ESG beyond carbon: governance, labour, supply chains and the EU rules
What governance and social standards ask of companies, the EU CSRD and CSDDD in plain words, and how sustainability shows up in costs, revenue and financing.
Firm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- ESG stands for environmental, social and governance. Carbon is only part of the E. The S covers how a company treats workers, including in its suppliers' factories, and its customers and communities.
- Cutting emissions is covered as a strategic move, with the economics of carbon prices, subsidies and premiums.
- Why buyers care: when the Rana Plaza building, which housed garment factories, collapsed in Bangladesh in April 2013, more than 1,100 people died and more than 2,500 were injured (ILO).
- Elsewhere: India requires its top 1,000 listed companies by market value to file a Business Responsibility and Sustainability Report, mandatory since the 2022-23 financial year (SEBI).
Key idea
ESG stands for environmental, social and governance. Carbon is only part of the E. The S covers how a company treats workers, including in its suppliers' factories, and its customers and communities. The G covers how the company is run and checked. All three can change costs, revenue and the price of money.
Governance means the rules and people that steer and check a company: a board with independent directors who can challenge managers, an audit committee, honest accounts, controls on payments and conflicts of interest, a safe way for staff to report wrongdoing (whistleblowing), and pay schemes that reward lasting results. Weak governance shows up in cases as fraud, mis-selling or decisions that serve managers rather than owners. The Wells Fargo sales targets in the incentives lesson were a governance failure as much as a pay design failure.
Labour and supply chain standards (checked on 1 October 2026)
- The International Labour Organization (ILO) names five fundamental principles and rights at work: freedom of association and collective bargaining, no forced labour, no child labour, no discrimination, and, since June 2022, a safe and healthy working environment (ILO).
- Why buyers care: when the Rana Plaza building, which housed garment factories, collapsed in Bangladesh in April 2013, more than 1,100 people died and more than 2,500 were injured (ILO). It showed that an unsafe supplier is a risk to people first, and to the brands that buy from it second.
- United States: since 21 June 2022, goods made wholly or partly in China's Xinjiang region, or by listed companies, are presumed to be made with forced labour and are refused entry unless the importer proves otherwise with clear and convincing evidence (US Customs and Border Protection).
- European Union: from 14 December 2027, no product made with forced labour may be sold in or exported from the EU market (European Commission, Forced Labour Regulation).
The EU CSRD and CSDDD in plain words
- CSRD (Corporate Sustainability Reporting Directive): large companies must report how sustainability issues affect them and how they affect people and the planet, using European Sustainability Reporting Standards (ESRS). The first companies reported on the 2024 financial year in 2025 (European Commission). In February 2026 the EU narrowed it through a package called Omnibus I (Directive (EU) 2026/470): it now covers only companies with more than 1,000 employees and more than EUR 450 million net turnover, plus some non-EU groups with more than EUR 450 million of EU turnover (Council of the EU; law firm summary). EU companies newly in scope report from financial years starting in 2027 (law firm summary).
- CSDDD (Corporate Sustainability Due Diligence Directive, Directive 2024/1760, in force since 25 July 2024): companies must find, prevent and fix harm to human rights and the environment in their own operations, their subsidiaries and their supply chains, run a complaints process, and report on it (European Commission). After Omnibus I it covers companies with more than 5,000 employees and more than EUR 1.5 billion net turnover (Council of the EU; law firm summary). Countries must write it into national law by 26 July 2028 and it applies from 26 July 2029 (European Commission). The EU-wide civil liability rule and the duty to adopt a climate transition plan were removed, and fines are capped at 3 percent of net worldwide turnover (law firm summary).
- Elsewhere: India requires its top 1,000 listed companies by market value to file a Business Responsibility and Sustainability Report, mandatory since the 2022-23 financial year (SEBI). The global ISSB standards, IFRS S1 and IFRS S2, were issued in June 2023 as a common global baseline for sustainability disclosure (IFRS Foundation).
Even a company outside these rules feels them. A small supplier in Vietnam or India is not covered by the CSDDD, but its large European customer is, and will ask the supplier for audits, data and proof of fair labour practices. That is how the rules travel down the supply chain.
How sustainability shows up in the numbers
- Costs: audits, safer buildings, fair wages and overtime limits, reporting teams and systems, and switching away from risky suppliers.
- Revenue: winning or losing large customers and public tenders that require standards, price premiums for certified products, and sales lost to boycotts or import bans.
