The CSRD requires a broader spectrum of companies to provide disclosures on their Environmental, Social and Governance (ESG) matters based on the European Sustainability Reporting Standards (ESRS). Forming part of the sea change of new directives and regulations emanating from the European Green Deal and the Sustainable Finance Agenda, it is estimated that some 50,000 companies across the European Union (EU) will be required to comply with the regulation.

The European Green Deal has been the driving force in entrenching sustainability within the EU regulatory landscape. While industry leaders recognise that compliance is both critical and necessary, not all are aware of the benefits that lie in store for companies that embrace sustainability as an integral part of their business model.

Results of a survey conducted by EY Ireland, the ‘EY CFO Survey 2023’, suggest that ESG is still considered a compliance and regulatory issue, rather than a source of commercial opportunity. In the survey, 43% of finance professionals indicated that sustainability regulatory compliance will be their main area of focus for the next two years. While 54% of finance professionals are finding there is greater focus on ESG reporting in the finance role, only 15% of them believe that building skills in ESG reporting is a priority. More telling is the finding that only 10% see opportunities in sustainability and decarbonisation as a growth driver in the year ahead. The survey suggests that the benefits and growth opportunities that come with embracing ESG remain unclear to many business leaders in Ireland. So, what are the potential benefits?

Mainstream investors are increasingly looking for accurate and reliable information that their investments are aligned with sustainable investment (SI) principles. There is an ever-expanding pool of socially responsible investors that align their sustainability values with their investment strategy. In doing so, they consider the ESG of companies they are considering investing in to gain more clarity on the long-term sustainability of the business as well as to address greenwashing concerns.

The 2022 FTSE Russell annual survey found that 86% of asset owners around the world are widely adopting SI. Asset owners have compelling reasons for implementing an SI investment strategy, opting to take a long-term view on sustainability.

These investors have stated that the largest barrier to increased SI adoption is the availability of ESG data. Organisational views on SI have seen significant changes between 2021 and 2022 indicating greater adoption of SI principles (Figure 1).

Figure 1: Organisational views on sustainable investment [Source: FTSE Russell Annual Survey, 2022]

Businesses’ access to debt finance will also be impacted by their ESG disclosures as these have become an increasingly more important criteria when applying for loans or other sources of funds from financial institutions. This is the result of legislation such as the Sustainable Finance Disclosure Regulation and the EU Taxonomy Regulation, both developed in line with sustainable finance imperatives identified by the EU.

Figure 2: ESG and lending for the mid-market [Source: Grant Thornton, 2023]

As noted by the EU, sustainable finance has a key role in delivering policy objectives under the European Green Deal, along with the EU’s international commitments on climate change and other sustainability objectives. More sustainable finance regulations are slated in the near-term future to channel institutional funding and private investment towards transitioning to a climate-neutral, climate-resilient, resource-efficient, and fair economy.

The impact of these legislations is being felt by companies across the board. A recent Grant Thornton survey has found that while ESG lending thus far has been dominated by large, listed companies, there has been a shift towards lenders increasingly focusing on ESG criteria for the mid-market as well (Figure 2). SMEs will therefore have to come to grips with ESG as part and parcel of their daily operations and management, should they want to access competitive rates for bank loans and overdraft facilities.

Moving beyond financial imperatives, there are other considerations for companies to be cognisant of, namely brand and reputation. In this new age of sustainability, consumers and customers have expectations that the products they purchase, and use have minimal impacts on the environment and are sourced through ethical and legal labour practices.

A joint study conducted by McKinsey and Nielsen IQ found that US consumers are backing up their concerns on sustainability with their wallets. The study conducted on 44,000 brands across 32 food, beverage, personal-care, and household categories found that consumers are shifting their spending towards products with ESG-related claims (Figure 3).

Figure 3: Growth in products with ESG claims [Source: McKinsey, 2023]

Similarly in Europe, studies have shown that consumers are increasingly concerned about the environmental impact of their consumption habits and are seeking transparency from companies about their business practices (Figure 4).

Figure 4: European consumers driving demand for sustainability [Source: Forrester, 2023]

Closer to home, large multinational companies have recognised this shift in consumption patterns and are leveraging on it to drive their future growth within their respective sectors. For example, within the foodservice market the Irish global multinational Kerry Group has conducted studies revealing that 71% of European consumers felt sustainability was an important factor when choosing where to eat out, with more than half surveyed reporting that they ate more sustainably since the Covid-19 pandemic.

