The integration of sustainable practices into corporate strategy is now increasingly considered as a prominent way to meet shareholder expectations and requirements of a company’s environmental, social, and governance (ESG) criteria globally. International standards such as the United Nations Principles of Responsible Investment (UNPRI), Task Force on Climate-Related Financial Disclosures (TCFD), and the Global Reporting Initiative (GRI) have recently advocated different suggestions to improve ESG reporting procedures around the world.
As ESG becomes a topic of much discussion and debate, various stakeholders such as investors, employees, customers, governments, and regulatory agencies are all emphasizing the importance of sustainable management.
ESG regulations will continue to drive the demand for ESG disclosures, thereby requiring companies to keep a close watch on the regulatory developments relevant to their industries, geographies and scopes of business. This article will discuss the following topics to help readers understand the current ESG regulations and emerging ESG trends across the world:
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- Growing ESG regulations and compliance requirements
- Importance of monitoring ESG regulations
- Navigating the global ESG regulatory landscape
- Complying with ESG regulations: What businesses need to do
- Key takeaways
- How RegASK can help monitor ESG regulations and improve ESG compliance
Need to learn more about ESG regulations? Get in touch with RegASK experts
Growing ESG regulations and compliance requirements
The regulatory landscape is moving in tandem, especially concerning ESG disclosures and transparency obligations, which the ever-expanding pool of sustainable investors rely on to determine how well financial services and products meet their predefined ESG investment criteria. According to a study conducted in Australia, reporting regulations distinctly influence the intentions of ESG disclosures of companies in the metal and mining sector[1].
However, these monumental changes to the regulatory landscape are more than just a compliance requirement. They are also an opportunity for businesses to make a fundamental choice by approaching the emerging ESG disclosure regulations to comply or recognize this as a long-term change in their business strategy.
Importance of monitoring ESG regulations
Leading corporations that have adopted ESG practices have started to reap the benefits by lowering capital costs and debts. In the coming times, we expect that companies will be forced to confront ESG as a requirement of doing business[2]. Certain studies mentioned that companies having high ESG scores tend to have lower capital costs and debts[3]. Achieving a high ESG score requires companies to disclose ESG transparently which will bring them various financial benefits. This was observed in a study that analyzed the relation between ESG and the cost of equity capital of 171 international Food & Beverage companies headquartered in North America, Western Europe and developed parts of Asia Pacific. The study reported that there is a connection between increased ESG disclosures under the right regulations and improved access to financial resources[4].
Sustainable investors have shown more interest in funding companies that proactively measure and audit their ESG practices and operations. This has called for regulators to raise their reporting requirements, add transparency to a business’s environmental and social impact, and develop mitigation measures. Companies that fail to comply with ESG regulations can distress various stakeholders and suffer from increased harm to their brands.
- Business disruptions: Businesses need to take into account their supply chains when determining the value of their sustainability efforts. Any failure in the supply chain to monitor ESG regulations can cause business disruptions, which is why having deep transparency over your supply chain is essential. By gaining complete visibility into your supply chain network, you can take an immediate approach to avoid disruptions caused by non-compliance.
- Loss of brand reputation: Consumers, investors, governments, NGOs, and journalists are all keeping a close eye on a brand’s operations and supply chain activities. If a scandal involving any of the ESG factors goes viral, the brand’s reputation is jeopardized.
- Lack of trust from stakeholders: The future business prioritizes social values, environmental consciousness, and stakeholder-based strategy. Failure to adopt such compliances can cost any company a heavy position in society, but making them a key part of the business can earn a company’s loyalty from various stakeholders.
