiative (GRI), used by 57% of companies, and the Sustainability Accounting Standards Board (SASB), used in 39% of cases. To align ESG reporting, the European Financial Reporting Advisory Group (EFRAG) published a set of standards (European Sustainability Reporting Standards, ESRS) in 2023, which should be adopted by an increasing number of companies. EFRAG also plans to release sector-specific versions of the ESRS in 2025.

In addition to textual information outlining the company’s strategic vision for sustainable development and the specific objectives it sets to improve its ESG performance, non-financial reporting must include numerical indicators to substantiate the company’s statements. Whether following existing standards or developed by the company itself, these indicators rely on data – data that must be collected and processed in a reliable and verifiable manner. This is crucial because the availability and reliability of source data largely determine whether an independent third party can validate the company’s non-financial performance statement, a requirement under the CSRD.

The quality of underlying data also determines the company’s ESG score. This composite indicator, ranging from 0 to 100, is calculated by extra-financial rating agencies to distinguish between companies excelling and those falling behind in sustainability and social responsibility. An ESG score below 50 indicates insufficient consideration of ESG issues, while a score above 70 confirms that the company adheres to best practices across all ESG domains.

  • As a mission-driven company, Nomadia helps businesses manage their ESG criteria and base their actions on reliable data with tools that improve the working conditions and safety of mobile professionals, while increasing their productivity and reducing their environmental footprint.
  • Discover how our solutions can help you sustainably balance economic, operational, social, and environmental performance.