PoolParty Lifesaver: If you’re not ESG-ing? What are you doing?

ESG – heard of it?

Let’s refresh your memory – ESG is an acronym that stands for Environmental, Social, and Governance. Starting to ring a bell?

Though not a new idea, ESG has been gaining attention in recent years as consumers and corporations are looking to be more environmentally conscious, socially responsible, and governance compliant. That being said, ESG is far more than just an idea, it is a structured framework encompassing three core pillars (Environmental – Social – Governance) that serve as guiding beacons for companies in their reporting endeavours. Ultimately, ESG aims to uncover and address the non-financial risks and opportunities intertwined within a company’s daily operations.

Source: HOLDING REDLICH

These are pretty broad pillars, so what exactly falls under each pillar? Deloitte identifies the following for each pillar:

What falls under the Environmental Pillar?

Emissions such as greenhouse gases and air, water and ground pollution emissions. Resources use such as whether a company uses virgin or recycled materials in its production processes and how a company ensures that from cradle to grave the maximum material in their product is cycled back into the economy rather than ending up in a landfill. Similarly, companies are expected to be good stewards of water resources. Land use concerns like deforestation and biodiversity disclosures also fall under the Environmental Pillar. Companies also report on positive sustainability impacts they might have, which may translate into long-term business advantage. From a reporting perspective this is the most complex pillar.

 

What falls under the Social Pillar?

Under the Social Pillar companies report on how they manage their employee development and labour practices. They report on product liabilities regarding the safety and quality of their product. They also report on their supply chain labour and health and safety standards and controversial sourcing issues. Where relevant companies are expected to report on how they provide access to their products and services to underprivileged social groups.

 

What falls under the Governance Pillar?

The main issues reported under the Governance Pillar are shareholders rights, board diversity, how executives are compensated and how their compensation is aligned with the company’s sustainability performance. It also includes matters of corporate behaviour such as anti-competitive practices and corruption.

Source: Deloitte (2022)

During the PoolParty Summit 2024, we had the privilege of hosting a dynamic panel of ESG experts who shared invaluable insights on Mitigating ESG Risks with Reliable Data and AI. The full panel featured industry experts including:

• • • Nathalie Ghorayeb, ESG Business Developer at Semantic Web Company
    • Armand Colard, CEO of ESG Plus GmbH
    • Josef Baumüller, University Lecturer and Researcher at TU Wien
    • Tassilo Pellegrini, Professor at the Department of Digital Business & Innovation at St. Pölten University of Applied Sciences

These experts delved into sustainability, finance, and technology, offering unique perspectives on ESG topics and the benefits of implementing AI-driven sustainability strategies. Let’s dive into the key takeaways from this insightful roundtable discussion.

What is ESG?

Environmental, Social, and Governance (ESG) is a framework for assessing the impact of an organization on the environment and society. It is closely related to sustainability, which aims to create a world that is livable for future generations. ESG is a measuring tool with reporting and accounting standards that help address sustainability and contribute to its development.

The term ESG was coined by the financial sector about twenty years ago to predict share prices by including non-financial factors. ESG helps investors ensure profitability and business survival by addressing sustainability. ESG also holds management and supervisory board members accountable for their competencies, due diligence processes, and responsibilities.

From a business perspective, ESG indicators measure progress towards sustainability goals. Investors use ESG data to decarbonize portfolios and reduce market shock vulnerability. Companies use ESG data to manage operational costs and impact on net profits. The concept of double materiality assessment considers how society impacts a company and how the company impacts society.

The reason for ESG and sustainability is the need to address severe crises facing society. While awareness of ESG is important, there is a need to move beyond awareness and implement effective measures quickly. There is no common definition of ESG, with individual views varying widely. Institutionally, ESG has been approached with a best-in-class method, focusing on the most sustainable investments within a sector.

ESG is about managing risks associated with regulations and laws and understanding the impact of a company or state. It is a tool for addressing sustainability and creating a better world for future generations. However, there is a need to move beyond discussion and implement effective measures quickly to address the crises facing society.

How do ESG regulations and the idea of being compliant have and impact on corporate financials? Also, how does it impact investors?

