Self-assessment insufficient: Formal ESG ratings are mandatory

Jenny Walther-Thoß
23. June 2021

In the last newsletter we explained how dynamically Environmental Social Governance (ESG) ratings are becoming key factors for business success. Today, we give you an in-depth insight into the ratings that are mainly used and demanded by clients of the packaging industry. We explain approaches and target groups and provide a basis for your decision.

 

In the course of our work for companies in the packaging industry, we repeatedly discover that there is definitely a sustainable corporate culture in the DACH region that is almost taken for granted. Employees and the environment traditionally play a major role, which is often “not talked about much at all.

That’s fine – and good. But times have changed. Today, it is no longer enough to certify sustainability to oneself. Formal ratings, rankings and assessments are mandatory. This development is without reversal! The “certified” sustainability report promises transparency in the question of whether the supplier or subcontractor has investigated and recognized its sustainability risks and with what ambitions it has addressed them.

The CPO of an international pharmaceutical heavyweight sums it up in a letter to a supplier: “I am personally requesting that you register on the EcoVadis platform and take the assesment. You will receive a sustainability scorecard from EcoVadis with detailed insights into your strengths along with areas for improvement.”

The EcoVadis rating (or Sedex rating) is currently set as a requirement for Environmental Social Governance (ESG). Nothing below that is possible. For example, CDP reporting, which is increasingly moving from freestyle to mandatory. Or also that the sustainability report is based on the GRI Reporting Framework.

What applies to every sustainability rating: the creation of the necessary management structures, strategies (such as a climate strategy) and evidence cannot be achieved overnight. It requires some preparatory work, which you should better start today than tomorrow!

 

Reporting Frameworks and Rankings

The term ESG rating is commonly used to refer to both reporting frameworks such as GRI and actual ratings such as CDP, EcoVadis and SEDEX. In contrast to real ratings, reporting frameworks “only” provide a structure and specify which aspects and factors must be reported on.

In the following, we will show what distinguishes the different “sustainability documents” and which ones are relevant for your company.

 

GRI

The Global Reporting Index (GRI) was introduced in 1999 and has since become the leading global medium for “Voluntary Non-Financial Disclosure Reports” (sustainability reports). Companies that publish a sustainability report and call it such are not legally obliged to apply the GRI structure. However, especially in European or global competition, GRI is now state of the art.

 

DNK

The guide to the German Sustainability Code (DNK) takes an exceptional position and is mainly considered for SMEs and use within Germany. The DNK allows a somewhat simplified entry into sustainability reporting.

 

ECOVADIS

With EcoVadis and Sedex, two ratings have emerged as the standard for the packaging industry. They are demanded by brands along the supply chain.

• EcoVadis is used exclusively in B2B business and shows with its classification in bronze, silver and gold how the company stands in the implementation of a holistic sustainability management compared to industry companies. EcoVadis is not a certification!
• Companies undergoing the rating are assessed in terms of their ESG performance and in comparison to industry and regional benchmarks. The rating is adjusted according to industry risks and company size.
• In the analysis, EcoVadis applies a clear risk management principle. It examines whether the company
  • Risks identified and prioritised
  • has entered into public commitments
  • Created guidelines or policies and set up implementation plans or strategies including targets & KPIs.
  • implements implementation measures
  • has introduced monitoring and external reporting.
• In contrast to Sedex, EcoVadis evaluates all four sustainability topics (environment, labour and human rights, sustainable procurement or supply chain, ethics or compliance) with the same focus.
• As a company, you are either asked by your customers to undergo an EcoVadis assessment or you do it voluntarily as a check and external recognition of your sustainability status as a company. The assessment consists of a questionnaire tailored to the industry and the size of the company.
• Since its inception in 2007, EcoVadis has become the world’s largest provider of corporate sustainability ratings, creating a global network of more than 75,000 rated companies. The fee-based service was originally developed for corporate procurement teams to assess the ESG performance of suppliers.

 

With EcoVadis, it is important to understand the evaluation mechanisms and avoid formal pitfalls in terms of quantity, quality and design of the documents to be uploaded. Because that will result in points being deducted!

 

SEDEX

The second standard rating for the packaging industry is Sedex.

