Sustainability is becoming a crucial goal for companies globally. The introduction of regulations and policies, both national and international, is guiding companies toward a path that aims to integrate sustainability into their operations. This process involves not only managing environmental impact but also social responsibility and governance (the so-called ESG principles: Environmental, Social, and Governance). In this article, we will explore the main guidelines for companies looking to embark on this journey, analyzing the most relevant regulations and best practices that companies can adopt to comply with ESG obligations.
To best address this topic, we decided to involve a professional in the field, Dr. Giovanna Villa, a chartered accountant and legal auditor with over 20 years of experience. A graduate of Bocconi University, she worked at PwC and listed companies, holding positions as a statutory auditor and member of supervisory bodies. She is currently a member of the control bodies of companies such as Lenovo Italy, KME Group, and Pirelli Information Systems. Since 2022, she has been focusing on ESG and reporting for SMEs.
ESG guidelines for businesses
The concept of ESG is now at the forefront for companies, as it represents an integrated approach to sustainability. Companies must adopt policies that promote environmental sustainability (E), respect for human rights and social well-being (S), and transparent and responsible governance (G). This approach involves a series of measures ranging from managing natural resources and carbon footprint to managing human resources and diversity, as well as transparency in business operations and decision-making processes.
Who is the ESG path aimed at?
The path toward ESG sustainability is primarily aimed at large companies but also at small and medium-sized enterprises (SMEs), though with different obligations.
- Large companies: According to Legislative Decree 254/2016, companies with more than 500 employees or with a turnover exceeding 20 million euros or assets of more than 2 million euros must comply with ESG reporting obligations. Starting with the introduction of the CSRD (Corporate Sustainability Reporting Directive) in 2022, even companies with 250 or more employees will be required to report their ESG performance.
- SMEs: SMEs that do not reach these thresholds are exempt from the reporting obligation but can still adopt frameworks such as LSME and VSME to integrate sustainability into their business without facing the bureaucratic burdens of large companies.
Thus, the ESG path is not limited only to multinationals but is also accessible to smaller entities, which can adopt simplified reporting methods, while still making a significant commitment to promoting sustainability.
From Legislative Decree 254/2016 to the EU Directive 2022/2464 CSRD
The path toward sustainability for Italian companies began with Legislative Decree 254/2016, which introduced the obligation for large companies to prepare a sustainability report. This obligation applies to companies with more than 500 employees and operating in certain sectors, and includes information not only on environmental aspects but also on social and governance issues. The decree thus initiated growing attention to ESG performance reporting.
In 2022, EU Directive 2022/2464, known as the CSRD (Corporate Sustainability Reporting Directive), further expanded reporting obligations. The CSRD broadens the type of companies that must provide ESG information, lowering the threshold from 500 employees to 250, and requires more detailed and standardized reporting compared to the past, covering the supply chain and introducing common reporting standards. The directive is part of a broader European plan to achieve sustainability goals set out in the European Green Deal.
LSME and VSME frameworks for smaller companies
Smaller businesses, namely small and medium-sized enterprises (SMEs), are generally excluded from the mandatory ESG reporting requirements due to their smaller structure. However, sustainability is becoming an increasingly relevant topic for these entities as well. To address this need, specific frameworks have been developed, such as LSME (Large Small and Medium Enterprises) and VSME (Very Small and Medium Enterprises), which offer simplified guidelines for ESG performance reporting.
These frameworks have been designed to allow even small businesses to enter the sustainability path, adopting simpler and less burdensome methodologies while still effectively ensuring accurate monitoring of business activities from an ESG perspective. This approach also facilitates SMEs’ access to green financing, which is increasingly demanded by financial institutions and investors.
European regulations on corporate due diligence: CSDDD
One of the most significant innovations in recent years is the introduction of the Corporate Sustainability Due Diligence Directive (CSDDD), a European regulation that requires companies to monitor and prevent risks related to human rights and the environment along their entire supply chain. The CSDDD requires companies to conduct due diligence to assess the environmental and social impacts of their activities and those of their suppliers, with the goal of preventing abuses such as forced labor, environmental damage, and other unethical practices.
The regulation introduces reporting obligations for companies regarding ESG risk management, requiring them to adopt preventive measures, intervene in cases of violations, and publicly communicate the actions taken. Companies must also ensure that their contracts with suppliers comply with ESG standards, increasing transparency and accountability throughout the supply chain.
The ESG reporting process
ESG reporting is the process through which companies provide information on their environmental, social, and governance impacts. This process is crucial for ensuring transparency and accountability toward investors, customers, employees, and other stakeholders. ESG reporting can follow several international standards, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-related Financial Disclosures (TCFD), which provide guidelines on how to report data consistently and comparably.
ESG reporting has become mandatory for many companies, as required by national and international regulations. Companies must integrate these reports with traditional financial statements so that investors can assess not only financial profitability but also the risks and opportunities related to sustainability. In the future, it is expected that ESG statements will become increasingly detailed, based on more precise measurements and higher-quality data.
3 Examples of companies that have embarked on the sustainability path
Many companies have already successfully embarked on the sustainability journey, implementing sustainability reports and achieving tangible results.
- Unilever: Unilever has long integrated ESG reporting into its operations, aiming to reduce its environmental footprint and promote responsible consumption practices. In 2020, the company achieved a 15% improvement in its sustainability performance compared to 2019, increasing sales of sustainable products and saving significantly on operational costs related to energy efficiency.
- Patagonia: The outdoor apparel company Patagonia has built its reputation on sustainability, reporting annually on its environmental and social impacts. Patagonia is one of the companies that has adopted B Corp principles, certifying its operations under strict sustainability standards. The results? A strong commitment to environmental protection and a loyal customer base that values its principles.
- Enel: Enel has been preparing sustainability reports for over a decade, receiving several accolades for its ESG commitments, particularly in the field of renewable energy. In 2020, Enel reduced CO2 emissions by 40% per MWh produced, and 55% of its energy production comes from renewable sources.
Conclusions: the future of sustainability for companies
The path to sustainability is an opportunity that companies can no longer ignore. With the introduction of regulations such as the CSRD and CSDDD, ESG reporting becomes a central commitment for all companies, not just large ones. Adopting best practices and implementing frameworks like those for SMEs (LSME and VSME) allows even smaller entities to participate in this transition. The path is not without challenges, but companies that take a serious and responsible approach to sustainability will benefit from competitive advantages, including access to new markets, consumer trust, and greater long-term resilience.
In summary, sustainability is no longer an option but a strategic necessity that companies must face with determination, following regulatory guidelines and integrating ESG principles into the heart of their operations.
