Navigating The Landscape Of ESG Regulations

In recent years, environmental, social, and governance (ESG) programmes have attracted a lot of attention, in part because of the abundance of rules in the US and Europe.

Current and emerging ESG regulations

Global legislation are progressively demanding businesses to tell interested parties about the nonfinancial components of their operations. Included in this is the Corporate Sustainability Reporting Directive (CSRD) of the European Union, which updates the Non-Financial Reporting Directive. The CSRD dramatically expands the list of businesses that must disclose information on issues including human rights, environmental concerns, climate change, and the idea of double materiality.

The proposed climate-related disclosure guidelines from the Securities and Exchange Commission (SEC), which were released on March 21, 2022, would impose additional ESG reporting obligations on U.S.-based businesses. Global laws focusing on ethical sourcing and required human rights due diligence have also proliferated, including the Uyghur Forced Labor Prevention Act, Germany's Supply Chain Act, and conflict minerals.

The increased regulatory focus on these concerns reflects a growing understanding of the dangers and opportunities that come with shifting social norms in a variety of ESG areas, including executive remuneration, diversity, equality, and inclusion (DE&I), and climate awareness. Companies are under more pressure than ever to change how they approach ESG, not only to comply with legal requirements but also to protect their brand from damage caused by noncompliance.

Exposures in the supply chain and jurisdictions

What does it mean that regulations are shifting? First and foremost, businesses must have a thorough awareness of the local laws that apply to the areas in which they conduct business. This understanding covers the markets in which businesses sell their products as well as requirements for product compliance. Even while worldwide standards for ESG reporting and practises are rising, local regulations may differ. Regulations may be triggered in each jurisdiction where a business generates money or has a specific number of employees or clients. A corporation may be exposed to a plethora of new regulations overnight in the case of a new purchase in a new jurisdiction.

To determine their overall ESG risk, businesses may also need to look beyond their own walls. While a firm may not fall under the purview of some regulations, businesses may discover that their clients or suppliers do. Even if a firm manages its own carbon emissions, others in the supply chain may still have an impact on the total carbon impact, which may increase the company's regulatory burden. All of this means that multinational corporations will need to prioritize adhering to ESG requirements.

A holistic approach

In the past, the departments in charge of risk management and regulatory compliance could completely separate from those in responsibility of sustainability reporting. These teams must now work together to develop a more comprehensive strategy. The entire process can be managed more effectively with an overarching ESG strategy that involves all parties and with open communication across silos.

Companies must first inventory all of their ESG programmes and exposures in order to proceed. Establishing a cross-functional team with visibility at all organisational levels and across operational units is a must. The sales staff must be aware of what human resources is doing, and vice versa. They must also be aware of any projects the communications division is working on. To be able to see the full spectrum of ESG-related risks and opportunities, the cross-functional team's members must be sufficiently senior and have access to information across business units and countries.

Companies need to be nimble, with defined and well-thought-out plans for how they might apply best practises from one jurisdiction to another, given that the global regulatory landscape is dynamic. If a corporation is in compliance with a rule in Germany and that rule is reproduced in France, the company should be able to rapidly comply in France if the necessary procedures are in place.

Non compliance and reputational harm

With all the data and technology available today, as well as the increased incentives for whistleblowers to report noncompliant businesses, it is more harder for these organisations to go unnoticed.

Failure to comply can result in fees or fines, but perhaps more crucially, it can damage your reputation. Failed compliance attempts are likely to come to light quickly. Noncompliant enterprises will benchmark badly when compared to other businesses, and they run the danger of being downgraded by ratings agencies.

Embracing the challenge

Being merely compliant won't cut it for businesses today because they are competing on ESG indicators and leveraging them as a competitive advantage. Companies who go above and beyond the requirements of ESG standards and take on the challenge of the evolving regulatory environment will be in a good position to succeed.