There was a time, not too long ago when investors based their decisions solely on financial outcomes. Today however, environmental, social, and governance (ESG) factors – as well as the regulations that govern them have become crucial yardsticks when seeking sustainable investment opportunities and planning out a long-term strategy.
Navigating the complex landscape of existing and upcoming regulations relating to ESG related issues can be daunting or confusing at the best of times with new acronyms like CSRD, CDSB, and TCFD cropping up all the time. However, global progress is being made to increase the consistency, accuracy, and transparency of how compliance with these new standards is measured.
As the pressure mounts from regulators, shareholders, society, and customers for organisations to act on ESG metrics and make the world a better place, progressive businesses and organisations cannot afford to turn a blind eye to a growing list of sustainability reporting laws and regulations. Organisations of all sizes need to get smarter about how they manage & report matters relating to ESG initiatives – to thrive in the present and futureproof their organisations.
Like other areas of compliance – access to accurate data and the ability to process it will be key to the time, resources, and cost of remaining compliant with these new regulations. This blog explores commonly used sustainability frameworks and regulations that are driving organisations to formalise their ESG processes and draws back the curtain on how the right software can help manage those regulations and reduce the complexity of ESG reporting.
Let’s explore some of the key regulations and frameworks that are influencing ESG programmes across the globe:
The Global Reporting Initiative has developed a set of standards to help organisations communicate and demonstrate their accountability for their impact on the environment, economy, and people.
The standards cover key topics like biodiversity, tax, waste, emissions, diversity, equality, and health & safety. These easy-to-use reporting guidelines for ESG related initiatives support businesses to gather and analyse data efficiently, allowing them to assess if their goals are aligned with their policies and investor expectations.
CSRD | The Corporate Sustainability Reporting Directive
The CSRD is a new piece of EU legislation that requires all large companies to publish regular reports on their environmental and social impact activities. The CSRD aims to ensure that businesses report reliable & comparable sustainability information to orient investments towards more sustainable technologies and companies. It applies to large companies with an annual turnover of above €150 million that are based in the EU.
PRI | Principles for Responsible Investment
Truly independent, PRI is not associated with any government and is a not-for-profit organisation – it is supported by but not part of the United Nations. As the world’s leading proponent of responsible investment, PRI encourages investors to invest wisely in sustainable organisations to enhance returns and better manage risks with 6 aspirational principles. These principles were developed by experienced investors to help other investors – and act as a list of ways to incorporate ESG issues into investment initiatives. Discover more on the Principles here.
IFRS | International Financial Reporting Standards
The International Financial Reporting Standards consist of a set of accounting rules that determine how transactions and other accounting events are required to be reported in financial statements. The aim to ensure credibility and transparency in financial markets – supporting investors and business owners to make informed financial decisions. The framework was established to create a common language for interpreting financial statements from organisation to organisation and country to country. Currently IFRS standards are adhered to in Asia, South America and the EU. See more about IFRS standards here.
CDSB | Climate Disclosure Standards Board
The CDSB provides organisations with a framework for reporting environmental impact with the same precision as financial information. The CDSB framework builds on the original Climate Change Reporting Framework Edition1.1 and helps investors understand the potential environmental impact and sustainability metrics of the companies they may seek to invest in. Currently 374 companies across 32 countries are using the CDSB framework, with companies across 10 sectors using the model to provide consistency and comparability for investors and other stakeholders.
TCFD | Task Force on Climate-Related Financial Disclosures
The TCFD framework supports public organisations to effectively disclose any climate-related risks through existing reporting processes and is built around risk management, governance, compliance, and metrics & targets. These four core pillars are further interrelated and supported by 11 recommended disclosures that build out the reporting framework and provides guidance for investors to understand how companies can assess climate-related risks and opportunities. Jurisdictions following the TCFD recommendations currently include the European Union, Canada, Singapore, Japan, and South Africa. While New Zealand and Britain are in the process of mandating climate-risk disclosure in line with the TCFD, starting in 2025 and 2023 respectively.