Corporate financials benefit from complying with regulations in several ways. Compliance, whether voluntary or non-voluntary, provides access to liquidity, better operational conditions, improved reputation, reduced risk, and reputational damage control. The impact on financials can be seen from a company’s perspective in cost savings, revenue generation, risk management, and investment performance.

For example, consider operational expenditures. Investing in assets or companies exposed to high emissions can affect insurance costs. Companies should examine their expenses, assets, liabilities, and revenue generation. Changing consumption habits show a growing demand for sustainable and environmentally friendly products. Meeting this demand is essential to avoid reducing the consumer base and impacting revenue.

Risk management is also crucial. Compliance with ESG aspects can reduce the cost of risk and lead to better insurance conditions. From an investment perspective, investors need to present an ESG story, which is interconnected with the instrument they are selling. Compliant companies can attract liquidity, leading to lower yields and better financial performance.

In Europe, the market-based approach is complemented by regulatory drivers. The Corporate Sustainability Due Diligence Directive (CSDDD) forces companies to comply with certain ESG aspects, imposing high financial fees and legal risks for noncompliance. The EU taxonomy focuses on six environmental goals, making it harder for corporations and the financial sector to be noncompliant.

Banks need to get their green asset ratios in place, investing in activities that address at least one of the six environmental objectives. Companies seeking capital through banks must address these objectives to be included in the green asset ratio. The Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Due Diligence Directive (CSDDD) also make it harder to be noncompliant within the supply chain, particularly with human rights issues.

In summary, it is becoming increasingly challenging for corporations and the financial sector to be noncompliant with ESG regulations. Compliance provides market advantages, better financial performance, and reduced risk, while noncompliance results in penalties and limitations in accessing capital.

What is a key element to a successful sustainability strategy within an organization? What should an organization have in place to get it right?

Tassilo Pellegrini discussed two approaches to an ESG strategy: corporate governance and cleaner production. Corporate governance entails creating a responsible environment, complying with transparency and reporting regulations, and considering stakeholders. Cleaner production involves changing structures to reduce pollution and resource usage, particularly for manufacturing companies. Both perspectives are crucial for corporations and SMEs alike.

However, these perspectives are not well-intertwined in regulation development. Tassilo illustrated this issue using the EcoDesign Regulation and the Corporate Sustainability Reporting Directive (CSRD), which are developed independently despite affecting similar ESG aspects.

Nathalie Ghorayeb took a business approach to ESG strategy, emphasizing measurability. She suggests first measuring environmental impact, focusing on greenhouse gas emissions, and working towards the 2018 Paris Agreement’s goal of reducing emissions by 45% by 2030. Nathalie also highlights the importance of benchmarking, learning from listed companies of various sizes, and involving employees and upper management in ESG efforts.

Josef Baumueller emphasized stakeholder engagement, moving beyond employees to include affected communities, suppliers, customers, and workforce. He stresses the importance of impact materiality, even if it’s difficult to measure, and the necessity of a culture shift towards stakeholder value within organizations.

In summary, an effective ESG strategy requires a balance of corporate governance and cleaner production, with a focus on measurable environmental impact, benchmarking, and stakeholder engagement. Achieving this strategy also involves a cultural shift within organizations towards stakeholder value.

Source: EUROPEAN COMMISSION (X)

What are some tips for getting rid of resistance to change, to sustainability, to ESG?

ESG is a structural transformation with culture playing a crucial role, according to Tassilo Pellegrini. He emphasized that top management should prioritize ESG over other corporate matters. To implement ESG goals, he suggests establishing channels between different departments to transcend silos and ensure that everyone can contribute in their unique ways.

Armand Colard stressed the importance of C-level commitment to ESG goals. He proposed tying executive remuneration to ESG performance and highlighting successful ESG stories within companies to demonstrate their commitment and leadership.

Nathalie Ghorayeb noted the importance of financial benefits in ESG implementation. She recommended having a clear ESG strategy, linking non-financial and financial aspects, and setting data goals using artificial intelligence to address the lack of social data.

Josef Baumueller agreed with the importance of top management commitment and remuneration systems. However, he also highlights the challenges of ESG backlash and the need to communicate the positive aspects of ESG to a broader audience, avoiding elitism and ensuring inclusivity.

