ESG is getting a lot of attention in the wake of the European Green Deal. The initiatives that Europe wants to realise by 2050 around climate, environment, energy, transport, industry, agriculture, and sustainable finance will have a direct impact on business in the coming years, at least.
ESG stands for Environmental, Social & Governance and refers to environmental, social responsibility and corporate governance.
Our definition
There is a strong relationship between corporate social responsibility and long-term (financial) performance. It is both ethical and essential economically to guard a healthy future.
A widely used method to measure how well a company scores on corporate social responsibility is ESG. GraydonCreditsafe developed an ESG score to monitor our healthy future. By integrating the ESG score into all business processes (e.g., Sales, HR, Procurement, Debtor Monitoring), companies are able to obtain a long-term financial return and generate a positive, social impact on top of that.
Thus, data-driven insights inspire us towards a healthy, sustainable future.
The introduction of ESG
Banks have led the way. Since April 2022, they have had to report to the European Central Bank the extent to which their corporate clients are engaged in ESG. From 2024, banks will have to do so for all customers.
Moreover, from the financial year 2024, all larger SMEs will have to include ESG reporting in their annual accounts. This means that all companies will have to report on the ESG values of their customers. Each company will also have to indicate in its annual accounts the extent to which it is itself engaged with ESG.
With financial statements to be filed in 2025, i.e., in relation to the 2024 financial year, it is high time companies put this on their agenda as a priority.
Impact
The introduction of ESG has quite a few implications.
ESG, alongside creditworthiness, will become a standard that financial managers will consider.
Two similar companies in the same position financially will nevertheless be judged differently based on their ESG score.
Organisations that score strongly on ESG will have easier access to (cheaper) credit and therefore have a better chance of survival.
ESG reporting
Today's ESG reporting is done based on time-consuming surveys and research, requiring the respondent to evaluate themselves through lengthy questionnaires and for a fee. It yields a mishmash of subjective answers, which help to form a picture of individual cases, but does not give an overview of the situation in a sector or geographical area. A major omission for those looking to develop a strategy and put ESG on the map.
ESG Indicator
The GraydonCreditsafe ESG Indicator shows in a uniform and objective way how a company scores on these topics. It is therefore an indispensable tool for companies and governments to screen customer and supplier portfolios, sectors, or an entire population in a quick and efficient way.
What makes ESG interesting for you?
ESG will initially be received as an administrative burden. But apart from being a legal obligation, ESG also contains numerous benefits and opportunities.
There are several drivers for including the ESG score in the underwriting or screening process of customers, suppliers, and other stakeholders: continuity, compliance, image, being an attractive employer, profitability, customer satisfaction or growth in new markets.
Below, we elaborate on some concrete benefits.
Often, ESG also involves reputation and image. To remain relevant, it is necessary for companies to build a strong image around ESG or CSR (Corporate Social Responsibility). Employees, customers, and consumers increasingly prefer companies that are sustainable in the broad sense of the word. A trend that can no longer be reversed.
ESG is therefore used to distinguish a company or brand from competitors. In this sense, it is a selling point and an element to boost employer branding. And it promotes customer and employee retention.
Organisations that comply with ESG requirements will have faster, easier access to capital. It improves continuity and increases the survival chances of the organisations in question. ESG will therefore be a factor used in credit assessment and prospecting.
By building long-term relationships with sustainable partners, you as a company do not have to worry (or worry less) about your equally sustainable supply chain.
Broader systemic partnerships increase profitability and mean a win-win for all parties involved.
Methodology
GraydonCreditsafe uses different methodologies and combines different data elements to build the ESG score.
1. Initially, ready-made data elements are used (e.g., from the social balance sheet).
2. By combining data, artificial intelligence, and human knowledge, we recognise behavioural patterns so that we also extract information from data that at first glance has nothing to do with it.
- For example, GraydonCreditsafe’s database does not contain information on drug offences or other crimes. Yet, we succeed in using financial data, fleet data and numerous other data sources to indicate the likelihood of a company exhibiting criminal or fraudulent behaviour.
3. We also look for non-measurable data elements (intangibles), which we can nevertheless convert into measurable elements (tangibles). Some correlations that GraydonCreditsafe discovered together with academics and universities are surprising to say the least.
- Language and grammatical structure of a website says something about a company's management style.
- Management style, as well as gender equality, along with several other parameters, says something about a company's innovativeness.
- Gender parity, in turn, says something about a company's shock resilience.
GraydonCreditsafe, with its local in-depth knowledge of the Belgian market, already has an edge over the big international rating agencies.
Want to discover more examples? Then contact our ESG expert.
Further evolution
Just like the anti-money laundering legislation, to which additions and amendments appear every so often, ESG still has a long way to go before it will be on point. As always, GraydonCreditsafe closely monitors the changes, adjusting the ESG score where necessary and continuing to refine it with new data elements and cross-references.