SFDR | Sustainable Finance Disclosure Regulation
A European regulation, the SFDR is aimed at improving transparency and preventing greenwashing regarding sustainability claims made by financial market participants. The SFDR has been established to reorient capital flow towards sustainable finance by establishing ESG disclosure requirements for financial market participants operating within the European Union and requiring a comprehensive sustainability disclosure covering a wide range of ESG metrics. Mandatory as off January 2023, the SFDR applies to investment firms, pension funds, asset managers, insurance companies, banks, venture capital funds, credit institutions offering portfolio management, and financial advisors.
The EU Taxonomy is a classification system that establishes a list of economic activities which should be considered sustainable. It affects large corporations and financial market participants who offer products and services within the EU. The goal of this taxonomy is to combat greenwashing and help investors choose environmentally conscious ventures. It also plays an important role in assisting the EU in scaling up sustainable investments in line with the European Green Deal. While the EU Taxonomy has been in place since 2020, large corporations were not required to report on their compliance until January 1st, 2023. Organisations must now publicly disclose the extent to which their revenue is taxonomy-aligned, i.e., meets the EU Taxonomy criteria for what is considered a “green” or “sustainable” economic activity. More about the criteria.
Modern Slavery Act
The Modern Slavery Act 2015 – part of the United Kingdom Parliament Act – is designed to prevent modern slavery and trafficking in the workplace. The act requires commercial organisations that supply goods or services, conduct business in the UK, and have an annual turnover of £36 million or more (together with their subsidiaries) to release an annual human trafficking and slavery statement. In Australia, the Modern Slavery Act 2018 commenced on 1 January 2019 and complements Australia’s comprehensive criminal justice response to modern slavery. The Act requires large businesses to report on how they are addressing modern slavery risks in their domestic and global operations and supply chains on an annual basis. Modern slavery is very closely related to the social aspect of ESG, and many organisations choose to include this in their wider GRC programme.
The United Kingdom Bribery Act of 2010 (“UK Bribery Act”) is the country’s primary anti-corruption regulation. It went into effect in July 2011 and covers bribery in both the public and private sectors. The Bribery Act applies to transactions that occur in the UK or abroad, and in both the public and private sectors. Companies that violate the UK Bribery Act face unlimited fines, based on the severity of their offences. Preventing bribery is often one of the key goals in ESG programmes and is closely related to both the social and governance aspects of ESG.
UN Sustainable Development Goals
The Sustainable Development Goals are a collection of 17 interlinked objectives formally adopted by the United Nations in 2015. Also referred to as the Global Goals, they serve as a shared blueprint to end poverty, protect the planet, and ensure that by the year 2030, all people enjoy peace and prosperity. The SDGs are not legally binding and are designed purposefully to provide leeway for organisations – allowing them to interpret the goals according to their interests. The main adopters of the SDGs are state authorities and non-state organisations including corporations & civil society.
The Science Based Targets Initiative (SBTi)
The Science Based Targets Initiative is a coalition that aims to empower companies to set emission reduction targets in line with climate science. SBTi defines and promotes best practices in science-based target setting, offers guidance to reduce barriers to adoption & resources, and helps to independently assess & approve an organisation’s targets. Adhering to them is also a way for businesses to boost their competitive advantage during the transition to a low-carbon economy and define emissions reduction targets. The guidelines focus on the number of emissions that are required to meet the objectives set out in the Paris Climate Agreement by following a top-down approach.
The Climate Financial Risk Forum (CFRF)
Established in 2019, the Climate Financial Risk Forum brings together senior representatives from the financial sector to share their expertise in managing climate-related risks and opportunities. The forum shines a light on best practices across financial regulators and those in the industry to advance the sector’s responses to the financial risks stemming from climate change. Close collaboration between financial services firms and those that regulate it will help organisations manage the risks arising from climate change and support the transition to net zero.