We do find that there are headaches with data – how can people overcome these data obstacles?

Tassilo Pellegrini discussed the role of digital technologies in clean production policies, highlighting structural challenges for small and medium-sized enterprises (SMEs) in implementing data management systems. He emphasized the need for increased digital literacy and cultural techniques to meet regulatory requirements, such as a digital product passport. Armand Colard described the ESG data world as oligopolistic, with two or three major players dominating the market. He suggested the need for a single access point for Corporate Sustainability Reporting Directive (CSRD) relevant data, which could be provided by the EU. Colard also highlights the differences in ESG definitions and ratings among companies, making it difficult to reach a consensus.

Josef Baumueller emphasized the importance of considering the users of ESG data, including civil society, employees, and consumers. Discussing the need to educate users on how to use the data responsibly and be aware of its limitations. Baumueller also highlights the European single access point as part of the Capital Markets Union (CMU) plan, which aims to support a green economy and make the EU more accessible for long-term investing. He stresses the importance of standardization and data comparability, which can be facilitated by AI.

In summary, the speakers discussed the need for increased digital literacy, a single access point for CSRD relevant data, consensus on ESG definitions and ratings, education for users of ESG data, and standardization and data comparability for better investment opportunities.

Where do you see the future of ESG?

Tassilo Pellegrini expressed concern about the future of ESG, stating we have a choice between transforming by design or disaster, as “physics doesn’t negotiate.” Nathalie Ghorayeb expressed her belief that efforts are present but not on target, calling for standardization, increased involvement from countries like the United States, and better coordination for a global economy.

Josef Baumueller, while acknowledging the gravity of the situation, highlighted positive developments, such as the passing of the CSDDD in Europe and China’s introduction of a double maturity framework. He sees these as a good starting point for progress.

Armand Colard took an optimistic view, praising the EU taxonomy as a powerful tool for greening financial flows. Finding it remarkable that such regulatory measures are in place today, considering the state of ESG 15 or 20 years ago. Colard has a positive outlook for the next five to ten years, especially if (half jokingly) the United States becomes involved.

During this roundtable discussion the experts made mention of many directives, protocols, legislation, and acronyms. This can be a dizzying amount of legislation to follow. Below, you’ll find a quick overview of some of the mentioned legislation during the roundtable that we think you should know (a bit) about.

EcoDesign Directive

This proposal introduces a structured framework to establish ecodesign requirements for specific product groups, aiming to enhance their circularity, energy efficiency, and overall environmental sustainability. It facilitates the definition of performance and information criteria for nearly all types of physical goods available in the EU market as outlined in Regulation 178/2002. Additionally, for product groups sharing common characteristics, the framework allows for the implementation of overarching rules.

The framework enables the establishment of a diverse set of requirements, including:

• • • product durability, reusability, upgradability and reparability
    • presence of substances that inhibit circularity
    • energy and resource efficiency
    • recycled content
    • remanufacturing and recycling
    • carbon and environmental footprints
    • information requirements, including a Digital Product Passport

The Ecodesign Directive has been in place since October 21, 2009 with a new Ecodesign for Sustainable Products Regulation (ESPR) drafted on March 30, 2022.

Digital Product Passport 

The innovative “Digital Product Passport” is designed to offer detailed insights into the environmental sustainability of products. By simply scanning a data carrier, consumers and businesses can access information on attributes like durability, reparability, recycled content, and spare parts availability. This tool aims to empower decision-making, support repair and recycling efforts, enhance transparency on products’ environmental impacts, and assist public authorities in conducting checks and controls more effectively.

Although there is much discussion about a Digital Product Passport or DPP there is still plenty of work that needs to be done in order to make this become a reality. In “The EU Digital Product Passport shapes the future of value chains: What it is and how to prepare now”, published by The World Business Council for Sustainable Development (WBCSD) and the Boston Consulting Group (BCG), they outline these key steps needed in order to materliaze a DPP:

1. 1. 1. Engaging in shaping the emerging DPP regulation 
      2. Assessing the company’s current data availability and starting to fill the gaps 
      3. Enabling the organization across departments to adapt to the coming DPP implementation
      4. Planning for changes in the tech setup

Corporate Sustainability Reporting Directive

According to European Union regulations, major corporations and publicly listed companies (excluding micro-enterprises) must divulge details regarding the risks and opportunities linked to societal and environmental matters, as well as the effects of their operations on individuals and the ecosystem.

