Policymakers and global think tanks want to enhance corporate governance by creating laws relevant to critical problems like pollution, discrimination, and data theft. So, companies must monitor how new legal requirements inspired by ESG frameworks affect them. This post will explore the different considerations in ESG regulation.
What is ESG Regulation?
ESG regulation means companies create self-assessment rules and public administrators conceptualize legal frameworks to track sustainability compliance. Business leaders can understand environmental, social, and governance (ESG) requirements by consulting the firms offering ESG data services.
Simultaneously, you want to know how existing laws and sustainability frameworks affect an industry and corresponding investments in the long run. For example, enhanced accounting standards utilizing financial analytics help companies become more efficient. However, recycling chemically complex composites can be more difficult for some business sectors.
Therefore, ESG advisory services have become more significant in enterprise risk management. Since investors prioritize sustainability reporting metrics, corporations in all countries must analyze and adopt them. Otherwise, businesses miss fundraising opportunities due to poor ESG ratings.
The 3 Pillars of ESG Regulation
International guidelines and regional laws belong to one of the three categories or pillars of ESG regulation: environmental, social, and governance. Each pillar is a vital component of sustainability reporting. Besides, grouping the relevant metrics often simplifies ESG consulting reports and inspections.
Consider the following reporting considerations to understand how to group different sustainability metrics.
1| Environmental Metrics
The environmental pillar of ESG regulation involves compliance parameters like carbon emissions and energy consumption. Preserving biodiversity and minimizing deforestation associated with development projects will also belong to this category.
Likewise, organizations can improve their environmental compliance by replacing packaging material with plastic alternatives. After all, reducing the usage of artificial plastics and polymers is indispensable to modern waste management.
Some businesses have high carbon emissions, and they release untreated industrial wastes into water bodies to bypass waste management requirements. However, ESG consulting firms recognize the role of government regulation in penalizing companies that pollute air and water. Reputable brands must also cut all ties with suppliers indulging in environmentally harmful activities.
2| Social Regulation
Maintaining a high employee satisfaction level helps companies eliminate the productivity risks of employee attrition and discriminatory recruitment practices. Investors, consumers, and public administrators are also concerned about fair wages and retirement planning.
The social pillar of ESG regulation encompasses the laws associated with preventing workplace harassment and child labor. Remember, you must also consider sustainability metrics related to affirmative actions to enhance the well-being of underprivileged and historically marginalized members of society.
Corporations and municipalities can benefit from consulting the domain experts in ESG advisory services to learn about social compliance requirements.
Moreover, contemporary industry trends also suggest a greater emphasis on the participation of women and individuals belonging to the LGBTIQA+ community, i.e., professionals identifying as lesbian, gay, bisexual, transgender, intersex, queer/questioning, and asexual.
3| Governance Regulation
International treaties and regional policies affect how a global enterprise might file its tax return by using exemption codes as the respective laws intend. However, maneuvering tax and investment laws to identify loopholes are some activities that have affected corporate compliance negatively.
While robust financial accounting standards are essential to improving taxation transparency, ethics associated with consumer data processing are also crucial for sustainable business development. ESG data services assist businesses and policymakers in auditing corporate governance requirements.
Additionally, restricting data modification rights to authorized employees enables businesses to ensure data integrity.
Governance laws also evaluate whether a business merger will have an unfavorable impact on the competition in an industry. Therefore, reputable ESG consulting firms integrate insights into anti-competitive agreement laws and corresponding legal precedents for governance regulation.
Regulatory Frameworks Used by ESG Advisory Services
Consider the following questions.
- Do the weapon ownership laws affect your ESG compliance scores?
- Which greenhouse emissions are more significant for environmental regulation?
- Is there more than one way of quantifying sustainability metrics? If yes, then how can governments and corporations determine a common benchmarking standard?
- Is there a single global framework for ESG regulation?
- Should you inspect corporate practices using multiple sustainability frameworks?
Such doubts arise in the minds of public administrators and business strategists because there needs to be a universally consistent ESG law. While the United Nations (UN) and Sustainability Accounting Standards Board (SASB) have published holistic guidelines, their legal status varies from country to country.
Nevertheless, investors and regulators encourage businesses to pursue a self-assessment and voluntary disclosure strategy to report on a company’s internal ESG regulation using reliable data services. Besides, the latest tech developments, like automated statistical modeling, enable advanced benchmarking features to help companies strategize their compliance improvements.
1| SASB Framework
SASB offers exceptional standards to educate businesses on how to share materialized sustainability metrics with different stakeholders. It primarily guides corporations in making mandatory financial disclosures concerning investor relations.
Up to 77 industries have the potential to leverage SASB standards. Doing so will allow them to prepare for ESG regulation laws that many governments intend to enforce. After all, this approach to evaluating sustainability metrics has international significance. Most policymakers will optimize their national ordinances according to SASB standards.
2| ISSB Standards – the Future of SASB
ISSB stands for International Sustainability Standards Board. It is the spiritual successor of SASB and will improve SASB standards so that more industries can benefit from sustainability reporting. Note that the consolidation between ISSB and SASB materialized on 1 August 2022.
Consider the following drafts under development at ISSB, which hints at the future of ESG data services from an international applicability perspective.
