Millennials and Gen Z don't usually vibe on anything. But a 2022 survey by Deloitte showed that both list climate change among their top two concerns.
Climate change mitigation, environmental damage, social impacts, and good corporate citizenship come under the umbrella of environmental, social, and governance (ESG). In this article, we explore ESG compliance standards in the major economies of the world.
ESG Compliance in the United States
ESG strategy in the U.S. involves both federal and state laws and regulations. We look at some of the federal ones that'll shape ESG compliance for U.S. businesses in 2023.
Environmental Regulations and Compliance
Environmental compliance saw some major developments over the past year:
- Inflation Reduction Act: This act, considered a landmark climate law, uses tax credits to encourage businesses to start clean energy initiatives and set up domestic supply chains. It also introduces new social regulations on employee wages and related record-keeping for companies.
- ESG strategy of the Environmental Protection Agency (EPA): The EPA's strategic plan for 2022-2026 aims for better environmental justice, civil rights policies, improved compliance, climate-related disclosures to investors, and stricter monitoring.
- Federal sustainability plan: This ESG policy aims for sustainable supply chains and net-zero emissions in federal procurement. Companies that are suppliers or vendors to the U.S. government should orient their procurement and compliance practices toward these ESG goals.
Recent social regulations seek to improve global human rights and domestic labor practices:
- The Uyghur Forced Labor Prevention Act discourages the exploitation of ethnic minorities from China's Xinjiang region in global supply chains.
- The Russian Harmful Foreign Activities Sanctions penalize any business practices that enable war atrocities by Russian forces in Ukraine.
- The Department of Labor's new rules encourage retirement plans to consider ESG factors in their investment decisions.
Companies must conduct comprehensive due diligence on third-party suppliers and maintain detailed records.
A variety of laws and regulations — like the Securities and Exchange Commission's reporting requirements, the Sarbanes-Oxley Act, and the Foreign Corrupt Practices Act, among others — mandate companies to improve and monitor various aspects of corporate practices, like:
- Diversity, equity, and inclusion
- Improved labor standards related to wages
- Detailed record-keeping
- Consumer protection
- Reduction of systemic risks
- Accounting practices
Social and governance compliance is generally prone to state politics in the U.S. For example, some states penalize ESG compliance through state anti-ESG laws. Companies with a presence in multiple states should factor this phenomenon into their risk management and anticipate losing some government contracts, private clients, local customers, or local suppliers.
ESG Compliance in the European Union
The European Union (EU) continues to be proactive in all aspects of ESG. In this section, we look at the regulations that apply to all 27 member states. Country-specific regulations are examined in later sections.
Environmental and Sustainability Compliance
Some recent regulations on environmental and sustainability practices include:
- Corporate Sustainability Reporting Directive: This regulation introduces new rules on reporting social and environmental impacts to investors and other stakeholders. Starting in 2024, companies in the EU must publish such reports that comply with the European Sustainability Reporting Standards.
- Corporate Sustainability Due Diligence Directive: The goal of this regulation is to include climate change mitigation, environmental protection, and human rights considerations in all business practices and value chains.
- Sustainable Finance Disclosure Regulation: From 2023, financial companies must publish detailed reports on, and mitigation plans for, the environmental and social impacts of their financial products (like venture capital funds, insurance offerings, or pension funds).
The Digital Services Act and the Digital Markets Act aim to make all digital services and marketplaces into safe spaces where the fundamental rights of users are protected and disinformation, illegal content, and misuse of private information are prevented.
To achieve these goals, service providers must be transparent about their moderation practices and advertisers to users and regulators in every EU nation.
ESG in Germany
Germany's Act on Corporate Due Diligence Obligations in Supply Chains requires companies in Germany, or with German presence, to identify and mitigate any risks of human rights violations and environmental damages arising from their business activities and those of their direct and indirect suppliers. From 2023, regulated companies must send regular reports of such due diligence to the regulator.
ESG in France
France's Loi de Vigilance, enacted in 2017, requires certain French companies to set up a vigilance and corporate due diligence plan to identify and prevent risks to human rights, environment, safety, and health in their business operations and supply chains.
Compliance involves publishing their plans for scrutiny by local communities and regularly reassessing the plans.
ESG in the United Kingdom
Here are some of the important ESG laws and regulations in the U.K.:
- The Climate-related Financial Disclosure regulations require companies to report the financial impacts of climate change on their businesses to help investors and stakeholders.
- The Modern Slavery Act requires large companies in the U.K. to disclose actions taken to prevent slavery and human trafficking in their operations and supply chains.
- On the governance side, the Consumer Duty regulation requires providers of financial services and products to place consumer interests above other considerations. To implement these changes, companies must improve their risk management and internal controls and maintain relevant documentation.
ESG Compliance in Japan
Japan's ESG rules are spread over multiple laws and regulations, including the Companies Act and the Corporate Governance Code. Similar to the rules in other jurisdictions, they require companies to disclose their climate-related and sustainability risks to investors and customers.
ESG Compliance in China
China's Securities Regulatory Commission encourages public companies in China to voluntarily report various ESG benchmarks based on international ESG reporting standards. These reports may become mandatory in the future.
ESG Compliance in India
In recent years, some electronics supply chains have been shifting from China to India. So, electronics manufacturers should be aware of the latter's ESG and supply chain regulations.
The National Guidelines on Responsible Business Conduct are core principles that all businesses in India must follow. They include climate change mitigation, environmental protection, and human rights concerns.
Based on them, India's regulator, the Securities and Exchange Board of India, asked listed companies, mutual funds, and other financial products to publish business responsibility and sustainability reports, starting in 2021. In 2023, it standardized the reporting metrics to be more objective.
ESG Compliance Frameworks and Standards
These overviews of ESG regulations are just one part of the puzzle. At the end of the day, every business still has to implement the actual compliance while remaining productive and profitable.
This is where ESG compliance frameworks and ESG standards help. They provide organizational, strategic, operational, and process guidelines to design and monitor ESG programs efficiently. At the same time, they're flexible enough to accommodate regulatory requirements.
Some reputed frameworks and standards are described below:
- Sustainability Accounting Standards Board (SASB): The SASB standards form a widely adopted framework that provides industry-specific guidelines, disclosure topics, and metrics. It focuses on financial information and covers 77 industries to help stakeholders make responsible investment decisions.
- International Sustainability Standards Board (ISSB): The ISSB standard provides a set of standardized sustainability disclosures and certifications to help ESG investment decisions.
- Global Reporting Initiative (GRI): This is a framework for reporting on sustainability, environmental, and social impacts.
- Integrated Reporting Framework: This is another framework for reporting on various ESG aspects but with a focus on integrated thinking and decision-making.
- Task Force on Climate-related Financial Disclosures (TCFD): The TCFD publishes a reporting framework for climate change impacts and other ESG risks.
However, frameworks and standards don't suffice either. The complexity of ESG compliance requires extensive use of technology to manage it efficiently.