In board rooms in Europe, directors are seeing what still needs to be done to comply with the Corporate Sustainability Reporting Directive that centres around reporting on Environmental, Social and Governance (ESG).
ESG is a framework being used by companies and investors to evaluate the sustainability and ethical impact of a business. Listed companies on regulated markets will be reporting on ESG in their annual reports covering the financial year 2024.
Businesses are encouraged to improve their ethical standards by giving importance to factors beyond profit. There is a new focus on the impact of business on the environment, such as on energy use and resource conservation, as well as on social issues such as labour practices, human rights, employee diversity and inclusion, community engagement and consumer protection.
Strengthening governance by establishing structures and practices that ensure transparency, accountability and ethical business behaviour should improve the way business is conducted. It demands enhanced transparency and accountability, and engagement in professional risk management and internal controls that improve trust in shareholders and the community at large.
The demand for stricter regulations to environmental and social issues creates more value in the business in the long term as it boosts awareness of ethical behaviour in business leaders as they consider that their impact goes further than making profit.
Pope Francis has expressed support for the principles behind ESG, even if he does not refer to them by name. ESG reflects the values prioritised by Pope Francis on environmental protection, social justice and ethical governance. The encyclical Laudato Si’ focuses on the interdependence of social and environmental issues. The protection of the environment is a moral imperative and a responsibility shared by all. The encyclical has had a determining role in encouraging religious and secular organisations to consider environmental stewardship in their activities and investments. The Vatican changed its Investment Policy Statement to be aligned to ESG goals, with a clear commitment to investment strategies that promote human dignity, economic justice and the common good.
A Vatican document Mensuram Bonam, published in 2022 by the Pontifical Academy of Social Sciences guides investors to make wise and morally acceptable investment choices, and urges them to consider values that reflect Catholic Social Teaching when choosing businesses in which to invest. The values of social justice, respect for human dignity, and respect for the common good are underlying criteria in the selection of good business. Pope Francis in Laudato Si’ says: “Nobody is suggesting a return to the Stone Age, but we do need to slow down and look at reality in a different way… to recover the values and the great goals swept away by our restrained delusions of grandeur.” (114).
The effectiveness of ESG initiatives depends on the sincerity with which business leaders engage in this task of business renovation. Indeed, ESG can possibly improve the company’s ethics, but we cannot take this for granted. Greenwashing, portraying the company as more environmentally friendly than it really is, is already one factor that analysts are examining when looking into companies in which to invest. A genuine motivation and commitment to implement such policies is necessary to contribute to the common good.