Navigating the global ESG regulatory landscape
Here are some examples of ESG regulations that are mandatory and currently being implemented. The list is not exhaustive, and more regulations and disclosure requirements are expected in the coming years.
| Country or Region | Regulation | Institution | Description |
|---|---|---|---|
| United States | US SEC Climate Guidance | Securities and Exchange Commission (SEC) | The guidance requires public companies to disclose material business risks to investors, transparently through regular filings with the SEC, including climate change risks that may develop on their business. |
| United States | NYSE Section 303A Corporate Governance Rules | NYSE | The regulation requires listed companies to “adopt and disclose a code of business conduct and ethics.” |
| United States | Interpretive Bulletin 2015-01 | Department of Labor | The regulation clarifies that ESG factors can be a part of the primary analysis of cautious investment decision making. |
| Canada | Consultation Report | Ontario Capital Markets Modernization Taskforce | The Consultation contains policy proposals to modernize Ontario’s capital markets for enhancing ESG disclosure including forward-looking information, for Toronto Stock Exchange (TSX) issuers. |
| Canada | TSX Listing Rules | Toronto Stock Exchange | The regulation states that any “material” information on the environment or social aspects must be immediately disclosed by a news release as required by the Exchanges’ Timely Disclosure Policies. The issuer must file a material change report on the System for Electronic Document Analysis and Retrieval (SEDAR). |
| Canada | National Instrument 43-101 | Canadian Securities Administration | Under this regulation mining companies are required to report on reasonably available information on environmental and social factors as it involves various mining and exploration activities. |
| European Union | EU Sustainable Finance Disclosure Regulation (SFDR) | European Commission | SFDR is designed to obligate financial market participants (FMPs) and financial advisers to be transparent with their sustainable investment products and to prevent greenwashing. |
| European Union | EU Taxonomy Regulation Article 8 Delegated Act | European Commission | The EU Taxonomy framework is designed to categorize economic activities to help fund managers, companies, issuers and project promoters navigate the transition to a low-carbon, climate-resilient, and resource-efficient economy. The taxonomy will increase transparency and facilitate green bonds in sustainable projects and assets across the EU. |
| European Union | Sustainable Corporate Governance Initiative | European Commission | The initiative was established to improve the EU regulatory framework on company law and governance by helping companies manage long-term sustainability goals such as social and human rights, climate change, environmental protection, etc. by introducing a duty of care and mandatory due diligence. |
| European Union | EU Non-Financial Reporting Directive | European Commission | It requires public companies with more than 500 employees to provide accurate data on social and environmental practices they have adopted to aid shareholders. |
| Germany | German Supply Chain Due Diligence Legislation | German Government | The act will go into effect on January 1, 2023, requiring the applicable companies to determine and assess risks to human rights and the environment within their supply chains, as well as to establish effective risk management systems. The act is applicable to German-based companies having more than 3,000 employees, and the threshold will be reduced to 1,000 starting January 1, 2024. |
| Netherlands | National Climate Agreement (Klimaatakkoord) | Dutch Government | The Klimaatakkoord contains agreements with specific sectors to achieve climate goals. The listed sectors are: electricity, industry, built environment, traffic and transport, and agriculture. |
| United Kingdom | FCA’s Climate-related Disclosure Regime | Financial Conduct Authority | The regulation requires commercial companies with a premium listing to disclose in line with the TCFD recommendations. |
| United Kingdom | Mandatory Climate-related Financial Disclosures by Publicly Quoted Companies, Large Private Companies and LLPs (Non-binding guidance) | Department for Business, Energy and Industrial Strategy | The guidance helps companies and limited liability partnerships (LLPs) understand how to meet new mandatory climate-related financial disclosure requirements. |
| Switzerland | Articles 964a-964c of the Code of Obligations | Federal Audit Oversight Authority | Swiss companies of public interest must prepare an annual report on non-financial matters covering environmental issues, social issues, employee-related issues, human rights, and combating corruption. |
| Switzerland | Article 964j-964l of the Code of Obligations | Federal Audit Oversight Authority | Registered companies in Switzerland must comply with obligations of due diligence in the supply chain and report if: 1. they place in free circulation or process in Switzerland minerals containing tin, tantalum, tungsten or gold or metals from conflict-affected and high-risk areas; or 2. they supply products or services that are produced by child labor. |
