Glossary of ESG Terms
CSR stands for “Corporate Social Responsibility”. This term initially described the voluntary assumption of social responsibility by companies. In this context, activities focused on topics relating to the environment and to social/societal issues. Corporate governance has become increasingly important when evaluating corporate sustainability. As a result, the more comprehensive term ESG (“Environmental, Social, Governance”) has emerged.
ESG is an abbreviation of the terms “Environmental”, “Social”, and “Governance”. Responsible and transparent action in these three areas is generally understood to form the basis for greater sustainability. Companies seeking to act sustainably should therefore set themselves clear goals in these areas, and develop an ESG strategy. Customers, employees, suppliers, banks, and other stakeholders are increasingly evaluating their business partners in terms of ESG activities. In addition, companies must be increasingly transparent regarding their activities in these areas. After all, the UN’s Sustainable Development Goals (SDGs) within the 2030 Agenda, as well as the EU’s Green Deal, oblige companies to help achieve these goals.
The Green Deal, approved 2020, is a European growth strategy with 6 defined environmental goals. For example, by 2030, CO2 emissions are to be reduced by 55%, and the European continent is to be completely emission-free by 2050. For each major economic sector, the Green Deal describes which measures are to be used to achieve the stated goals. Thus, the Green Deal also informs the respective directives adopted by the EU – and exerts a direct influence on companies in EU member states.
GRI stands for “Global Reporting Initiative”. This is an international and independent organization that defines and sets standards for reporting on ESG activities. The first GRI standards were published back in 2000. These standards are used by companies of all sizes, and are recognized worldwide.
Large corporations and listed companies, in particular, share the annual progress they have made in terms of sustainability – in a dedicated sustainability report. In doing so, they take up the most important measures from the “Environmental”, “Social”, and “Governance” areas (“ESG” or “triple bottom line”). In Germany, the legal basis for this is the CSR Directive Implementation Act of 2017. In April 2021, the EU issued the so-called Corporate Sustainability Reporting Directive (CSRD). According to the CSRD, all large companies (>40 million euros in sales, >20 million in total assets, >250 employees) must report on their sustainability activities within their management report as early as 2024 for financial year 2023. In Germany, the CSRD will become law in 2022.
Pursuant to Section 289 of the German Commercial Code (HGB), large and capital market-oriented companies must submit an annual “non-financial statement” as of financial year 2017. In addition to a brief description of the business model, the statement needs to address environmental, employee, and social concerns, respect for human rights, and anti-corruption as well as anti-bribery measures. The non-financial statement can be part of the management report or part of the sustainability report, provided that it meets the standard requirements (GRI or IIRC) for integrated reporting.
The Paris Agreement is legally-binding international treaty, adopted by 196 parties with the aim of protecting the climate, as a successor to the Kyoto Protocol. It contains goals and measures to address the causes of climate change. The broad goals include: reduce emissions, adapt to the impacts of climate change, and help developing countries protect the climate. The aim is to keep global warming below 2 degrees.
The 17 Sustainable Development Goals (SDGs) aim to create a better and more sustainable future for the world’s population. These goals, adopted by the United Nations in 2015, form the foundation for the 2030 Agenda, and thus also for the sustainability strategies of the EU and Germany. The SDGs are also the starting point for companies’ sustainability strategies.
A taxonomy is a classification system that employs uniform terms and definitions. The EU has developed such a classification system in the “Environmental” area, for the goals “protect the climate” and “adapt to climate change” (Regulation 2020/853 of June 18, 2020). The taxonomy makes it possible to assess the environmental sustainability of an activity on a comparable basis. The taxonomy definitions are also intended to become the basis for companies’ non-financial reports. In July 2021, a taxonomy proposal was submitted for the “Social” area.
UN Global Compact
The United Nations Global Compact is a voluntary agreement between companies and the UN to make globalization more socially and ecologically responsible. It was presented on January 31, 1999. Companies that join this contract commit themselves to ten fundamental principles. The Global Compact can be considered the precursor to the UN’s SDGs (adopted in 2015).