As of January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) has come into effect, introducing updates and enhancements to the regulations surrounding the disclosure of social and environmental data by companies. This directive expands the scope to include a wider range of large corporations and listed SMEs who must now report on their sustainability efforts. Additionally, non-EU companies will be obligated to report if their activities on the EU market that exceed 150 million euros.

The implementation of these new guidelines will grant investors and stakeholders access to vital information necessary for evaluating companies’ impact on both society and the environment. Additionally, it will support investors in assessing financial risks and opportunities linked to climate change and sustainability issues. Ultimately, companies can expect reduced reporting costs in the long run as the data provided becomes more standardized and streamlined.

Corporate Sustainability Due Diligence Directive

Adopted by the EU parliament in April 2024, the Corporate Sustainability Due Diligence Directive or CSDDD, has the objective of promoting sustainable and ethical corporate practices, incorporating human rights and environmental factors into companies’ operations and governance. These new regulations will require businesses to address the negative effects of their actions, both within and beyond Europe’s value chains.

The directive establishes a corporate due diligence duty – key responsibilities include addressing negative impacts on human rights and the environment, ensuring business strategies align with limiting global warming to 1.5°C, and incentivizing directors to support sustainability and climate goals. 

Additionally, the directive introduces duties for the directors of EU companies – these duties encompass setting up and supervising due diligence procedures, seamlessly integrating them into the company’s strategic framework. Moreover, when directors fulfill their obligation to act in the company’s best interests, they must consider the impact on human rights, climate change, and the environment in their decision-making process.

Capital Markets Union

Seen as an action plan for people and businesses, he primary goal of the Capital Markets Union (CMU) is to facilitate the flow of investments and savings across the EU, benefiting consumers, investors, and companies regardless of their location.

Despite some progress since its launch in 2015, EU capital markets still face fragmentation, limiting the full potential of offering deep, competitive, efficient, and reliable funding sources. Now more than ever, a robust and comprehensive CMU is crucial to aid in the economic recovery post-COVID-19, support green and digital transitions, and foster a more inclusive and resilient society. Integrated capital markets are essential for the EU’s global competitiveness and autonomy, addressing challenges posed by an aging population along the way.

The CMU action plan is comprised of 16 actions, both legislative and non-legislative, that span thee key objectives, which are: 

1. 1. 1. Support a green, digital, inclusive and resilient economic recovery by making financing more accessible to European companies
      2. Make the EU an even safer place for individuals to save and invest long-term
      3. Integrate national capital markets into a genuine single market

European Single Access Point

The financial services sector under EU legislation mandates companies to disclose a plethora of documents, specifics, and datasets to enhance transparency and diminish information imbalances. These datasets encompass aspects like an entity’s financial performance, environmental impact, social responsibilities, governance practices, as well as the products and services they offer.

On November 25th 2021, the European Commission approved a legislative draft regarding the European Single Access Point (ESAP). ESAP is designed to serve as a centralized platform for disseminating public financial and sustainability-related information about EU enterprises and investment products.

This initiative aims to boost companies’ visibility among investors, thereby unlocking additional avenues for financial support. Particularly beneficial for small businesses operating in compact capital markets, this move will elevate their presence on the radars of both EU and global investors.

Furthermore, ESAP will host sustainability-focused data shared by companies, aligning with the objectives of the European Green Deal. As a unified data hub, ESAP plays a pivotal role as a cornerstone for the EU’s Digital Strategy and Digital Finance Strategy.

We should have a good grasp on the whole “ESG” thing now – but how exactly can we put this to good use in our enterprises? How do we get started? What makes the most sense? Is this something that needs to be done? 

How to Start the ESG Journey within your Enterprise

Luckily, Recommendations for a Sustainable Enterprise presented by Lorenzo Tosi, ESG Solutions Engineer, and Daniel Gallar, Associate Director of Sales, at the PoolParty Summit 2024 had some great advice on how to begin the ESG journey in your company.

