ESG compliance is a process by which a company or organization adheres to best practices in environmental, social, and governance (ESG) issues. This can include everything from reducing carbon emissions to ensuring workers are treated fairly.
Organizations that implement ESG compliance programs often do so to mitigate risk, improve reputation, and attract sustainable investment. Many institutional investors now consider a company’s ESG performance when making decisions about where to allocate capital.
ESG compliance is sometimes also referred to as sustainability reporting or corporate social responsibility (CSR). While there is some overlap between these terms, CSR generally refers to a company’s voluntary efforts to improve its social and environmental impact, while sustainability reporting is a method of disclosing those impacts. ESG compliance, on the other hand, encompasses both voluntary and mandatory actions that a company takes to address its ESG impacts.
Is there an ESG Standard?
There is no single standard for ESG compliance, as different companies and investors may have different priorities. However, there are a number of frameworks and guidelines that organizations can use to develop their own ESG compliance programs.
One of the most widely used frameworks is the International Organization for Standardization’s (ISO) 26000, which provides guidance on social responsibility. The ISO 26000 standard is voluntary, but many companies choose to adhere to it in order to demonstrate their commitment to CSR.
Another popular framework is the Global Reporting Initiative’s (GRI) Sustainability Reporting Standards. The GRI standards are voluntary, but they are widely used by companies looking to disclose their sustainability performance.
New ESG Rules
The forthcoming SEC legislation is a proposed Climate Disclosure Rule which will require companies to report all of their climate-related risks and information. This includes greenhouse gas emissions, including not only scope 1 and scope 2 but scope 3 as well, which consists of emissions from all upstream and downstream operations. The intention of the disclosure rule is to attempt to standardize environmental impact in order for investors and stakeholders to easily compare between companies.
In addition to the upcoming SEC Climate Disclosure rule in the United States, the European Union released new climate reporting requirements as well. The EU legislation is entitled the Corporate Sustainability Reporting Directive (CSRD) which may have an impact on US businesses as well. Encompassing a much wider scope than the SEC ruling, the CSRD will impact non-EU companies if they are of a certain profit level or have over 250 employees.
President Biden also released an executive order in November 2022 containing actions around climate mitigation efforts like
- 2050 net zero goals
- Implementing a National Climate Task Force
- Renewable energy infrastructure development
- Alternative fuel development
- Environmental justice
- and more
This executive order is important because it showcases a national shift towards prioritizing sustainability and the importance of diversifying strategies for climate mitigation.
What are the Benefits of ESG Compliance?
ESG compliance can offer a number of benefits to companies, including:
- Reduced risk: Addressing environmental and social issues can help companies avoid financial risks, such as those associated with climate change or social unrest.
- Improved reputation: Companies that are seen as leaders in sustainability often enjoy improved reputations, which can lead to increased customer loyalty and new business opportunities.
- Attracting sustainable investment: An increasing number of institutional investors are considering a company’s ESG performance when deciding where to allocate capital. As a result, companies with strong ESG compliance programs may be better positioned to attract sustainable investment.
What Are the Challenges of Implementing an ESG Compliance Program?
Developing and implementing an ESG compliance program can be challenging for companies, particularly starting from scratch.
Some of the challenges that companies may face include:
- Determining which issues to focus on: With so many environmental and social issues to choose from, it can be difficult for companies to decide which ones to address through their ESG compliance program.
- Identifying the most effective actions to take: Once a company has identified the issues it wants to address, it then needs to determine which actions will be most effective in addressing those issues. This can be a challenge, as there is often no one-size-fits-all solution.
- Ensuring that employees are on board: Implementing an ESG compliance program often requires changes in employee behavior. This can be a challenge, as some employees may resist the changes or may be unaware of their role in the program.
If you are looking for ESG compliance support, contact Veritrove.