Regulation can be an important catalyst for driving corporate action on sustainability. While corporate sustainability ‘leaders’ may choose to act early on ESG issues, it is not until regulation is enforced that change occurs at scale, raising standards across industry.
A rapidly evolving regulatory landscape
The past few years have seen a growing number of regulatory developments, and more are coming down the line. These range from new requirements on ESG disclosure, to pay transparency, diversity and human rights.
This year, premium listed companies in the UK were the first tranche of companies required to produce climate-related disclosures within the Annual Report reporting, on a comply-or-explain basis against the TCFD recommendations.
In May 2022, the US Securities and Exchange Commission (SEC) proposed a new ruling to require public companies to report their climate-related risks, emissions and net-zero transition plans. Should it pass, the US will join jurisdictions including Singapore, New Zealand, Brazil and several others that have mandated TCFD-aligned reporting.
The EU Taxonomy also came into effect earlier this year. The taxonomy sets out common criteria for the classification of projects that promote the transition to a low-carbon, climate-resilient and resource-efficient economy.
However, it has not been only and all about climate. Following difficult and uncertain geopolitical situations this year, the social and governance aspects have seen a resounding increase in stakeholder expectations, for transparency supported by the implementation of new regulations, as well as proposals for stringent policies.
In the EU, the proposed Corporate Sustainability Reporting Directive (CSRD) will set new requirements for ESG disclosures. These will apply to large and listed companies operating in the EU, even those that may be headquartered outside the EU. As part of its Green Deal, the EU also has proposals under way for regulations on protection of human rights, labour rights (an EU Social Taxonomy has been proposed), biodiversity, corporate governance, circular economy and more.
In July 2022, the Norwegian Transparency Act came into place, requiring companies of a certain size and turnover to demonstrate their approach to protecting human rights in their business and supply chains.
The list goes on…
The rise in volume and prominence of ESG regulation
There is a lot to navigate and monitor regarding current and emerging ESG regulations. A study by EY in 2021, showed that the number of ESG regulations and standards across the world has almost doubled over the past five years.
One of the challenges when seeking to respond to regulation, is managing the differences in disclosure requirements relating to different regulatory frameworks. For example, the UK Government has set out plans to mandate climate-related financial disclosures in a phased approach, to cover the majority of companies by 2025. The FCA Listing Rule 9.8.6(R) outlines requirements to comply with disclosure expectations. It states the expectation for companies to assess compliance against the TCFD recommendations. In comparison, the amendment to the Companies Act 2006 for inclusion of climate-related financial disclosure within the Strategic Report makes an indirect reference to TCFD alignment. This raises some confusion as to what information is needed across the two reporting frameworks.
From a broader sustainability perspective, there is growing concern about the divergence in sustainability reporting standards emerging between the EU sustainability reporting standards, and those being developed by the International Sustainability Standards Board (ISSB). Ironically, the ISSB was launched at COP26 with the express aim of bringing more cohesion to the reporting space, by agreeing a global baseline of disclosures.
The first steps in navigating ESG regulations
It may seem overwhelming to navigate the abyss of mandatory and voluntary disclosure requirements, balancing compliance, stakeholder expectations and alignment to strategic objectives and internal needs. That’s why a holistic approach to monitoring, managing, aligning and reporting against regulatory requirements is essential.
- Monitor existing and emerging regulations
With this fast-moving landscape of new regulations and expectations, putting a monitoring process in place to track developments has to be the first step.
- Map regulations, standards and frameworks with internal policies, process and data
It is a good idea to map the requirements of different frameworks. This can help identify gaps and areas for improvement. It also helps avoid any duplication of efforts, by showing where the commonalities are between different regulatory regimes, and which issues might be outliers.
- Engage the business
Get relevant teams and data owners on board. Ensuring a complete understanding of what action is needed can be key in identifying who should be involved, and where processes and controls need to be reviewed and revised.
- Report information publicly and for internal purposes
Ultimately this all boils down to the disclosure of information. The processes and systems put in place to assess or manage ESG issues are important to deliver long-term value for the organisation, but the disclosure is what external stakeholders will assess.
The bigger picture, thinking beyond compliance
Scrutiny from stakeholders and regulators is ever-increasing.
Historically, ESG regulation has helped to accelerate companies taking action on urgent issues. Now, for organisations that are prepared and willing to be proactive, guidance surrounding ESG regulation can help companies manage risk better, and identify new opportunities to increase positive impact within owned operations and across the value chain. Regulation helps to level the playing field.
Regulations will continue to evolve, pushing organisations towards more sustainable practices that address a wide range of ESG matters. The goal posts may be for ever moving, but if you head towards best practices and focus on the issues that are most important to your business and stakeholders, then you will improve business resilience in an increasingly uncertain operating environment.