Many companies are thought to be sustainable, but are they really?

It is often the situation that companies do not realistically understand their ESG readiness or recognise their sustainability requirements and the expectations of their stakeholders well enough to be able to respond and commit to them. There may also be shortcomings in their ESG communications and verifying their sustainability. Now is the time to consider ESG risks and opportunities. A useful checklist to get started can be found at the end of the text.

The growing demands of customers and other stakeholders are clearly visible in dozens of stakeholder interviews conducted by Medita between the end of 2022 and 2024 in connection with customer projects related to developing their ESG+D, from which the anonymous quotes marked in italics below have been extracted.

“Contractor liability documentation also requires ISO certificates from our supply chain, and compliance with our Code of Conduct is mandatory. This covers a wide range of child labour, corruption and employee satisfaction issues,” described the representative of one SME.

“We expect that the internal operating practices of our partners also meet our sustainability criteria – not just the minimum criteria, but that they appear to be aware and competent in their own operating practices,” described the representative of a large domestic company.

Threats realised ahead of time for many SMEs

Ignoring environmental, social, governance (ESG) themes, which refer to the sustainability of a company’s operations, together with stakeholder dialogue (D) will most likely backfire. This is true even if the perceived lack of ESG readiness is unintentional due to a lack of expertise or simply too little (sustainability) communications.

For example, the reporting obligation related to climate impacts will be imposed even on small companies that are part of the supply chains of larger companies no later than with the EU’s Corporate Sustainability Reporting Directive (CSRD) in 2026. The directive is related to corporate sustainability and ESG impacts, and requires companies that already fall under the scope of reporting to also report on the sustainability of their existing supply chains – in other words, on the climate impacts of even the smallest products and parts.

SMEs should also prepare well in advance to calculate the carbon footprint of their products and communicate to their stakeholders about their sustainability and the environmental and social impacts of their operations in order to ensure business opportunities in the near future as well.

As of 2024, the reporting obligation applies to listed companies with more than 500 employees. From 2025, CSRD will apply to all companies that meet at least two of the following three criteria:

• Revenue over EUR 50 million
• Total assets over EUR 25 million
• Number of personnel over 250

From 2026, CSRD will apply to all listed SMEs. From 2028, CSRD will expand to third-country companies operating in the EU with revenue of more than EUR 150 million.

Complying with product requirements has been challenging for SMEs

Here in Finland, the effects of CSRD can already be seen as a boom in supply chain changes as large companies prepare to expand their own sustainability reporting. This is according to survey of large companies by the OP Financial Group in 2024, according to which no less than 56 percent of the respondents said that they had already had to change subcontractors due to stricter sustainability obligations, including industrial subcontractors and raw material suppliers. Accordingly, the threat to SMEs that depend on the subcontracting chains of large companies has materialised ahead of time due to the fact they have not been able to meet their customers’ requirements for sustainability reporting. 

This trend regarding more intense sustainability requirements by large companies has developed perhaps even faster than anticipated and is reflected also in Medita’s interviews.

“Not all new suppliers have been able to meet the criteria. Environmental issues have been the most challenging for them, and especially product specs have been challenging to respond to. For example, mechanical pumps with a digital display and a battery are covered by the RoHS directive, but suppliers do not always promise to comply with this legislation because they do not know that it applies to them. A company that does not follow legislative obligations is weak,” stated the representative of a large international company.

Sustainability requirements for the supply chain can be surprisingly laborious to respond to and verify – they can also represent an expensive investment if third-party certifications are required. Still, it is probably a good idea to plan operations and communications on the basis of generally known and respected standards. They can help you focus on what is most relevant in terms of business and ESG impacts and also identify your own strengths. Certificates issued by an independent party, in turn, can help assure larger customers and enable working with them.

“A supplier stands out from the crowd when the product has certification confirmed by a third party. For example, the Nordic Swan Ecolabel has great value in Finland, because it has clear criteria and third-party supervision,” said the representative of a medium-sized company operating in Finland.

Now is the time to consider ESG risks and opportunities

Companies need to think about whether they recognise the risks and opportunities related to the sustainability of their own operations and products. For example, do all the parts of a major delivery to an industrial plant, such as electric locks on doors, insulation material, coatings, wall brackets and other seemingly small items, comply with the required standards?

Checklist for getting started with ESG+D assessment:

• Which requirements and standards apply to your own products, operations and supply chain?
• Which sustainability factors are critical in terms of your own operations and society, and how could these factors be monitored more closely?
• Have your products and their components been certified as required by the customer either now or in the future in order to be eligible for purchase?
• Can your product information be found in the public registers that stakeholders rely on?
• Have you communicated sustainability themes directly to your stakeholders and do you discuss regularly with them about any upcoming requirements?
• Are ESG communications and marketing claims based on reliable data and material impacts?
• What is the situation of your own company compared to other options on the market when viewed externally, for example by potential new customers?
• What is your own, genuine ambition and how has it been communicated within the company?

It can be helpful to evaluate your ESG situation, risks, opportunities, the target level for sustainability and sustainable communications strategy with an external expert in order to get you started and clarify the basics. 

“We expect our suppliers to take ESG seriously and communicate their sustainability. Our suppliers must be aware of ESG requirements and demonstrate compliance with them,” said the foreign representative of a large industrial company.

Author: Päivi Tervonen
COO, Leading Communications Expert, Partner

Medita Communications Ltd
ESG+D situation assessments, ESG+D strategy, sustainability communications

Published:
10.6.2024

Medita’s goal is to protect and increase the value of our clients’ businesses through sustainability communications and by developing their ESG+D (environmental, social, governance, dialogue) readiness.

Find more about our ESG strategy and sustainability communications services