Aïssata Coulibaly, audit partner at Deloitte Luxembourg, provides a deep dive into the evolving landscape of environmental, social and governance (ESG) standards. She addresses the complexity of multiple reporting frameworks and the necessity of accurate data collection, outlining how companies can navigate these challenges and gain advantages from robust ESG practices, such as enhanced financial stability and increased investment appeal, while also emphasising the importance of governance and strategic integration in achieving long-term success.
ESG standards
The journey towards ESG compliance is fraught with challenges, mainly due to the fragmented nature of reporting frameworks. Coulibaly noted that the sheer variety of ESG standards often prompts companies to ask, “Which one?” The absence of a universal standard forces companies to navigate a landscape of both mandatory and voluntary frameworks. In the EU, regulations such as the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD) impose obligatory requirements, while voluntary codes like the International Financial Reporting Standards (IFRS S1/S2), Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD) offer alternative guidelines. This multiplicity can be overwhelming, especially for companies with diverse portfolios spanning multiple sectors and regions, each with different ESG focuses. “This makes it difficult for companies to determine which one best aligns with their goals and stakeholders’ expectations,” reasons Coulibaly.
Moreover, “gathering accurate and complete ESG data is another hurdle.” Effective ESG reporting demands robust data management systems and advanced technology to ensure the integrity and completeness of data. This is especially critical for private equity funds, which face difficulties in gathering and verifying ESG data during due diligence processes. Coulibaly points out that regulations like SFDR create additional complexity due to the absence of a consensus on what constitutes comprehensive ESG data. Although the CSRD could potentially serve as a valuable data source for principal adverse impacts (PAI) reporting under SFDR, “ESG reporting for the CSRD is not required until 2025,” adds Coulibaly.
ESG data credibility and accuracy
To ensure the credibility and accuracy of ESG data, Coulibaly underscores the need for “transparent methodologies and robust processes.” This includes “thoroughly documenting everything to ensure transparency and build trust among stakeholders.” Technology--particularly advanced software solutions and analytics--plays a crucial role, improving data accuracy by reducing human error through automated ESG reporting tools.
In addition, “engaging an independent third-party such as the fund’s external auditor--to review and validate ESG data methodologies, processes and controls--adds an extra layer of credibility,” she says. “This can be achieved through limited assurance on selected ESG key performance indicators (KPIs), PAIs, or the use of proceeds from green bonds, which reduces the risk of greenwashing accusations.”
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ESG compliance is increasingly recognised for its positive impact on corporate financial performance and market valuation, says Coulibaly. “There is a clear positive impact with ESG compliance, as it helps companies achieve more stable cash flows and reduced volatility by identifying and managing risks. Additionally, companies with strong ESG practices often attract more investment, especially from institutional investors focused on responsible investing driven by client interest or regulatory pressure.” Research shows that firms integrating ESG principles often outperform their peers over the long term due to sustainable practices and better governance.
ESG regulations
Coulibaly highlighted several benefits of aligning with ESG regulations. Recent changes in global sustainability reporting, such as the CSRD, European Sustainability Reporting Standards and the Taskforce on Nature-related Financial Disclosures (TNFD), signal significant regulatory evolution. Referring to the Deloitte 2024 sustainability action report, Coulibaly notes, “Based on the survey of 300 executives from large publicly owned companies, the report reveals that 20% of companies expect enhanced ESG reporting to improve the brand’s reputation, 15% expect better talent attraction and 14% anticipate pricing premiums for their products.” She adds, “Internally, 51% of companies foresee benefits like improved operational efficiencies, risk reduction and strengthened stakeholder trust.” Aligning with ESG regulations also helps firms and funds stay ahead of market trends and investor expectations.
“Another important aspect is that ESG factors help investors assess risks and returns more accurately, which helps them make better decisions. Companies adhering to ESG regulations are often seen as more sustainable and ethical, which attracts long-term and responsible investments.” Furthermore, “ESG regulations help stabilise financial markets by including long-term risks, such as climate change and social upheavals, in their risk management frameworks. Consequently, companies can avoid potential financial losses and reputational damage. ESG rules also promote coherence and comparability across institutions and geographies. Essentially, these regulatory and policy guidelines help align financial institutions’ practices with broader sustainability goals, aiding the transition to sustainable finance and green lending solutions.”
Value creation
European and international ESG rules foster a sustainable business ecosystem where responsible management, innovation and risk mitigation drive value for both companies and investors, according to Coulibaly. For companies, ESG compliance enhances capital access, boosts reputation and increases brand value.
For investors, “ESG-compliant companies are often better positioned for long-term financial performance, offering sustainable and resilient growth,” while mitigating environmental, social and governance risks. “ESG alignment also helps investors avoid regulatory penalties by aligning their portfolios with ESG standards and meeting emerging global regulations.” She notes that growing demand for ESG investments drives value creation and attracts increased fund inflows. Investors can leverage their influence to drive positive change in companies’ ESG practices, leading to improved corporate behaviour and performance, and ultimately better investment returns.
Aligning ESG principles with the company’s core values and mission ensures authenticity and ease of implementation
Companies can leverage ESG reporting to gain a competitive edge in the global market by integrating ESG factors into their core strategies and reporting progress diligently. Coulibaly argues, “Strong ESG practices attract investors who value sustainability and ethical behaviour, while also demonstrating effective risk management, and its initiatives can also improve operational efficiency through better resource use and drive innovation, leading to cost savings and new opportunities.”
By adopting a long-term perspective, companies can future-proof their operations and engage meaningfully with stakeholders, supporting “both immediate business goals and long-term resilience, enhancing competitiveness and positioning in the global market.”
Successful ESG integration
Successful integration of ESG principles into business models involves several key strategies. “Aligning ESG principles with the company’s core values and mission ensures authenticity and ease of implementation,” Coulibaly notes. She highlights that companies effectively integrating ESG principles benefit from strong top leadership commitment, stating, “when the board and C-suite executives fully support ESG principles, these become ingrained in the corporate culture and decision-making processes.”
Moreover, integrating ESG into the overall business strategy rather than treating it as an add-on “ensures that sustainability is considered in every business decision and operation, promoting long-term thinking rather than short-term gains.” And importantly, “continuous improvement is the key.” Successful companies continuously assess and improve their ESG initiatives, adapting to new challenges, opportunities and stakeholder expectations, advises Coulibaly.
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Integrating ESG considerations into corporate governance involves several key strategies. Establishing a dedicated ESG committee and providing ongoing education for board members are essential. Setting clear ESG goals, developing KPIs and linking ESG metrics to executive compensation “ensures that everyone is accountable.” Incorporating ESG risks into risk management and using standardised reporting frameworks, such as GRI or TCFD, enhances transparency.
Future of ESG regulations
Looking ahead, “we anticipate that ESG regulations will become stricter due to climate change, social issues and governance challenges.” While global standards may simplify compliance for multinationals, integrating ESG into core operations will remain challenging. Adapting to these regulations can offer a competitive edge by attracting investors and customers, whereas non-compliance risks damaging reputations.
To navigate these changes, companies should stay informed about evolving standards, embed ESG into their strategies, leverage technology for ESG management, engage stakeholders and ensure data credibility, advises Coulibaly. She stresses that “building in-house ESG expertise is crucial for long-term success and value creation.”
This article originally appeared in the on private market funds and Luxembourg’s fund ecosystem