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ESG and the Importance of Standardisation

ESG and the Importance of Standardisation

  • Vicente Bento • Partner & General Manager at Insite

If you’re a lover of technological gadgets, you certainly won’t have missed the launch of Apple’s new carbon-neutral Smart Watch 9 series, which is part of the company’s strategy to achieve carbon neutrality by 2030.

If, on the one hand, the company created by Steve Jobs is taking positive steps to reduce the carbon footprint of its products, on the other, it continues to rely on a business model based on selling a new version of its products every year. Alternatively, Apple could, for example, work on modular designs that allow its customers to upgrade their smartphone instead of buying a new one every year.

Like Apple, there are other companies that communicate their good environmental, social and governance (ESG) practices to their stakeholders (e.g. customers, employees, investors), and this is a good thing. However, it is important to ensure that the information you pass on is as transparent and truthful as possible. Although ESG has gained prominence as an important approach to investment decision-making and responsible business management, it also faces a number of criticisms, which include greenwashing, the subjective measurement of certain indicators, the inconsistency of the rating agencies that evaluate organisations or the omission of critical issues for companies, those that are not intended to be disclosed.

To combat these kinds of risks, the creation of standards to help regularise the sector and make it more transparent is welcome. Standardisation thus plays a crucial role in the ESG context, as it helps to establish objective, clear and mutually comparable standards and evaluation criteria. Only in this way can the information that is communicated by organisations be analysed in a more consistent and assertive way. Standardisation allows investors and shareholders to make informed investment decisions. In many countries, standards are being developed for the disclosure of ESG information. This is the case in the countries of the European Union (EU) where 12 standards for sustainability reporting have been adopted, which are to be implemented by EU-listed companies from January 2024 as part of the Corporate Sustainability Reporting Directive (CSRD).

“Standards in the area of ESG play a key role in preventing greenwashing, a practice in which a company expects to fulfil certain sustainability commitments but simply doesn’t have the means to do so”

These standards cover a whole range of environmental, social and governance issues, including climate change, biodiversity and human rights. They also provide information for investors to understand the sustainability impact of the companies in which they invest. Another important point is their alignment with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), in order to guarantee a high degree of interoperability between European and global standards and to avoid unnecessary duplication of reporting by organisations.

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To the east, Singapore is an example of how business and sustainability are not antagonistic concepts. Large public and private companies in this country will be obliged to provide climate-related information in line with the ISSB standards recently published by the IFRS (International Sustainability Standards Board). This mandatory climate reporting decision aims to maintain Singapore’s position as a global business hub, while at the same time contributing to achieving the goals of its Green Plan by 2030.

In short, ESG standards play a key role in preventing greenwashing, a practice in which a company hopes to fulfil certain sustainability commitments but simply doesn’t have the means to do so. Thus, only with clear and concise rules and regulations can a solid framework, objective criteria and verification processes be created that make it more difficult for companies to make false or misleading claims about their commitment to environmental, social and governance issues. It’s a hard road, but we’ll get there!

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