Today, ESG compliance has become a critical component of corporate strategy.
ESG compliance is important for organizations to manage risk, stay competitive, and be in demand in investment markets. ESG-compliant companies often must gain better governance and care more for the environment as well as sustainable development.
ESG- The Key to Unlocking a Better World
The threatening impacts of climate change are propelling businesses globally to hit the reset button as investors are holding companies accountable. Navigating conflicting priorities is difficult, but stakeholders often reward the organizations that can create sustainable outcomes for the environment and society.
Climate change indicates a global threat that is real to our economies and way of life. This requires businesses and consumers to face the challenge head-on through measurable and verifiable actions. However, it is an opportunity for innovation and growth that can further help drive decarbonization, create new solutions, and enhance customer satisfaction.
Today, companies are fully compliant with environmental, social, and governance (ESG) guidelines. Being ESG compliant implies being aware of the environmental impact and staying interesting for investors. Reports have highlighted that 25% of investors intend to make ESG investments by 2025. However, 30% of investors struggle to find attractive ESG investment opportunities. ESG compliance is likely to gain more attention from company owners and investors in the near future. However, they need to consider a wide range of factors when making decisions, such as:
- Environmental impact: Reducing the environmental footprint
- Social impact: Treating employees, customers, and the community fairly and supporting human rights and labor standards.
- Governance: Ensuring ethical governance
- Risk management: Demonstrating responsibility for risk management
- Cost reduction: Working to reduce costs
- Sustainable investments: Making sustainable investments
- Proactive evolution: Willing to evolve with the changing market trends
A global effort by governments and regulators to assess policies and regulatory requirements is a proactive step. They should also reinforce the commitment to EG investments and mitigate climate-related risks.
Read more: Sustainability in Marketing Strategies: How Can Brands Go Green
What is ESG Compliance?
Environmental, social, and governance (ESG) compliance is a set of guidelines and standards an organization implements in internal policies mandated by regulatory bodies. For an organization, being ESG-compliant implies following ESG principles and taking action across three dimensions:
- Environmental: Environmental criteria indicate a company’s impact on the environment along with the risk management practices it takes to reduce them. This contains the company’s carbon footprint, its practices to address climate change, and sustainability efforts across business and supply chains.
- Social: Social ESG considerations consider how an organization improves its social impact and manages relationships with its employees, customers, stakeholders, and communities. This ESG issue tackles racial diversity, LGBTQIA+ equality, work ethics, and inclusion programs.
- Governance: Governance of ESG practices considers everything related to how the company is managed and led, as well as how the management drives changes. It includes executive pay, shareholders’ rights observance, and internal controls to boost corporate transparency.
ESG compliance is a critical component of corporate governance for publicly traded companies as investors opt for socially responsible investing. To ensure fair ESG compliance, organizations should:
- Appoint a Chief Sustainability Officer to establish company-wide ESG goals and work with professional reporting and compliance teams.
- Integrate ESG goals into a corporate strategy, such as short- and long-term compliance business practices.
- Establish a compliance blueprint that will be regularly updated.
Read more: What is The Albedo Effect And How Does it Impact Climate Change?
ESG Compliance Frameworks and Standards
It is important for organizations to understand the difference between an ESG compliance framework and a standard.
- ESG framework is a broader vision. It is a set of principles that guides organizations and enables them to build an understanding of a particular concern. An ESG framework offers direction for reporting but does not provide a concrete methodology.
- ESG standards are a more specific requirement. They offer detailed criteria of what actions need to be taken for reporting and dictate what data can be collected and structured.
Let's review the most common ESG frameworks and standards companies need to seek to be ESG-compliant.
Common ESG Compliance Frameworks
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Carbon Disclosure Project (CDP)
CDP framework concentrates on forest health and preservation, water security, and an organization's carbon footprint. It enables enterprises to disclose data unrelated to financials, like company environmental performance and greenhouse gas emissions.
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Global Reporting Initiative (GRI)
The GRI reporting framework includes different ESG factors like inclusiveness, integrity, diversity of stakeholders, and sustainability.
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Bloomberg Terminal ESG Analysis
The ESG analysis framework assesses an organization's data from publicly displayed CRS reports, sustainability reports, and official websites.
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Sustainalytics
This framework assesses an organization's data depending on media reports and findings.
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Climate Disclosure Standards Board (CDSB)
The CDSB focuses on the “E” component in ESG. It aims to regularize the company’s data related to climate change and environmental impact.
Read more: Sustainability-Related Risks are Critical Business Metrics. Why?
ESG Compliance Standards
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International Sustainability Standards Board (ISSB)
The primary goal of the ISSB is to create a set of accounting disclosure standards to introduce transparency to financial markets. They collaborate with numerous organizations, including the Global Reporting Initiative as well as the World Economic Forum.
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European Financial Reporting Advisory Group (EFRAG)
The EFRAG encircles two focus areas: sustainability and financial reporting.
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Sustainability Accounting Standards Board (SASB)
The SASB presents standards focused on financial information that would be relevant for investors. The SASB is critical in ESG investments as it offers the U.S. Securities and Exchange Commission (SEC) with details investors can use to review how the organization performs regarding ESG factors.
ESG Compliance Requirements
Typically, ESG compliance regulatory requirements can be categorized into four types:
- For organizations to disclose their ESG regulatory compliance practices
- For investors to take ESG regulations when planning investments
- Specific regulations that concern ESG reporting obligations but are not entirely focused on ESG compliance
- For organizations to manage their business operations based on ESG frameworks and standards
How can Organizations Become ESG Compliant?
An organization's compliance with ESG is more of an obligation. Non-compliance can often lead to high employee turnover, problems in attracting new candidates, and low investor interest in a company. It can also wreck the company’s reputation because our modern society focuses on issues like high carbon print, gender pay gap, and unhealthy equality balance.
To be ESG compliant, an organization should choose what initiative to commit to and understand the technical aspects to prepare for ESG issues as well as to create an ESG plan.
Read more: How to Reduce Global Greenhouse Gas Emissions: 10 Effective Ways
Final Thought
Environmental, Social, and Governance compliance is a set of guidelines a company must follow that regulatory bodies require. Therefore, ESG compliance is critical to manage risk and stay competitive. Being ESG compliant does not mean being aware of their environmental impact or taking care of social issues inside the company. It also indicates demonstrating concern for global problems and staying in demand in investment markets.
A leader in ESG Services, SG Analytics offers bespoke sustainability consulting services and research support for informed decision-making. Contact us today if you are searching for an efficient ESG (Environmental, Social, and Governance) integration and management solution provider to boost your sustainable performance.
About SG Analytics
SG Analytics (SGA) is an industry-leading global data solutions firm providing data-centric research and contextual analytics services to its clients, including Fortune 500 companies, across BFSI, Technology, Media & Entertainment, and Healthcare sectors. Established in 2007, SG Analytics is a Great Place to Work® (GPTW) certified company with a team of over 1200 employees and a presence across the U.S.A., the UK, Switzerland, Poland, and India.
Apart from being recognized by reputed firms such as Gartner, Everest Group, and ISG, SGA has been featured in the elite Deloitte Technology Fast 50 India 2023 and APAC 2024 High Growth Companies by the Financial Times & Statista.
