Introduction to ESG and Sustainability Reporting - a Broad Overview

What is sustainability and what exactly is ESG?

Sustainability refers to the long-term strategy of keeping resource consumption lower than regeneration capabilities. This means adapting behavior in the present without restricting the capabilities of future generations.

Therefore, for (business/political, etc.) decisions, the criteria "economically efficient," "socially just," and "ecologically sustainable" must be considered. This brings us to ESG.

ESG stands for Environmental, Social, and Governance and describes a comprehensive framework for evaluating the sustainable and ethical actions of companies. It emerges from Corporate Social Responsibility (CSR) and condenses it into concrete figures.

Environmental (E) includes, for example, water consumption, greenhouse gas emissions, and energy usage
Social (S) includes, for example, occupational safety, diversity, and demographic change
Governance (G) includes, for example, corporate management, values, and compliance

What are ESG criteria?

ESG criteria (Environmental, Social, and Governance) play an increasingly significant role in evaluating companies and investments. These criteria consider not only financial performance but also the handling of environmental concerns, social aspects, and corporate governance.

ESG criteria expand over time, from an initial focus on environmental compatibility to a comprehensive framework that includes social justice, working conditions, human rights, and ethics.

Companies that continuously consider and expand ESG criteria demonstrate a clear commitment to responsible actions for a more positive future.

Greenhouse Gas Emissions: An overview

Greenhouse gases such as carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O) are primarily released through human activities like industrial production, agriculture, and transportation: They significantly contribute to global warming. Therefore, it is essential to understand our emissions and the possibilities for their reduction for a more sustainable and environmentally-friendly future.

Scope 2 – Indirect Emissions:
Definition: This category includes indirect emissions from the generation of electricity, heat, or steam purchased and consumed by a company.

Scope 1 – Direct Emissions
Definition: Direct emissions arise from sources owned or controlled by a company or organization. This includes emissions from company-owned vehicles, factory facilities, or heating systems.

Scope 3 – Other Emissions
Definition: Scope 3 emissions are the resulting emissions from a company's entire value chain, including emissions associated with purchased materials, product manufacturing, transportation of goods, and other external activities.

The common goal of sustainability from different perspectives

Customers
Consumer needs, expectations, and purchasing decisions have changed: "Sustainable products" with honest transparency regarding used materials and their origin; waste avoidance; the use of recyclable packaging, etc., are in particular focus.

Greenwashing is not a solution, and a sustainability report provides genuine added value for your customers.

Procurement/Suppliers
The interest in the sustainability of companies in the upstream and downstream supply chain is rising massively (keyword: Product Carbon Footprint) because suppliers influence one's own sustainability. As a result, companies can also be indirectly affected by new statutory sustainability reporting requirements, even if they do not meet the specified criteria for reporting obligations.

Employees
Sustainable companies with a noticeable impact externally are more attractive on the job market and can score with valuable ESG advantages in the "war for talents."

Legislator
The new legal obligations regarding sustainability reporting are being expanded for companies through the Corporate Sustainability Reporting Directive (CSRD). The requirements will affect not only large companies or corporations but also medium-sized enterprises.

Banks
Banks decide when granting credit to your company based on sustainability criteria for the investment. This can lead to investments (e.g., in high-emission machines) failing or demonstrably sustainably operating companies receiving improved credit conditions.

What is ESG reporting?

ESG Reporting is a powerful framework that enables companies to transparently disclose their efforts towards sustainable and responsible practices. It goes beyond mere financial performance and highlights the key aspects of environmental impacts, social responsibility, and effective corporate governance. ESG Reporting enables companies to showcase their commitment to addressing global challenges like climate change, diversity and inclusion, and ethical decision-making. By adopting ESG reporting, companies demonstrate a strong commitment to making a positive impact on the planet, society, and long-term business success. This dynamic approach not only fosters stakeholder trust but also positions companies as pioneers of change on the path to a better and more sustainable world.

What are the challenges with ESG reporting?

Data availability
Your Enterprise Resource Planning (ERP) system is the number one data source, as it controls and integrates the business core processes of your company. However, much data is still not available because there was previously no reason to explicitly capture ESG-relevant data.

Risk assessment
Sustainability reporting also requires a comprehensive risk assessment of sustainability risks. This entails new tasks and challenges for your company's risk management.

Data quality
For sustainability reporting, various data must be collected and compiled from different departments. Variations in data quality can lead to inaccurate reports and thereby incorrect representation (cf. §331 HGB).

Measurability
Another challenge in sustainability reporting lies in initially measuring aspects of sustainability. This is complicated if data is available, but it is unclear whether their quality meets high standards.

Complexity
Sustainability is much more than just creating reports; it begins with planning innovations and must consider the entire lifecycle of products and services.
It requires a rethink, for which your company must define the guidelines.

Involvement of stakeholders
You must involve your stakeholders in your sustainability strategy.

Only in this way can you ensure that all relevant stakeholder groups and their concerns and expectations are adequately considered.

Four steps to creating an ESG report from data in the SAP system

01 - Inform

Find out whether and to what extent your company is affected by the reporting obligation and talk to your auditor!

02 - Actual analysis

Use an ESG analysis to clarify the actual ESG data situation in your company. A preparation analysis shows you how well your data is prepared for EU standards.

03 - Use existing processes

Take advantage of the capabilities of your ERP system and use standard processes that can be used to generate and collect ESG data at the same time.

04 - Report creation

With the collected data, you are able to create a reliable ESG report. Your auditor must be able to certify the content of the report.