Recently, there has been a growing interest in Environmental, Social and Governance (ESG) compliance among companies and investors alike. With increasing awareness of the impact of business practices on the planet and society, ESG compliance has become a critical consideration for businesses seeking to thrive in the modern economy.
What is ESG Compliant?
Environmental, Social and Governance compliance has become an important strategy for businesses seeking to ensure their long-term sustainability while minimising their impact on the environment. It is becoming more critical for businesses to consider and ensure their competitiveness and reputation within their market.
ESG compliance refers to the understanding of ESG guidelines mandated by regulatory bodies and frameworks and then implementing them into internal policies and practices. Various countries and their stock exchanges regulate disclosures for ESG compliance. As such, there are some globally accepted standards and frameworks. These include The Global Reporting Initiative Standard and The United Nations Principles for Responsible Investment.
Ethical Property for example, addresses developing requirements by implementing ESG practices into their business model by considering the financial, environment and social impacts of every decision made.
In the UK there is currently no single ESG law or regulation as the current ESG regime consists of domestic and EU-derived laws, many of which are not ESG focused. However, ESG regulations continue to evolve at pace across the world, with no common standard on ESG scoring, reporting and disclosure.
Standardisation of regulations is key to helping financial institutions understand their ESG responsibilities, make policy changes to meet regulations and accurately report on ESG activities.
ESG compliance can be broken down into three key components:
Environmental:
Environmental compliance involves understanding a company’s environmental impact and how their actions affect the environment. Companies need to be able to quantify how green they are and take steps to operate sustainably.
Social:
Social aspects of ESG compliance considers the measures organisations take to protect their employees, including health and safety standards, fair labour practices and diversity and inclusion policies. This extends beyond direct employees, encompassing clients and consumers of products.
Governance:
Governance compliance refers to how policies and procedures are implemented and the extent to which they are adhered to in an organisation. This includes how companies deal with standard process, including audits, taxes, and legal matters. Strong governance practices will ensure accountability and transparency.
ESG Compliance Requirements
ESG compliance requirements address operational risks that impact third parties and their extended supply chains. Public companies will often have a legal responsibility to consider their third party and extended supply chain ESG practices.
ESG compliance requirements can largely be broken down into four categories.
- Requirements for organisations to disclose ESG performance and practices.
- Requirements for investors to consider ESG as part of their investment planning.
- Specific laws that touch on parts of ESG but are not focused on ESG themselves.
- Requirements for organisations to audit and manage their business practices and supply chains.
International regulators are increasingly interested in ESG compliance regulations. Established laws such as the U.S Foreign Corrupt Practices Act and the UK Bribery Act deal with elements of ESG. Whilst the EU has implemented new ESG reporting rules, which will apply to many US suppliers as well. The reporting will be mandatory for all EU companies employing more than 250 people, including private firms and foreign subsidiaries. Reporting requirements will be introduced in phases between 2024 and 2026. The new rules are designed to standardise ESG reporting across the EU and provide investors with information needed to make informed decisions.
How to Become ESG Compliant
A successful ESG strategy will have two features: measurable, quantifiable action and results. Whilst there isn’t a one size fits all approach to developing an ESG strategy there are still common aspects to becoming ESG compliant.
The first is carrying out a materiality assessment. This involves determining who are your primary stakeholders, what ESG metrics are important to them and why? This establishes a baseline, which supports the requirement for measurable results.
It is key to define your ESG goals. These goals should be specific, measurable, and time bound. You will then be able to analyse performance gaps, using KPIs to assess progress and show how far the company must go to reach its ESG integration targets.
The next step is to create an ESG plan which outlines the actions required to achieve the goals and timelines. This plan serves as the roadmap for ESG growth.
Regular ESG reporting is crucial to provide information on success to key stakeholders. Reporting should be transparent, comprehensive, and accurate to evaluate ESG performance.
Create your own ESG Strategy
Creating an ESG strategy requires a deliberate and measured approach that determines who the primary stakeholders are and the ESG metrics important to them. It is key to establish a baseline, define goals and analyse performance gaps. By paying attention to ESG compliance now, companies can better manage risks, improve their reputation, and attract investors, ultimately driving long-term sustainable growth.