| Singapore | Environmental Risk Management for Asset Managers, Banks and Insurers | Monetary Authority of Singapore | The guidance lays out expectations for asset managers, banks, and insurers to improve the resilience of funds and segregated mandates they manage by laying out effective environmental risk management procedures that can be implemented. |
| Hong Kong | ESG Reporting Guide | Hong Kong Securities Exchange | Proposed in 2015, the regulation went through changes in 2020 for introducing ESG mandatory requirements for corporations. There is a requirement to report on the environmental and social factors. |
| Hong Kong | Circular to Management Companies of SFC-authorized Unit Trusts and Mutual Funds – ESG Funds | Securities and Futures Commission of Hong Kong | By enhancing the disclosure standard of ESG funds, the circular aims to improve their comparability, transparency and visibility. |
| Brazil | Instrução Normativa 480/2009 | Brazilian Securities Commission (CVM) | Items 7 and 10 of Annex 24 require listed corporations to include the following environmental sustainability information in their yearly reports: environmental policies, costs for compliance with environmental regulations and international standards, and third-party assurance check. |
| Brazil | DECISÃO DE DIRETORIA Nº 125/2015/V/I, 26 de maio de 2015 | Companhia de Tecnologia de Saneamento Ambiental de Brasil
(CETESB) |
CETESB in São Paulo requires companies in highly polluting industries such as manufacturing and energy to report scope 1 and 2 GHG emissions. |
| Brazil | Resolution CMN nr 4.661/2018 | National Monetary Council | This resolution sets out guidelines for listed entities to “carry out their activities with good faith, loyalty and diligence” and “ensure high ethical standards” in the application of resources. Article 10(4) states these entities “should consider in the analysis of risks, whenever possible, the aspects related to economic, environmental, social and investment governance sustainability”. |
| Japan | Corporate Governance Code Amendments 2018 | Japan Exchange Group | The code outlines core principles for successful corporate governance with the goal of achieving mid to long-term growth and increasing corporate value. |
| China | ESG-related Amendments to the Disclosure Rules Applicable to Listed Companies | China Securities Regulatory Commission | The act mandates that companies, corporations and investors report on disclosure principles, content, and scopes, as well as liabilities, emphasizing the necessity of transparency for both companies and investors. |
| China | Measures for the Assessment of Information Disclosure of Listed Companies on the Shenzhen Stock Exchange (2020 revision) | Shenzhen Stock Exchange | These metrics analyze whether listed firms have taken the initiative to disclose their ESG performance, as well as if the substance of their disclosure reports is comprehensive and complete enough to assess their social responsibility. |
| Australia | Workplace Gender Equality Act | Australian Government, Workplace Gender Equality Agency | This act requires non-public sector companies with more than 100 employees to submit a report to the Workplace Gender Equality agency annually, detailing the gender composition of their workforce, the gender composition of their governing bodies, gender remuneration, and anything else related to gender-based harassment and discrimination. |
| Australia | ASX Corporate Governance Principles and Recommendations: 4th edition | ASX Corporate Governance Council | By focusing on material environmental and social risks, the fourth edition of the law pushes listed firms to strengthen climate and non-financial risk disclosure. |
| Australia | National Greenhouse and Energy Reporting Regulation (NGER) | Australian Government, Department of the Environment and Energy | NGER was developed as a framework for energy and emissions reporting. The Determination 2008 provides methods for calculating GHG emissions and energy data provided by the NGER act. Amendments to this act are made annually. |
| Australia | The Corporations Act 2001 | Australia Securities and Investments Commission | Companies filing director’s reports must disclose social and environmental information, as well as ethical information, under this Act. It also applies to superannuation funds, which must explain how environmental, social, and governance factors are factored into investment decisions. |
Source: United Nations Principles for Responsible Investment (UNPRI)
Complying with ESG regulations: What businesses need to do
Companies are recommended to follow these 5 key steps to ensure compliance with ESG regulations.
- Be aware of current ESG regulatory policies relevant to their business
Understanding current ESG regulatory policies is becoming increasingly important across various industries as they face pressure from various stakeholders. Stakeholders and regulators are trying to seek from recently introduced disclosure compliances to consultation drafts on emerging ESG regulations of a company. There are certain parameters that need to be considered for understanding regulations in relevance to their own businesses, such as the nature and size of business, geography of operations, scale of operations, and stakeholder priorities.
