Compliance with global environmental, social, and governance (ESG) requirements is now proving to be even more tough with each passing day for businesses due to the manifold regulatory regime. From tight ESG stipulations in the EU to the US and other territories, financial institutions and businesses must comply. With changes in ESG circumstances, compliance management has become a byword in several jurisdictions.
Including how to align in that respect is Dasseti ESG. Our AI-enabled platform ensures that organisations are able to navigate the nuances in global versus regional ESG regulations. Dasseti ESG does that by simplifying the majority of activities on ESG data collection through sustainability reporting compliance, ensuring accurate and efficient delivery of that entire process.
Understanding the Rise of ESG Regulations
The ever-increasing number of ESG regulations denotes cognizance of the private sector's input toward addressing various global issues such as climate change, social inequality, and good governance. Governments, stock exchanges, and various international bodies, including the OECD and UN PRI, are setting up rules to put slight checks on conduct-related business.
The Key Derives of ESG RegulationInvestor Demands: ESG considerations are becoming the primary focus of institutional investors, who push for standardized disclosures.Global Commitments: Other regulations related to sustainability are impressed upon the governments by instruments such as the Paris Agreement and the UN Sustainable Development Goals (SDGs).Risk to Reputation: With growing environmental and social awareness and activism, companies become accountable for their actions, the demands for stricter governance to be applied upon them.The Global ESG Regulatory Challenge
Now businesses are required to comply with an increasing number of regionally tuned ESG regulations. Within the EU only, companies have to comply with the regulations including the Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD). Each of these regulations requires massive ESG data collection to be followed by precise reporting.
In the US, firms are gearing up for the SEC Climate Disclosure Rule and are already under the obligation of the Department of Labor ESG Rule. The UK's FCA Sustainability Disclosure Requirements, Australia's ESG Labelling and Disclosure Requirements, and even more disclosures currently required under TCFD recommendations in Hong Kong, Singapore, and Japan intensify the complexity of the ESG landscape.
ESG Compliance Regulations Around the World
Still changing throughout the world, here are some important regulatory developments:
1. The European UnionCorporate Sustainability Reporting Directive (CSRD): The CSRD imposes reporting rules on those firms identified in the CSRD with broader ESG focus across the EU. Under the CSRD, firms must assess the double materiality of the ESG risk, that is, the risk on its internal operations and stakeholder considerations like its customers or nearby communities. The CSRD is already effective with gradual expansion in the ensuing years.Corporate Sustainability Due Diligence Directive (CSDDD): Scheduled to be adopted by the EU Parliament in 2022, the CSDDD (or CS3D) established the corporate supply chain due diligence standard to protect human rights at the global level from environmental degradation. CSDDD will initially apply to larger companies. Inside the EU with reporting obligations possibly commencing in 2027.EU Deforestation Regulation (EUDR): In 2023, the EUDR set under supply chain due diligence rules that are annoying and tough to comply with for firms to assure that their commodities are "deforestation-free". The range of products under the EUDR includes cattle, cocoa, palm oil and coffee, while the law shall become enforceable as of December 30, 2024.2. United Kingdom
Forest Risk Commodities (FRC): Although the regulation has not yet been finalized, much like the EUDR, the regime applicable to the FRC will require due diligence requirements to be imposed on larger firms trading products such as cows, cocoa, and palm oil.
Corporate Governance Code (CGC): Commonly known as 'UK SOX', it is exactly what it sounds; that is, it entails the financial reporting obligations that larger UK businesses must comply with, especially in terms of compliance and responsibility at the executive level. An updated version of the UK CGC will be brought into effect in late 2024.
ESG Rating Regulation: The year 2024 has been set aside by the government of the country to promulgate the regulations on ESG ratings agencies in the UK. The British Academy for Training and Development offers a professional training course in London. The legislation would tie the UK ESG Ratings into the international equivalents, place supervision and transparency standards, thus ultimately restoring industry confidence into a broader ESG regulatory regime.
Sustainability Disclosure Requirements (SDR): Just like with the CSRD, larger UK businesses will have to comply with the sustainability disclosure requirements of the UK SDR. The SDR's phased implementation will commence in 2024.
3. United States
Customs enforcement: The US has enhanced its existing custom rules to further strengthen the ban on goods probably produced under forced labor onto US shores. The Uyghur Forced Labour Prevention Act plays a pivotal role here; it was enacted in 2022.
SEC Climate Disclosure Rules: On March 6, 2024, the US Securities and Exchange Commission made federal rules regarding the climate disclosures required of publicly traded corporations functioning internally in a country called America. Following legal challenges from certain states in the USA, the SEC has postponed enforcement of the rules until March 15, 2024.
4. APACChina: In May 2024, China imposed ESG disclosure rules on its largest companies. The Self-Regulatory Guidelines closely mirror the provisions set out in the EU's CSRD and focus heavily on double materiality. Singapore: Most recently, the Monetary Authority of Singapore (MAS) has issued various regulations on ESG, such as a January 2023 Circular on Disclosure and Reporting Guidelines for ESG funds, followed by an ESG Code of Conduct in December 2023 advocating governance best practices. Australia: From January 2024, the Australian government has initiated plans to impose mandatory climate-related financial disclosures. The reporting requirements will be instated from 1 January 2025.Strategies for Navigating Global Social Regulations
To remain ahead of the rapidly evolving regulatory environment, firms must implement proactive compliance strategies.
Conduct Extensive Compliance Audits: Compliance audits are a means of assessing social performance gaps and ensuring that internal operations and supply chains meet the standards set forth by law. Actionable tip: Advanced ESG reporting tools can be used to automate auditing processes while ensuring timely and accurate reporting. Articulate Policies and Procedures: Documented, well-communicated policies for labor rights, human rights, and diversity are truly necessary. These policies guide employees and suppliers in ensuring compliance with global regulations.Actionable Tip: Keep standard policies across geographies and yet tailor them for local regulations so that there is consistency within various jurisdictions.Ensure Transparency in Supply Chains through Technology: Some technologies can allow for real-time compliance tracking and increased supply chain visibility and accountability; such as blockchain and AI. Blockchain guarantees that changes are immutably recorded in supply chain transactions to preserve ethical labor practices. Example: Through blockchain technology, companies should be able to trace their material and labor origins in all production processes to verify any good laborers with social standards. Provide Periodic Training and Education: Employees and suppliers must constantly be trained on current social regulations to keep them compliant. Regular programs, such as e-learning, are ideal to have everyone informed and aligned with the company's policy.Actionable tip: Make sure e-learning courses focus on the regulatory landscape affecting My Industry, bringing all global teams up to date on compliance requirements.Proactively Engage Stakeholders: By working together with stakeholders including employees, suppliers, NGOs, and regulatory bodies compliance is ensured on a more comprehensive scale. Being in touch with these groups offers insights into potential risks and best practices. Example: Collaborate with NGOs to oversee the third-party auditing of your supply chain for any human rights risk or labor violation.Keep Monitoring and Adapt: Compliance should never be viewed as a one-off action; it needs to be continually monitored and adjusted as the regulations change. Companies should develop teams dedicated to tracking regulatory developments and to making such changes to the organizational policies as is necessary to remain compliant. Actionable Tip: Establish a compliance task force with a mandate to track alterations in global regulations and advise accordingly on subsequent policy alterations.