ESG: A sustainable future pathway

21. 11. 2023.

Climate change has transcended local or regional issues, posing a significant global threat to both the environment and human society. The consequences of climate change highlight how traditional economic models can harm our planet and underscore the necessity of balancing economic development, social justice, and environmental protection. Companies need to strive to reduce their negative environmental impacts and emissions by effectively utilizing renewable energy sources and adopting sustainable production and procurement practices. ESG provides a framework for this and serves as a measurable and comparable tool for achieving sustainability goals.

ESG aims to enhance companies’ understanding and management of sustainability-related risks and opportunities. It enables them to proactively address global challenges posed by climate change, resource scarcity, and social inequalities. Considering these aspects is not just about compliance with regulations but encompasses corporate responsibility and long-term value creation.

What should we know about ESG?

ESG stands for Environmental, Social, and Governance, based on three foundational pillars:

  • Environmental: This pillar focuses on a company’s environmental impacts and risk management. It deals with the company’s environmental footprint, including greenhouse gas emissions, resource usage, and its role in a circular economy.
  • Social: It examines a company’s relationships with its employees and the broader society, encompassing ethical supplier practices and respecting employee rights.
  • Governance: It analyzes a company’s internal governance structures, accountability, and leadership incentive systems.

ESG involves concepts that can be aligned with these three pillars within the framework:

Materiality principle: A conceptual tool that helps a company determine which ESG topics to address in its disclosures or ESG risk management processes.

Scope 1, 2, and 3: Categories used to classify and measure greenhouse gas emissions related to an organization’s activities. Scope 1 covers direct emissions from a company’s activities, Scope 2 includes indirect emissions from purchased energy, and Scope 3 comprises all other indirect emissions across the value chain.

Sustainable investing: Investment in economic activities contributing to environmental or social goals. It is measured by minimizing harmful effects and companies receiving such investments typically follow good corporate governance practices (e.g., robust governance structures).

ESG reporting obligation*

Companies are required to prepare ESG reports by applying the ESG framework, which can carry environmental benefits resulting from a focus on sustainability through their operations. These reports can help identify areas and practices to reduce negative environmental impacts, whether it’s reducing greenhouse gas emissions, increasing energy efficiency, or supporting recycling initiatives. Striving for sustainability encourages more efficient resource use, thereby reducing natural resource depletion and waste production. The pursuit of sustainability incentivizes innovation and the development of eco-friendly technologies.

Creating ESG reports, alongside responsible practices and efficient operational mechanisms, brings business advantages. Prioritizing transparency and accountability enhances a company’s credibility and competitiveness, facilitating business decision-making. Companies with such reports are often preferred by investors and customers, becoming more attractive to talented employees and gaining consumer trust. A conscientious corporate environmental approach serves as an awareness-raising tool for broader society, encouraging more conscious choices and support for sustainable practices in the future. All of this contributes to both the business stability and long-term success of a company.

More information on the obligations, other interesting facts and our service portfolio can be found on our ESG transformation solution page, and our January 2024 web article will provide an overview of the regulatory background of ESG in Hungary.

* From 2025, the European Union obliges some companies operating within the EU (based on employee count and certain other criteria) to prepare their annual sustainability reports (initially based on data from 2024) and develop their ESG strategies. The scope of companies obligated to report will gradually expand after the year 2025, and starting from 2027, even small and medium-sized enterprises qualifying as entities of public interest will be required to comply with these obligations.