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ESG Compliance: What Companies Need To Know

As the value of ESG reporting continues to grow, demonstrating compliance with internationally recognized standards and frameworks is becoming vital.

Environmental, Social, and Governance topics (collectively known as ESG), are increasingly a key focus for organizations. As ESG issues can develop into material risks, there is much to be gained for businesses in effectively managing their ESG affairs properly including reduced risk, better decision-making, and quite often, improved company performance and profitability.

What is ESG and compliance?

Not only are companies themselves beginning to see the benefits of properly managed ESG operations, but so too are their investors and stakeholders.

Identifying risks through the ESG lens provides a broader view than a pure focus on financial disclosures, in-turn allowing for more informed decision-making. Investors are thus seeing the link between access to ESG disclosures to give context to a company’s performance, and its potential future trajectory with regards to profitability and sustainability.

Furthermore, the interconnectedness of our modern business landscape and increased public access to information via digitalization means that there is no hiding from the gaze of all and sundry.

Not only are companies finding it more difficult than ever to hide activities which they’d rather not admit to, but once uncovered and made public knowledge, the ability for information to ‘go viral’ and ruin reputations has made the potential for negative publicity a terrifying prospect.

With our global climate crisis dominating the headlines on a daily basis, public sentiment has very much turned towards expecting businesses to engage in various ‘green’ activities such as cutting greenhouse gas (GHG) emissions, reducing carbon footprint, minimizing waste, recycling, and increasing the sustainability of products or services produced.

Unfortunately, companies in industries that have a heavy impact on the environment and on local communities are not always able to comply with all of these expectations, setting themselves up be met with disdain by the public community, as well as viewed in a negative light by potential investors.

Companies can circumvent this with the establishment of good governance, positive social investment and development, and the mitigation of environmental impacts. These positive practices can nullify negative repercussions and enhance company image. Accurately reporting these positive impacts to the wider community can therefore be important.

What are ESG regulations?

As a direct result of the climate crisis, governments and regulatory bodies worldwide are setting a variety of ESG regulations to force (mostly public) companies to become more sustainable in their operations.

Examples include the Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) in Europe, and in the USA, the US Securities and Exchange Commission (SEC) proposal regarding scope 3 emissions disclosure for public companies.

While public companies are generally large and mature enough to already be tracking, measuring, and managing their sustainability initiatives, smaller, less mature companies may be bewildered and intimidated by the alphabet soup of ESG acronyms, and have trouble knowing where to start.

Scope 1, 2, & 3 emissions
The US SEC has submitted a proposal regarding scope 3 emissions disclosures for public companies.

ESG reporting frameworks and standards

In an attempt to bring consistency and guidance to the ESG reporting and disclosure process, various ESG reporting frameworks and standards have been created and have evolved over the years.

By devising a common set of principles and measurements across the environmental, social, and governance arenas, a consistent baseline can be established. Not only are companies informed upon which ESG metrics to measure, manage, and report on, but in following the framework and standards guidelines, they also receive a yardstick in terms of how sustainable they are, and how they measure up to other organizations in their environment and/or industry.

Although often general enough to be used across multiple industries, some reporting standards may be suited to specific environments. An example is the ESG Data Convergence Initiative (EDCI), which seeks to greatly reduce the amount of ESG KPIs gathered to streamline the private investment industry’s previously fragmented approach to collecting and reporting ESG data.

Another example of a reporting framework designed for a specific purpose is the Sustainability Accounting Standards Board (SASB) standards, which guide the disclosure of financially material sustainability information by companies to their investors. Available for 77 industries, the standards identify the subset of ESG issues most relevant to financial performance in each industry.

Other popular ESG reporting frameworks used internationally include the Global Reporting Initiative (GRI), the Taskforce on Climate-related Financial Disclosures (TCFD), the CDP (formerly the Carbon Disclosure Project) and most recently, the International Sustainability Standards Board (ISSB).

Environmental factors

Most environmental metrics within ESG reporting frameworks and standards relate to the total climate impact caused by an organization including its greenhouse gas (GHG) emissions, energy and water usage, and waste.

Companies will usually track performance and monitor their results against their own internal environmental compliance thresholds, and use these to assess the effectiveness of their environmental impact mitigation initiatives on an ongoing basis.

Social factors

While many may assume that social metrics simply relate to the diversity, equity, and inclusion (DEI) statistics of an organization’s workforce, social metrics also incorporate factors such as occupational health and safety, community impact through service and investment, product quality and safety, and labor practices.

Social issues are getting increasing amounts of exposure as business becomes more human-centered, and the ‘S’ in ESG continues to gain relevance.

Governance factors

Governance metrics encompass the composition of the oversight body (usually the board of directors), executive compensation, anti-corruption policies, risk management, and overall corporate transparency.

Responses in this category tend to be more qualitative than with environmental or social metrics, which perhaps makes internal ESG compliance more complicated than with the environmental and social factors.

ESG compliance is becoming increasingly important

While the use of the word ‘compliance’ within ESG may be more loosely interpreted than its use within the health and safety environment for example, it still remains an important point for consideration.

Ever-evolving ESG standards and frameworks place pressure on internal company resources to stay abreast of all manner of environmental, social, and governance reporting requirements.

Organizations must continually track their ESG metrics across local, regional, and national operations, as well as manage all the permits, licenses, approvals, and other documents needed to gain social license to operate, where required.

With increasing governmental regulation, and investor, supply chain, and public pressure, ESG compliance is no longer something that organizations can afford to ignore.

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Frequently asked questions (FAQ)

ESG compliance is not universally mandatory but it is becoming increasingly regulated for public companies with the intention of maintaining or improving their sustainability. Non-public companies are generally not regulated currently, but may choose to voluntarily adopt ESG compliant activities to demonstrate good business practices.

ESG compliance is important for businesses as it maintains or increases their sustainability, reduces risks, attracts investors, enhances brand/company reputation, minimizes regulatory fines and penalties, and helps to align them with their stakeholder expectations.

The key components of ESG compliance comprise the environmental (impact on the environment), social (social responsibility), and governance (internal systems and structures) aspects. Companies must address these areas to manage their environmental sustainability, prioritize their social responsibilities, and ensure ethical governance throughout their business processes and structures.

Companies should conduct thorough assessments to identify relevant regulations, implement robust policies and practices, and regularly audit their operations. 

Companies can leverage ESG consultants, industry associations, and online resources to gain insights, best practices, and tools for achieving compliance. Dedicated ESG management software can also help to control and manage the relevant processes and procedures to achieve compliance.