ESG and the capital market

Research shows that companies with strong ESG performance and clear ESG communication tend to show greater confidence and resilience in periods of uncertainty. Weaker ESG ratings and unclear communication can, in other words, affect the share price negatively, partly because companies are excluded from sustainable funds and indices, and partly because investors and analysts perceive the shortcomings as a risk indicator.

The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation that governs how institutional investors and financial market participants report on sustainability. For listed companies, this means that your shareholders place demands on sustainability information, including through the SFDR PAI indicators, in order to meet their own reporting requirements. Companies that communicate their ESG work clearly make things easier for their investors and strengthen the relationship with institutional shareholders.

The EU Taxonomy is a classification system for sustainable economic activities, and is reported as part of the sustainability report. Together with the Omnibus package, a new materiality threshold of 10 per cent is being introduced, which means that companies only need to report activities that account for at least 10 per cent of turnover, capital expenditure or operating expenditure. In addition, simplified reporting templates are being introduced to reduce the administrative burden on companies. We help with analysis, classification and reporting in line with the Taxonomy.

Institutional investors often ask their own questions beyond what the CSRD requires, for example through their own ESG frameworks, direct enquiries or SFDR PAI indicators. The aim is to understand how the sustainability work is linked to the business strategy, how the company manages climate-related risks and opportunities, and whether management incentives are tied to sustainability targets. We are here to help you prepare and structure this communication in line with their expectations.

ESG ratings are external assessments of a company's sustainability work in the areas of environmental (E), social (S) and governance (G) issues. They are produced by actors such as MSCI, Sustainalytics and ISS and are used by institutional investors to make investment decisions and meet their own reporting requirements under the SFDR. A low rating or deficient communication can affect access to capital and the company's inclusion in sustainable funds and indices.

Each institution has its own methodology:
- MSCI uses a scale from CCC to AAA and weights key issues based on industry exposure.
- Sustainalytics measures unmanaged ESG risk on a scale from 0 to 100, where lower is better.
- ISS assesses whether a company is "Prime" based on sector-specific benchmarks.
- S&P Global rates sustainability performance relative to industry peers on a scale from 0 to 100.
- EcoVadis focuses on supply chains and awards medals from bronze to platinum.