This will undoubtedly impact consumer choices when it comes to restaurant and food options.

One of the key takeaways from COP27 was the fact that this is the critical decade for climate action to limit global warming to around 1.5°C above pre-industrial levels. The global economy must therefore mitigate climate change by reducing or preventing greenhouse gas (GHG) emissions.

The E in ESG – Environmental – focuses on environmental factors that affect the long-term sustainability of our planet in relation to climate change. ESRS 1 to 5 focus on the conservation of natural resources and biodiversity without foregoing economic and social progress. They cover climate change (ESRS 1), pollution (ESRS 2), water and marine resources (ESRS 3), biodiversity and ecosystems (ESRS 4) and resource use and the circular economy (ESRS 5).

At the heart of the European Green Deal is the EU’s objective to be climate neutral by 2050. This would mean a future European economy with net-zero GHG emissions. Towards achieving this end goal, the EU has set a mid-term target to reduce GHG emissions by at least 55% by 2030 and is backing this up with various policy and legislative tools.

As challenging as this may sound, the transition to a climate-neutral society also presents businesses with opportunities. At COP 27, Taoiseach Michael Martin announced that the provision of wind energy would be accelerated to ensure that Ireland meets its climate-reduction commitments which is aligned with EU policy. As noted in a study commissioned by the European Parliament, ’Decarbonisation of Energy – Determining a robust mix of energy carriers for a carbon-neutral EU’, the shift to a net-zero future will involve the large-scale expansion of low-carbon electricity while phasing out unabated fossil fuels.

Figure 5: Scope 3 emissions [Source: PwC, 2023]

Companies like Bord Na Mona have recognised the opportunities that lie in the decarbonisation agenda and have integrated it into their ‘Brown to Green’ strategy to accelerate decarbonisation by moving away from their traditional peat business into renewables, resource recovery, and new sustainable businesses. Businesses that are first movers in the area of sustainability are gaining a competitive advantage against their peers and benefiting from their position as a sustainability leader in their sector.

Companies are also under ever increasing pressure to improve their operational processes in order to reduce their environmental footprint. While this poses challenges, it also comes with significant benefits. Key ways businesses are improving their environmental performance are by reducing their use of raw materials, energy, water, and packaging. This in turn has led to reduced business costs. The Sustainable Energy Authority of Ireland (SEAI) has also noted that businesses can save up to 10% on their energy bills by implementing no-cost and low-cost energy efficiency measures and has a section on its website dedicated to providing SMEs with tips and resources on how they can achieve this.

In more recent years, SMEs are finding that ESG has become a central theme in maintaining their relationships as vendors or suppliers of large companies. This is primarily due to ESG disclosures required from large companies as a result of regulatory requirements. In the ESRS, disclosures that focus on the ESG performance of the supply chain can be found in ESRS 1 ‘Climate change’ and ESRS 2 ‘Workers in the value chain’. The former relates to Scope 3 GHG emissions (Figure 5) which are emissions that arise from a company’s supply chain, while the latter focuses on human rights and work conditions of employees of businesses in the supply chain.

The ’PwC Digital Trends in Supply Chain Survey 2022’ found that responding to regulatory changes is the largest supply chain ESG challenge companies are facing today (Figure 6). In the survey, 66% of respondents said staying aware of rapidly evolving legislative and regulatory frameworks in their respective jurisdictions is currently a challenge, with 23% considering it a major challenge.

Figure 6: The extent to which ESG-related issues are posing a challenge to the supply chain function [Source: PwC, 2022]

Figure 7: Environmental impact of supply chains in the consumer sector [Source: McKinsey, 2023]

Across the board, industries are under mounting pressure to reduce their GHG emissions in line with the climate action agenda.

A significant portion of a company’s GHG emissions are Scope 3 emissions. While this varies from one sector to another, according to McKinsey more than 80% of the GHG emissions of companies in the consumer goods sector emanate from their supply chain (Figure 7).

Consequently, the sustainability performance of the value chain has become an important criterion for large companies. SMEs that want to retain their long-term business relationships with large corporations and global multinationals will have to step up on their own sustainability measures to keep up with changing regulatory demands.

Tangible rewards lie in store for companies that embrace ESG as part of their business model. While this may involve some capital outlay, there will be significant return on investment as a longer-term payoff. Going beyond the objective of compliance, there are also opportunities for businesses to future proof themselves and remain a thriving entity in a low carbon/net-zero economy.

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