Focusing their talk on the new features of the PoolParty Recommender System, they presented the PoolParty Application Development Framework (ADF). The PoolParty ADF offers a cutting-edge, low-code solution for developing applications within the PoolParty Semantic Suite. Whether you choose to utilize pre-programmed applications or craft your own, the PoolParty ADF serves as the foundation for creating customizable and executable software. With its innovative architectural approach, development philosophy, and integrated solutions, the PoolParty ADF streamlines the process of tackling common tasks and routines for application development.

Leveraging the power and adaptability of PoolParty middleware components, PoolParty ADF empowers you to effortlessly create user-friendly interfaces, dynamic workbenches, interactive dashboards, and seamless connectors to external systems. Whether you opt for a  pre-built solutions or prefer to customize your own, PoolParty ADF simplifies the development process. Simply configure the ready-made options with a few clicks, or delve into programming with React and JavaScript to craft a unique solution.

The PoolParty ADF now includes the Recommender Workbench and is built on top of the PoolParty Semantic Suite, our flagship product for over 20 years. Utilising LLMs (Latent Dirichlet Allocation models) in the PoolParty Semantic Suite we can create more sophisticated knowledge models. In turn, the knowledge models ensure LLMs provide accurate and sourceable answers. This creates a type of circular symbiotic relationship between data to help continuously improve results.

PoolParty is a reliable and trustworthy AI system that provides solutions for business critical decision making, including regulated industries and sophisticated domains like ESG. PoolParty Recommender Systems excel in tailoring to specific domains and applications, ensuring precise and effective results without any filtering blind spots. By harnessing the adaptable architecture of PoolParty, we seamlessly integrate knowledge graph entities with advanced statistical AI models like ML and LLMs, merging the best of both worlds for enhanced capabilities.

PoolParty Recommender Systems follow a knowledge-based approach with clearly defined step-by-step explainable and transparent logic. The user submits the query (1), which consists of a sentence, a paragraph, a section, or an entire document. The text passes through the text annotation component (2) and receives its semantic footprint (3). The subsequent query expansion (4) is a traceable intervention in recommendation depth and recommendation sharpness. The matches found (5) thus contain both the implicit knowledge of the domain model and the query-specific adjustments. The finally obtained recommendation (6) is clearly traceable and controlled.

Traceable recommendation workflow of the PoolParty recommendation system

The ADF includes the PoolParty Recommender Workbench, where recommendation systems are configured. An inquiry is annotated with concepts based on the knowledge model, and semantic expansion is used to provide more relevant and well-rounded answers. The end result is tailored and explainable answers.

The PoolParty Recommender Workbench allows users to create their own possible semantic expansions and recommendations. It is highly configurable and customizable, and comes with a set of APIs that can be connected to the front end. The PoolParty Recommender Workbench interface allows users to experiment with different semantic expansions in a worry-free test environment.

In short, PoolParty Recommender System and the PoolParty ADF provide reliable and accurate recommendations using knowledge graphs and LLMs. The PoolParty Recommender Workbench allows users to create their own semantic expansions and recommendations, providing tailored and explainable answers.

We hope you’ve enjoyed this installment of the PoolParty Lifesaver series that took a closer look at ESG at the PoolParty Summit 2024 – inpsiring you to start your sustainability journey by incoporating this framework in your enterprises with the use of LLMs, knowledge graphs, and recommender systems. Keep your eyes peeled for these and other emerging technologies in the media, in your inbox, and around the  office water cooler – you never know when they will come handy. 

If you liked this blog, and want to keep up to date, click the join mailing list button below and you’ll get a notification right in your inbox when a new installment of the PoolParty Lifesaver is available. 

Sources:

Proposal for Ecodesign for Sustainable Products Regulation, European Commission (2022)

Ecodesign for Sustainable Products Regulation, European Commission (2024)

Corporate sustainability due diligence, European Commission (2022)

The EU Digital Product Passpot shapes the future of value chains: What it is and how to prepare now, WBCSD and BCG (2022)

Capital markets union 2020 action plan: A capital markets union for people and businesses, European Commission (2020)

European Single Access Point, In “An Economy that Works for People”, Stefano Spinaci (2024)

#1 What is ESG, Deloitte (2022)

Corporate sustainability reporting, European Commission (2024)