- Financing: sustainability-linked loans whose interest margin falls when agreed targets are met, green bonds that fund specific projects, investors who exclude poor performers, and insurers who price risk.
Worked case
A garment maker weighs a safety and labour upgrade
The prompt
A fictional garment maker in Vietnam has revenue of USD 50 million a year. Its largest customer, a European brand covered by the CSDDD, takes 40 percent of sales and earns the maker a 10 percent margin on them. The brand will keep buying only if the maker upgrades fire and building safety (USD 3 million once) and adds audits, overtime limits and higher wages (USD 0.8 million a year). The maker also has a USD 30 million sustainability-linked loan whose interest margin falls by 0.10 percentage points if it meets the same standards (illustrative numbers). Should it invest?
The structure
- Profit kept against cost of compliance, plus the financing benefit
- Revenue and profit at risk from the brand
- Net yearly gain after the running cost
- Key: Payback on the one-off upgrade
- Interest saved on the loan
Working it through
1. Revenue at risk
40 percent of USD 50 million.
Revenue at risk (USD million):50 × 0.4 = 202. Profit at risk
10 percent margin on USD 20 million.
Profit at risk (USD million a year):50 × 0.4 × 0.1 = 23. Net yearly gain
Profit kept minus the extra running cost.
Net yearly gain (USD million):2 - 0.8 = 1.24. Payback
USD 3 million upgrade divided by USD 1.2 million a year.
Payback (years):3 ÷ 1.2 = 2.55. Loan saving
0.10 percentage points on USD 30 million.
Interest saved (USD a year):30,000,000 × 0.001 = 30,000
The recommendation
Invest. Keeping the brand protects USD 2 million of profit a year; after the USD 0.8 million running cost the maker gains USD 1.2 million a year and pays back the USD 3 million upgrade in 2.5 years. The cheaper loan adds only USD 30,000 a year, so the decision rests on the customer, not the financing. Safer factories also lower the risk of accidents, which no business case should treat as a small matter, and make it easier to win other buyers with the same standards.
Risks: The brand may still move orders to cheaper countries; Upgrade costs often run over; get firm quotes.
Next steps: Ask other buyers whether the upgrade would win new orders; Check which standards the loan and the brand require, so one audit serves both.
After Omnibus I, which EU company is inside the CSRD?
A European retailer covered by the CSDDD has net worldwide turnover of EUR 5 billion. If the penalty cap is 3 percent of net worldwide turnover, what is the maximum penalty, in EUR million?
Cutting emissions is covered as a strategic move, with the economics of carbon prices, subsidies and premiums. Use the same method: put the cost, the revenue at stake and the financing effect side by side.
See sustainability and decarbonisation in the strategic movesA small supplier is not covered by the CSDDD. Why might it still have to prove fair labour practices?
Which of these is a governance issue?
Sources for this lesson (11)
- International Labour Organization: International Labour Conference adds safety and health to the fundamental principles and rights at work (June 2022, official)
- International Labour Organization: Rana Plaza, never again (April 2014, official)
- US Customs and Border Protection: Uyghur Forced Labor Prevention Act, rebuttable presumption in effect from 21 June 2022 (official)
- European Commission: Forced Labour Regulation (EU) 2024/3015, applies from 14 December 2027 (official)
- European Commission: corporate sustainability reporting (CSRD), first companies reporting on financial year 2024, and the Omnibus changes (official)
- European Commission: corporate sustainability due diligence (CSDDD), Directive 2024/1760 and the Omnibus I amendments, with dates (official)
- Council of the EU: Council signs off simplification of sustainability reporting and due diligence requirements (24 February 2026, official)
- Inside Energy and Environment (Covington): EU CSDDD and CSRD Omnibus published in the Official Journal (February 2026, law firm summary)
- Securities and Exchange Board of India: circular on Business Responsibility and Sustainability Reporting by listed entities (10 May 2021, official)
- IFRS Foundation: ISSB issues inaugural global sustainability disclosure standards, IFRS S1 and IFRS S2 (26 June 2023, official)
- US Consumer Financial Protection Bureau: CFPB fines Wells Fargo USD 100 million for the widespread illegal practice of secretly opening unauthorized accounts (September 2016, official)
My notes on this lesson
0 of 5,000 characters. Saves automatically.
Try the 4 remaining checks and drills above to complete this lesson (0 of 4 done).
Spotted something wrong or out of date? Report a mistake. We check every report and correct the page.