- Establish ESG framework to meet compliance targets
There are numerous reasons to devote significant time and efforts to developing a company’s ESG framework and procedures. When stakeholders come knocking, ESG policies are unquestionably the first line of defense. It is imperative for companies subject to ESG regulatory scrutiny to have an ESG framework that provides a layout of compliance duties, internal operations, and audits. For instance: Food & Beverage companies in the EU need to comply with the Farm to Fork strategy for creating a sustainable food system that will benefit all the stakeholders[5].
- Closely monitor ESG regulatory changes
Companies that develop metrics to track ESG progress must be able to compare performance over time, across industries, and against the ever-evolving regulatory requirements. In doing so, they must foresee where the regulations will fail. As a result, board members must maintain open lines of communication with regulators and policymakers, and companies should seek to collaborate and coordinate best practices with their industry peers. Due to growing regulations related to human health and the environment, the cosmetic industry has formed an EcoBeautyScore Consortium consisting of 36 cosmetics and personal care companies as well as professional associations, aiming to develop an environmental impact assessment and scoring system for cosmetic products[6].
- Establish a robust framework to respond to the changing ESG regulatory landscape
The board needs to focus on designing a regulatory change management system that would allow the company to respond quickly to the regulatory changes taking place. This will be essential in shaping the ESG policies of any company especially concerning the supply chain.
- Engage external ESG experts for expertise and support
Many companies are currently struggling to generate reports to endorse ESG strategies due to diverse data sources, with regulators focusing on sustainability and their wishes to address these concerns. This makes it difficult for businesses to make informed decisions while protecting their risk-return profile, as their investments are vulnerable to the effects of regulatory decisions. Therefore, it is advisable to engage external ESG experts who can provide the latest trends and insights into the regulatory landscape of ESG.
Need to learn more about ESG regulations? Get in touch with RegASK expertsESG regulations key takeaways
Due to regulatory requirements, companies are under increasing pressure to analyze and communicate the ESG impacts of their current operations and their suppliers. Prudent businesses are researching trends, assessing risks and opportunities, and taking proactive measures. They are demonstrating ESG commitment using innovative compliance schemes and management systems.
Investors want companies to adopt measures that are more specific in setting their ESG goals such as inclusion of supply chain due diligence and setting concrete carbon reduction targets. Disclosures on executive remuneration, political lobbying and human rights are also top priorities of the investors. Regulators take a stance against companies that lack well-articulated ESG strategies as it may lead to financial as well as non-financial losses for shareholders.
Several countries have started issuing ESG reporting as a mandatory requirement for listed companies. A study identified 25 countries in the world between 2000 to 2017 that have mandated ESG mostly for public companies or large corporations[7]. With the rise of mandatory ESG reporting, companies can stay ahead of ESG disclosure regulations by thoughtfully incorporating regulatory requirements into their business strategies. Companies with a strong ESG proposition are better at delivering long-term value for shareholders and increasing their resiliency in a changing world.
Be ESG compliant with RegASK ESG regulatory compliance solution
How RegASK can help monitor ESG regulations and improve ESG compliance
RegAlert and RegInsight are functions of an artificial intelligence platform created by RegASK to monitor the changing ESG landscape for an accurate and reliable analysis of current and emerging regulatory trends.
The platform collects the latest regulatory notices published across the world and makes the content available on an overarching dashboard to provide a consolidated view of ESG matters. Users will be notified of any changes in the ESG regulatory environment and understand key ESG trends to anticipate business risks.
Monitoring ESG regulations with the RegASK platform would ease the regulatory pressure, avoid non-compliance and help deliver long-term value to stakeholders.
To know more about the platform, book a demo to ensure you choose the right path for monitoring ESG regulatory risks and opportunities.
References:
[1] The Effects of Mandatory ESG Disclosure Around the World
[2] Farm to Fork strategy for a fair, healthy and environmentally-friendly food system
[3] Eco-Beauty Score Consortium Launch
[5] ESG factors and equity returns – a review of recent industry research
[6] Non-financial information and cost of equity capital: an empirical analysis in the food and beverage industry
[7] Integrating Environmental, Social and Governance (ESG) Disclosure for a Sustainable Development: An Australian Study
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