A non-profit organisation, the Sustainability Accounting Standards Board (SASB) was founded in 2011 and aims to establish and maintain industry-specific standards to guide the disclosure of financial sustainability information by companies to their stakeholders and investors. These standards serve as an ESG guidance framework to be used by organisations when they disclose sustainability risks & opportunities impacting their enterprise value. The standards cover 77 industries and have been developed based on extensive feedback from companies & investors.
RG 97 is a set of guidelines issued by the Australian Securities & Investments Commission (ASIC). RG97 provides guidance to responsible entities of managed funds and superannuation trustees on how to disclose fees and charges to their clients. It aims to improve transparency and comparability of fees and charges associated with managed funds and superannuation products. This is often used a one of the regulatory guidelines to drive the social & governance factors of ESG for the financial services industry in Australia.
This Public Procurement Notice was passed on June 21st, 2021, by the UK Government with the purpose of supporting their 2050 Net Zero goal of decarbonising the public sector. PPN 06/21 expects all companies who apply for central government contracts to demonstrate their alignment with the government’s 2050 Net Zero goals by assessing if the bidder has taken the required steps to understand their environmental impact and carbon footprint relevant to the delivery of the contract. The legislation requires firms to measure their carbon emissions annually and demonstrate that they have a carbon reduction plan in place that meets the 2050 Net Zero goals.
Originally designed by the UK government, the Energy Savings Opportunity Scheme is aimed at helping businesses improve their energy efficiency and save money by assessing their energy use. Businesses can use the scheme to identify opportunities to reduce their consumption and costs. ESOS is now a mandatory energy assessment and reporting scheme for large businesses, requiring them to carry out energy audits & assessments every four years and report their findings to the Environment Agency. These reporting requirements are designed to help businesses to track their progress towards becoming more energy efficient over time and are seen to be contributing to the UK’s net zero commitment.
Aimed at Chief Financial Officers, trustees and accounting officers at academy trusts, the Streamlined Energy and Carbon Reporting initiative provides guidance for academy trusts by providing an overview of the 2018 regulations to help not-for-profits comply with their legal obligations. The regulation requires large academy trusts that have consumed more than 40, 000 kilowatts-hours of energy in the reporting period to include energy and carbon information within their directors’ report.
The International Sustainability Standards Board will issue its reporting standards by the end of June 2023. The standards will require businesses to disclose information about all significant sustainability‑related risks and opportunities to which it is exposed.
The ISSB is developing standards that will create a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. Organisations will be required to disclose information about governance of sustainability‑related risks and opportunities and share its strategy for addressing them. To align with the standards, they must share details around how the company’s reputation, performance and prospects could be affected by its actions.
UK Corporate Governance Code 2018
The UK Corporate Governance Code sets out standards of good practice for listed companies on board composition & development, remuneration, stakeholder relations, accountability, and audit. The code is applicable to companies with a premium listing on the London Stock Exchange and lays out expected standards of good practice to enable better strategic planning. It places emphasis on the relationships and interactions among companies, shareholders, and stakeholders. It highlights the importance of aligning corporate culture, purpose, values, and business strategy, and advocates for integrity and diversity.
UK Stewardship Code 2020
The UK Stewardship Code 2020 sets high standards for those investing money on behalf of UK savers and pensioners, and those that support them. The code applies to asset owners, asset managers, and service providers and seeks to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment, and society.
Directive on Green Claims
A proposal for a directive on green claims was initiated in March 2023 by the European Commission. It will introduce criteria to make green claims reliable, comparable, and verifiable across the EU, to protect consumers from ‘greenwashing’. Its aim is to create a greener economy by enabling consumers to make informed purchasing decisions. This upcoming legislation/ regulation reflects the increase in ‘green claims’ made by traders who are responding to not only additional regulatory scrutiny but also steadily increasing consumer demands for environmentally friendly products.
