Climate change, ESG criteria and recent regulation: challenges and opportunities

Abstract

The application of environmental, social and governance (ESG) criteria has now become a more than essential requirement in the financial world. Therefore, it is necessary to understand, select and assess the risks of these ESG criteria and evaluate how they can impact a product or investment decision. Thus, the main objective of this article is to analyze ESG (Environmental, Social and Governance) indicators and their potential impacts in the framework of non-financial information. Current regulatory developments, such as the European Corporate Sustainability Reporting Directive (CSRD), are pushing to make ESG indicators (within this triple perspective: social, environmental and governance risks) a key set of information to be used for reporters and users of information. This article will study in further detail the main implications these regulations will have in how corporations will reflect social and ecological footprint information in their external reporting. Since these ESG indicators could have relevant financial impacts on the financial drivers of a corporation, stakeholders will be concerned on how enterprises are dealing with these ESG risks. Therefore, this ESG data will increase transparency and would mean a better understanding on how companies and investors have a sustainability compromise to evolve to a neutral carbon economy. In order to understand a company’s commitment with these ESG criteria, stakeholders would have to assess different aspects of the information reported. In this sense, this article will focus on how credit rating agencies incorporate these risks in their assessments. Credit rating agencies are becoming important actors in the sustainability criteria, as they incorporate ESG risks in their assessments, transmitting the importance of these indicators to investors and to markets. This study will look into the different time horizons between financial profitability and sustainability indicators. Current tendency and huge demand of non-financial indicators do not have the same profoundness, framework and tradition as financial indicators. This could lead to a situation in which it would be necessary a period to adapt both worlds and make them join and connect together in a sense in which one need the other one.