• Sedex was founded in 2005 with a focus on improving working conditions in global supply chains. Environmental aspects and a stronger focus on necessary management structures were then added over time. Therefore, particular attention is paid to the Sedex rating in the supply chains of the food and textile industries. In these industries, public discussions about working conditions have come comparatively much earlier and more strongly into focus.
• Sedex also applies a clear risk management principle in the analysis of company information. So here, too, it is examined whether the company is
  • Risks identified and prioritised
  • o has entered into public commitments
  • Created guidelines or policies and set up implementation plans or strategies including targets & KPIs.
  • implements implementation measures
  • has introduced monitoring and external reporting.
• For the rating, companies “have” to become members of Sedex. So you are not just buying a service.
• Also at Sedex, most companies are asked by customers to prove it. The verification process at Sedex consists of two steps:
  1. via a Self Assessment Questionnaire (SAQ), which is mandatory to submit as the first step (companies can also do this step voluntarily without a SMETA audit following).
  2. as well as via an audit requested by the customer according to the Sedex Audit Method SMETA. SMETA contains criteria for each of the four fields under consideration: labor, health and safety, environment and business ethics. In contrast to EcoVadis, a company can also demonstrate its Sedex compliance via a third-party audit.
• Unlike EcoVadis, Sedex does not have a bronze, silver or gold rating. Instead, a score is determined based on the company’s performance against the Sedex criteria.
• Sedex is now one of the world’s leading membership organisations for ethical trade and works with 60,000 companies.

 

In principle, Sedex and EcoVadis are often considered equivalent. So if a client asks for Sedex and you can present EcoVadis, this is accepted in most cases. From B+P Consultants’ point of view, EcoVadis covers ESG topics more comprehensively, only in supply chains with a high risk or strong awareness in the area of labor and human rights Sedex, including a SMETA audit, is the more adequate tool.

 

CDP

The Carbon Disclosure Project (CDP) is a younger representative in the arena of ESG ratings and is now being requested more and more frequently by customers.

• CDP was founded in 2002 and is a non-profit organisation based in the UK. It operates CDP as a global disclosure system for investors and companies, but also for states, regions and cities. Started with a focus on energy and greenhouse gas balance, water use and deforestation risks were later added.
• Companies submit their information via special questionnaires of the CDP Climate, CDP Water, CDP Supply Chain and CDP Forest platforms. Only one or more questionnaires can be submitted. This means that as a company, you decide yourself (or are requested to do so by your customer) in which areas disclosure is made.
• The data submitted is evaluated by CDP according to a sophisticated method and differentiated according to industry and size. The score hierarchy has four levels, each with two sublevels:
  • D: Disclosure. The company has responded to the request for a report.
  • C: Awareness
  • B: Management
  • A: Leadership

Out of 9,000 companies that reported in 2020 in the area of climate, only 277 were able to achieve the highest level A.

• If the reporting is carried out as a result of a customer or investor request, the service is free of charge for the requesting company. If the reporting is done on the company’s own initiative, a fee will be charged.

 

CDP is not a substitute for EcoVadis or Sedex. It clearly focuses on the E in ESG. However, a CDP report is credited very positively by both EcoVadis and Sedex.

 

Where the rating pressure comes from and how to react.

When an ESG rating is due, the pressure usually comes from brands or consumer facing companies. They may, for example, have issued a climate statement and must now include their supply chains in the disclosure obligation. There is no other way for them to present and make transparent the emission values of their supply chain (Scope 3).

The public, media and regulators are putting on the pressure. Legal requirements such as the Supply Chain Duty of Care Act passed by the Bundestag on June 11 (be curious – we will report on this in our next newsletter) are demanding more and more transparency in supply chains. In times of the sustainability revolution, it is therefore not surprising that the “untested” self-disclosure is no longer sufficient. In the past, customer inquiries in which a customer specifically asked for compliance with formalized ratings and rankings were sometimes successfully ignored and sat out. But those days are over.

 

EcoVadis, Sedex and increasingly CDP are becoming mandatory for companies. This should not be taken lightly. And it should not be put on the back burner, because the preparatory work is extensive. It’s good to know that you have an experienced and convinced partner at your side. We support you pragmatically not only with EvoVadis and/or Sedex, but also with CDP and the creation of a climate strategy.