ESG refers to the framework used to assess an organisation’s business practices and performance.

Environmental, social and governance (ESG) is today a popular term that most businesses are familiar with, but the true extent of this area is perhaps not fully understood. At face value, people tend to assume that ESG simply refers to a company’s efforts to align with environmental, social and governance principles in their activities.

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While this is certainly one part of ESG, the area is much wider in scope and, with the legislation that is already in place and further anticipated legislation, it is important for businesses to better acquaint themselves with the ins and outs of this area of regulation.

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ESG is primarily a disclosure framework based on data and measurability. It requires businesses to look at their policies, governance, activities and the general impact of their business on the wider community, in an effort to quantify the effect of these areas on sustainability – not just environmental sustainability, but sustainability in a wider sense.

ESG is, thus, not simply an exercise in CSR, which traditionally refers to a company’s voluntary efforts to align with socially positive initiatives. it is also not a simple tick-the-box exercise where, if you fulfil a minimum set
of criteria, you are ‘awarded a pass.’

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Rather, ESG requires a more comprehensive review of a company’s whole operation, with a view to determining its positive and negative impacts on sustainability. ESG also introduces the concept of corporate accountability, as companies within scope are legally bound to audit and disclose their findings in annual reports.

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There is ample EU legislation addressing ESG, with perhaps the most crucial being the Corporate Sustainability Reporting Directive (CSRD) due to its wide reach. Indeed, the CSRD will directly apply to all listed SMEs as well as private undertakings fulfilling at least two of the following criteria: (i) employ more than 250 employees; (ii) net turnover of more than €50m; (iii) balance sheet assets of more than €25m.

“Environmental, social and governance is a popular term that most businesses are familiar with,

but the true extent of the area is perhaps not fully understood. ”

But there is also an element of indirect applicability, in that companies within scope will increasingly begin to request ESG metrics also from their suppliers and companies they work with who otherwise fall out of scope.

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It is thus important for all companies, large or small, to acquaint themselves with the basics of ESG.

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Of course, ESG policy has its fair share of critics. Some companies might see this as an added
and unnecessary burden on their resources. Others might question the efficacy of the legislation
in achieving the sustainability goals it seeks to address.

However, while it is still somewhat early to determine whether this policy area will prove effective, it is certainly promising to see aregulatory shift towards holding businesses accountable for their activities and this will hopefully
induce them to consciously adopt more sustainable practices going forward.

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Luca Amato is a senior associate at Fenech & Fenech Advocates and forms part of the ESG
practice of the firm.