ESG and social responsibility: How companies shape a better future

Abstract

In the context of global challenges related to climate change, growing social inequalities and the need for responsible corporate governance, sustainability is emerging as a key priority in business strategies. The coming period will mark significant changes in the global approach to sustainability. Through innovation, regulation and governance, companies are playing a significant role in shaping a more sustainable future and responding to the most pressing global challenges by implementing ESG standards (E-Environmental, S-Social, G-Governance) and adopting a more responsible approach to society (CSR-Corporate Social Responsibility).

Environmental thematic standards explain how companies manage their impact on climate change, energy and water use, biodiversity and ecosystems, how they manage waste, how they use other resources and contribute to the circular economy. The transition from traditional to sustainable practices involves implementing green practices such as switching to renewable energy sources, reducing carbon footprint, designing products with a lower environmental impact.

Social standards cover a company`s relationships with employees, customers, suppliers, owners and the communities in which they operate. They address diversity and inclusion, fair working conditions, respect for children´s and human rights, health and safety at work, and contributions to local communities.

Governance standards refer to how a company is managed, including business ethics, transparency, control and accountability systems. This includes governance structures, anti-corruption measures, the protection of owners, transparent reporting, respect for labour and human rights, and the management of sustainability-related risks and opportunities. Managing in alignment with the elements of sustainability is very important for ensuring stability and security, and it affects a company ability to attract investment and the trust of investors, especially institutional ones.

Over the last decade, due to alarming data related to climate change, several initiatives and legislative frameworks have been adopted:

Paris Climate Agreement focus on issues related to climate change and limiting global warming. In force since 2016.

Sustainable Development Goals (SDGs) are seventeen global goals and 169 sub-goals that are focused on addressing the causes of poverty and the need for development at a global level. They were adopted in 2015 with targets set for 2030.

European Green Deal an EU growth strategy adopted in 2019 with the ultimate goal of achieving climate neutrality by 2050.

Corporate Sustainability Reporting Directive CSRD (EU 2022/2426), sets a more modern and rigorous framework for corporate sustainability reporting, based on the European Sustainability Reporting Standard.

Taxonomy Regulation (EU 2020/852) establishes a framework for facilitating sustainable investments and amendments to Regulation (EU) 2019/2088.

European Sustainability Reporting Standards (ESRS) define the information companies are required to report.

Delegated Regulation determines the content and presentation of information on environmentally sustainable economic activities, as well as the methodology for reporting obligations.

Delegated Climate Regulation (EU 2021/2139) defines technical screening criteria for determining whether an activity contributes to climate change mitigation or adaptation, without causing significant harm to other environmental objectives.

Delegated Regulation on the Environment (EU 2023/2486) defines technical screening criteria under which it is determined under what conditions an economic activity is considered to contribute significantly to one of the remaining four environmental objectives – circular economy, protection of water and seas, protection of biodiversity and ecosystem, and prevention and control of potential pollution.  

Regulation on Deforestation-Free Products (EU 2023/1115) imposes due diligence and traceability obligations on companies placing certain products on the EU market or exporting them, to prevent deforestation and forest degradation.

Directive on Corporate Sustainability Due Diligence (EU 2024/1760) requires large companies to conduct due diligence on their operations and value chains concerning human rights and environmental protection.

Companies that integrate ESG standards into their operations can contribute to shape a better future in several ways:

1. Innovation and resilience-the implementation of ESG standards affects the introduction of new business models, technological progress and stimulates innovation. It brings companies resilience to environmental shocks and faster market adaptation, but also influences the creation of market conditions.
2. Trust of investors and investment institutions-Sustainable practices improve access to capital by reducing risk and making companies more attractive to investors, banks, and insurers.
3. Attracting and retaining talent-ESG strengthens employer branding and appeals to employees, especially younger generations who prioritize ethical, transparent, and socially responsible employers. Adequate working conditions, fair pay, and benefits also promote employees´ economic well-being, indirectly benefiting their families and contributing to a more prosperous society.
4. Customer loyalty and market differentiation-Today´s consumers, especially Generation Z, are oriented towards “green” products with clear information about the entire supply chain and the characteristics or composition of the product. Thus, sustainability, ethic and transparency become important differentiation in the market.
5. Credibility and public image-Companies that genuinely invest part of their profits in addressing societal or environmental challenges gain a reputation as leaders and socially responsible entities, which improves both customer and employee loyalty and positively impacts profitability.

In addition to these benefits, companies also face challenges in integrating ESG elements into their business processes. Developing an ESG strategy requires in-depth analysis and, based on the findings, changes in operations and cross-sector collaboration. Thus, in turn, demands investment in employee and stakeholder education (e.g., suppliers, communication strategies, and avoiding misleading claims (greenwashing), which can result in reputational damage and regulatory sanctions.

In practice, companies often face subjectivity in the assessment of ESG factors, which leads to the questionable quality of ESG information, the lack of clear standards, and the limited availability of data.

The main goal of this paper is to show how S-social components in ESG strategies contribute to the creation a more sustainable future and plays a key role in successful business and profitability in the service of creating long-term value and positive changes in society.