When it comes to ESG measurement systems and reporting processes, both public debate and corporate practice appear to focus almost exclusively on environmental issues, while social and governance themes, despite their crucial importance, often struggle to gain traction. Achieving balance in this area is essential if sustainability is to become truly comprehensive and aligned with the needs of communities and local areas.
Establishing and awarding companies operating in the Trentino economic system a regional label indicating environmental, social and governance sustainability is the objective of the ESG Framework project by Trentino Sviluppo. This agency within the autonomous province of Trento promotes innovation, entrepreneurial growth and collaboration between companies, start-ups and professionals.
In this context, the Department of Economics and Management at the University of Trento is collaborating on the creation of five scholarships and research contracts on sustainability issues. Ericka Costa, full professor of business economics and member of the working group set up within the Department of Economics and Management, explained this and more to us in an interview.
Costa, what are the areas of focus of this research project and what is the common thread that connects them?
In general, the purpose is to provide scientific support and analyse ESG dynamics, while developing theoretical frameworks and specific measurement models that highlight the unique characteristics of companies and the territory in which they operate. The first in-depth area concerns ESG reporting in public administration, in order to develop criteria and parameters for evaluating the effectiveness of social and governance indicators specific to the Trentino context. The second focuses on qualitative and quantitative metrics for measuring and reporting on these two aspects in local businesses. The third is devoted to the selection of appropriate indicators, the definition of standardisation criteria and the determination of quantitative aggregation strategies in order to obtain a model that enhances the strengths of the local production system.
Why are the two S and G factors often overlooked in measurement practices with respect to environmental impacts? Is it a cultural or a methodological issue?
The answer to these questions accurately depicts the high potential, including the scientific one, of the project. The first consideration that can be made focuses on the relationship between the social and environmental dimensions, which currently do not carry the same weight in terms of data collection, analysis, and reporting, as revealed by studies in major global journals in the field from 1988 to 2008 (Parker, 2011). Most research analyses environmental issues (54%), with only 26% addressing social issues and 20% addressing both areas simultaneously. Other studies (Gray, 2002) have also highlighted the prevalence of environmental research at international level over the twenty-year period under review. This lesser focus on the social dimension is also linked to a change in vocabulary: there has been a shift from the initial concept of social responsibility to that of sustainability, broken down into environmental and social, with the latter seeing a decline in its importance.
What does the concept of responsibility mean today, whether social or environmental?
This is where governance comes into play. A sustainable governance model is what we call “stakeholder-oriented”. Since mid-2019, the Business Roundtable, which gathers leading US companies, has clearly established that capitalist business models, focused solely on maximising economic and financial value for shareholders, are no longer desirable, as they create too much inequality and, in general, have negative social impacts. In order to revise sustainability, therefore, governance practices that inevitably involve more democratic and inclusive management of the various stakeholders are necessary.
Regarding the social component, which aspects are easiest and which are most difficult to measure and implement?
The social dimension today does not have a specific taxonomy or classification. Very often, this aspect includes elements related to staff training, as well as compliance with regulations and workplace safety. Yet there is a growing awareness that this is not enough to enable a supportive and sustainable transformation of business models. Hence, in the specific context of this research project, the social dimension will need to look at territorial and community elements, currently unexplored in international measurement and reporting standards.
Governance is perhaps an even more challenging dimension. What are its specific characteristics?
Let's say that this dimension was introduced, or rather invented, by financial investors. Traditionally, sustainability has always been analysed from an economic, social and environmental perspective. As mentioned, the economic aspect has disappeared from the language of transformation, taking on a new channel, namely financial materiality, and governance has been introduced. This concept can be interpreted narrowly, for instance in relation to the introduction of diversity on boards of directors, information on management and supervisory bodies, and directors' remuneration; or new dimensions can be envisaged, allowing for the analysis and evaluation of inclusive and democratic horizontal governance systems.
Returning to the big picture, are there any differences between the public and private sectors?
The integration of ESG criteria into public administration is an emerging topic in academia: earlier studies have revealed that applying this paradigm aims to enhance sustainability performance by actively involving citizens, businesses, and civil society organisations. This approach promotes transparency and accountability, and contributes to a positive long-term impact for all stakeholders. The inclusion of ESG criteria in public administration is a crucial step forward in creating public value. Many challenges remain, however, especially those related to the lack of standardisation in evaluation criteria and the difficulty in collecting accurate data.
And what is the situation for businesses, instead?
More research has been conducted in this area, particularly concerning large companies. The challenge of this research project will thus be to contextualise the indicators in relation to small and medium-sized enterprises in the Trentino region, with the aim of overcoming the limitations of generic and standard metrics and measurements. As a matter of fact, many of the ones developed so far fail to capture the specificities of the companies and/or the territory and context in which they operate. In particular, SMEs have always been at the forefront, albeit informally, in protecting and enhancing the social dimension: this derives in particular from the family nature of many of them. Both within the public administration and on the business side, an ad hoc effort is therefore needed, addressed not only to the application of existing metrics and measurement standards, but also to the construction of substantial and innovative criteria, capable of capturing the specific characteristics of the Trentino region.
How does the mandatory nature of reporting introduced by the legislation, rather than voluntary reporting, affect data collection and cultural change?
There are currently two sustainability reporting mechanisms: voluntary and mandatory, introduced for certain companies by the recent CSRD (Corporate Sustainability Reporting Directive - 2022/2464/EU). The transition from one to the other has been the subject of numerous studies. Mandatory reporting leads to standardisation and comparability, and therefore meets the information needs of investors, who require the ability to compare the environmental and social performance of different companies. At the same time, however, it raises questions about the quality of the information provided: according to some studies, companies that have started ESG reporting on a voluntary basis tend to provide higher quality data than those that do so only for regulatory compliance. The reason is that the voluntary approach often reflects a genuine commitment to sustainability, while the obligation could lead to mere formal compliance.
How can we make S and G aspects more visible in the near future?
I believe a cultural approach is necessary. The pandemic has shown us that the relationship between humans and nature has been laid bare in all its fragility and reciprocity, and that humans themselves are not so powerful or actually omnipotent. Humans and nature must learn to coexist in a new way, and in this very precarious balance, the role of business is now being discussed. In this regard, I can see a few lines of analysis. Firstly, we can look beyond regulatory and financial constraints in order to reflect in a constructive and fruitful way on the role or “purpose” of business: are we really convinced that the goal of a company is to maximise profits for shareholders and/or remunerate investors as much as possible, or is its task to create value, and not just profit? Nowadays, we need to think of companies as places for the exchange of value, in a broad sense. Secondly, we can rethink the “S” of sustainability by starting from the centrality of people: businesses must build healthy environments with a positive corporate climate based on collaboration, reciprocity, trust, passion, and a desire to do and grow. All these elements are linked to the well-being and integral development of the individual. And finally, we need to reclaim the concept of social responsibility: this calls for a collective sense of ethics and the acceptance of responsibility, with burdens and honours, as a deliberate act of taking certain actions, regardless of regulatory and financial constraints.
Cover: photo Envato