The underestimated power: ESG ratings and EU taxonomy regulation

Investors and regulators are increasing the pressure on sustainability. Environmental Social Governance (ESG) ratings and the new EU taxonomy regulation are becoming key factors in the allocation of funds and contracts. The availability of data on production processes and supply chains is thus also becoming a guideline for corporate success in the packaging industry. In a two-part series, we show what is behind the development, what the future holds, and how to prepare.

 

If you want to attract investors to your company in the future, raise money on the financial market or generate orders as a supplier, you have to be prepared for changed framework conditions. Because without the transparent presentation of a good sustainability performance, these opportunities will remain unavailable.

The reason for this is parallel developments in regulators and financial markets that are increasingly making sustainability measurable and decisive. On the one hand, the increasing need for society and politics to experience sustainability not as a voluntary add-on but as an inherent part of a product, and on the other hand, the growing market for green finance is eagerly seeking for the new possibilities of sustainability ratings. Central to this development are ESG ratings and the EU taxonomy coming into force on January 1, 2022.


ESG ratings

ESG ratings are an attempt to objectively assess a company’s commitment to sustainable business practices. They assess environmental, social and corporate governance.

  • The relevant factors are weighted differently depending on the industry and focus on the most relevant and material aspects in each case.
  • The use of ESG ratings is becoming increasingly prevalent. There are now already around 150 specialized agencies worldwide, such as CDP, MSCI ESG Rating, SEDEX, EcoVadis, RobecoSAM & S&P Global ESG Score and Sustainalytics ESG Risk Rating.
  • The origins of ESG ratings go back to 2005, when then-UN Secretary General Kofi Annan initiated the establishment of principles for responsible investment. Among other things, the signatories of the “UN Principles for Responsible Investment” made a voluntary and non-binding commitment to respect ESG criteria as guiding principles for their investment decisions, to actively engage as shareholders, and to enforce transparency with regard to ESG issues.


EU taxonomy

The aim of the EU taxonomy framework is to establish benchmarks for environmentally sustainable investments. This is intended to channel financial flows into the area of sustainable technologies and companies.

  • The corresponding Regulation (EU) 2020/852 was adopted by the Council and Parliament of the EU on 22 June 2020 and will apply from 1 January 2022.
  • The framework is part of the implementation of the Sustainable Growth Financing Action Plan. At the same time, it pays towards the implementation of the EU’s goal of climate neutrality by 2050.
  • For the first time, the classification system is intended to create a standardized understanding of the sustainability of economic activities in the EU. For this purpose, the EU taxonomy includes six environmental objectives:
    • Climate protection
    • Adaptation to climate change
    • Sustainable use of water resources
    • Change to a circular economy
    • Prevention of pollution
    • Protection of ecosystems and biodiversity
  • The key point: Under the framework, all economic activities are divided into assessment categories ranging from environmentally friendly to transitional to non-sustainable.

 

Companies in the pillory

The sign could hardly be much clearer: The world’s largest asset manager Blackrock publicly pilloried 244 companies in the summer of 2020. They were criticized for insufficient progress in climate protection.

In 53 cases, Blackrock even refused to approve individual members of the supervisory board or the entire board. The asset manager placed the remaining 191 companies on a negative watchlist and announced a negative vote against the company’s management in the event of a lack of significant progress in sustainability in 2021.

German flagship companies such as Siemens, Uniper, Mercedes Benz, Lufthansa and HeidelbergCement are also affected.

 

The new power

In the future, there will be no way around providing detailed data on production processes and supply chains. New money from the capital market, reporting to investors, winning new customers or orders – all this will depend on good corporate performance in terms of ESG criteria. Already now, corresponding ratings are a mandatory criterion in certain areas in order to master market entry as a supplier.

The importance of ESG ratings is still too often underestimated in the industry. Yet, without any doubt, they are a new power in terms of corporate success. Driven by increasing regulatory pressure from the EU and the financial market’s search for new opportunities in the area of green finance, they are becoming a driver or obstacle for companies.

 

The right rating for my company

As mentioned earlier, the different ESG factors are weighted differently depending on the industry. They focus on those aspects that have the greatest relevance and significance for the respective industry – and accordingly result in different ratings.

 

In the second part of our series, we present the most relevant ratings for the packaging industry and outline how you can succeed as a company.

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