- Climate ED is a “climate-related disclosures exposure draft” that will lead to the final version of ISSB’s climate standards. It will enhance SASB requirements to make universal compliance feasible.
- General Requirements ED will govern sustainability-related disclosures to allow investors and financial regulators easy access to an enterprise’s performance data as mandated by ESG regulation.
3| GRI (Global Reporting Initiative)
GRI standards are the universal sustainability reporting guidelines for professional ESG consulting firms. It claims to be a module-based system that can offer interconnected standards according to stakeholder requirements.
Therefore, organizations and government officers get more flexibility when revising policies or legal requirements for more efficient ESG regulation. For example, learn about the three global reporting initiative standards below.
3.1 – GRI Universal Standards
They comprise sustainability disclosure requirements and principles in GRI 1. Meanwhile, GRI 2 dictates how to customize a report to document an organization’s business details. You will learn to identify the material topics suitable for an organization in GRI 3.
3.2 – GRI Sector Standards
The sector standards start with GRI 11. Consider how agricultural firms experience unique sustainability challenges. However, ESG regulation associated with the coal sector must refer to GRI 12.
Remember, it differs from the one optimized for agriculture and fishing sectors, i.e., GRI 13. As a result, the global reporting initiative recognizes how various sectors have a specific impact on society and the environment. This benefit of GRI standards simplifies reports offered by ESG data services.
3.3 – GRI Topic Standards
These standards include guidelines in GRI 201 and subsequent specifications. For example, GRI 205 determines that preventing corruption is a financially material topic. GRI 207 discusses tax reporting, while GRI 306 focuses on industrial effluents and waste management.
The financial material sustainability topic can be complementary to sector standards. Therefore, business managers adjust their reporting practices based on the compliance improvement advisory in ESG services.
Examples of Global ESG Regulation Across Different Continents and Nations
1| EU’s Corporate Sustainability Due Diligence Directive (CSDDD)
It is the European commission proposal that was approved on 23 February 2022. CSDDD will work with another proposal by European Union: corporate sustainability reporting directive, i.e., CSRD. The on-ground implementation might commence on 1 January 2024.
CSDDD and CSRD give industrialists insights into how the European Union plans to realize its sustainability compliance initiatives. Corporations can approach ESG consulting firms to determine which obligations will affect their revenue and legal risks.
EU’s proposals often include provisions that can increase compliance requirements outside the European Economic Area (EEA). Therefore, all enterprises must watch this space, or they can request competent advisory services to monitor these ESG policies on their behalf.
2| US’s Securities Exchange Commission (SEC)
The United States Securities Exchange Commission is in the process of consolidating ESG and sustainability reporting requirements. Moreover, several investors and fund managers have provided the SEC with comments highlighting the market’s inevitable greenwashing risks.
Greenwashing is an unethical marketing tactic that uses manipulated data to convince investors and consumers that a company is eco-friendly and socially responsible. However, most ESG data services assist investors and financial regulators in identifying the deviations between filed sustainability disclosures and actual business practices at a company.
While proposed regulations undergo contemplation for further improvements, experienced ESG consulting professionals suggest US regulations will refer to the TCFD framework.
It is the result of the research and consultation done by the task force on climate-related financial disclosures to fulfill the expectations of the financial stability board (FSB). TCFD empowers insurers, investment researchers, and authorities to encourage transparency in company disclosures for risk management and ESG regulation.
3| ESG Regulation in APAC, Indo-Pacific, and EMEA
The Asia Pacific (APAC) region and Indo-Pacific nations exhibit distinct regulatory styles when researching how to implement sustainability accounting guidelines. Still, the multiple ESG policies remain committed to achieving the net-zero targets for carbon emissions, although their proposed timeframes differ.
Countries with a smaller population require less time to accomplish net-zero targets. In contrast, the nations like India and China, the two most populated nations on Earth, will require significantly more time to achieve holistic carbon neutrality.
EMEA includes Europe, the Middle East, and Africa. You can analyze how each region has devised strategies to uphold sustainability accounting standards using appropriate ESG data services. For example, the organization of the petroleum exporting countries (OPEC) encounters more challenges in decarbonization and transitioning to renewable resources.
All OPEC member nations have signed the framework convention on climate change at United Nations (UNFCCC), but they are significant in international oil and gas availability. So, ESG policies and OPEC nations have a more complicated relationship.
Conclusion
More stakeholders want legally enforceable ESG regulation standards. Simultaneously, different nations and international organizations have unique interests in sustainability accounting. However, reducing carbon emissions, preventing discrimination, and enhancing cybersecurity remain the top priorities.
The demand for more consistent compliance assessments has increased the responsibility of ESG advisory services. After all, these services will guide corporations in aligning their business objectives with sustainable development strategies.
Short-term transition pains have financial materiality that can hurt investor sentiments if business leaders cannot quantify the risks in ESG regulation. Still, modern technologies and international unity can lead the world toward cleaner air to breathe, more inclusive societies, and robust corporate governance.
A leader in ESG data services, SG Analytics assists organizations in identifying business improvement opportunities and socially responsible investing strategies. Contact us today to acquire reliable peer benchmarking and automated data-sourcing capabilities for sustainable business growth.