EU Biodiversity Strategy
The EU Biodiversity Strategy 2030 has been created to put Europe’s biodiversity on a path to recovery by 2030 and contains specific actions and commitments to halt the loss of biodiversity, protect nature, and reverse the degradation of ecosystems. It is a comprehensive and long-term plan which targets effective management of all protected nature areas, increasing the ‘protected’ surface area so that a minimum of 30% of the EU’s land area and 30% of the EU’s Sea area are covered by legal protection including all remaining primary and old-growth forests. This is a key concern for organisations whose operations could impact those protected areas.
The Companies Act 2006
While ESG disclosures and where those obligations are found are heavily dependent on the size and type of the company, a key regulation for UK ESG disclosure is the Companies Act of 2006. It includes requirements for annual reporting – which applies to large companies that are either listed, exceed € 500 million in annual turnover, or have more than 500 employees. While non-financial information has always been required in annual reports, in 2022, the Act expanded to include sustainability metrics. New requirements align with recommendations from the TCFD. Companies are required to discuss strategy, processes, and due diligence in the matters of the organisation’s impact on the environment including social impact, employees, human rights, and corruption & bribery.
Managing ESG Compliance
With so many regulations to consider – both mandatory and optional – organisations need a comprehensive way to track and monitor their ESG obligations to ensure compliance. Many organisations are realising that GRC platforms that offer ESG capabilities provide the ideal framework to manage compliance with these requirements.
Firstly, firms should establish a list of mandatory obligations that are relevant to their ESG goals & initiatives and then identify which additional non-mandatory guidelines, frameworks, and standards they would also like to follow to demonstrate their commitment to ESG. They must understand how these standards work together to create a process that meets multiple requirements without the need for duplicate processes.
Once a complete list of obligations has been identified, organisations must build a comprehensive obligations library. This is best done using a GRC tool with ESG capabilities. Stakeholders simply complete an online form for each obligation. Forms capture the relevant details regarding, regulatory body, relevant citations, jurisdiction, related business units, processes & policies, due date, and the internal stakeholder who is responsible for ensuring compliance with the policy. These regulations should also be mapped to the relevant business processes.
Once each obligation is uploaded into the system, controls can be set to monitor compliance. Organisations must identify which metrics signify that they are compliant and monitor these on an ongoing basis. These metrics could be results of audits, risk assessments, questionnaires, and surveys, or metrics from operational data which can be fed into the ESG platform through a series of API integrations with other systems and data sources. As data feeds into the platform, controls can be set to monitor levels and flag areas of non-compliance. Automated workflows alert the relevant stakeholder of the potential area of non-compliance and workflows enable them to implement corrective actions. Dashboards & reports provide a complete overview of compliance status for all applicable ESG regulations.
Some more advanced tools offer regulatory horizon scanning, enabling organisations to receive regulatory updates from their preferred third-party content provider. When a regulation changes, they receive a simple breakdown of what has changed and what action they should take to comply with the amended guidelines. As regulations are already mapped to any related business processes, policies, and departments in the GRC platform, teams can make the changes quickly and have a complete audit trail of what was amended and when – to satisfy regulators.
The Importance of ESG is Growing
The pending risks of the climate crisis and the substantial impact it can have on the global economy have made many investors and policymakers recognise the need to accelerate investments and focus on businesses that prioritise ESG. In the United States sustainable funds & assets only attracted $5.4 billion back in 2018, in 2021 that number increased almost tenfold to $51.1 billion and is set to continue to grow.
The importance of having an ESG strategy in place is becoming more fundamental for many companies as they seek to become more attractive to potential investors, and more employees are expressing an active interest in working for companies who have an ESG programme in place according to research by Marsh & McLennan. Naturally, those with highly satisfied employees have a better ESG performance. Organisations with poor ESG credentials can suffer consequences such as high employee turnover and face difficulty in attracting candidates. If things such as the gender pay gap, high carbon footprint, an unhealthy equality balance, or bad waste management are made public, this can negatively affect their long-term reputation.
Unlock the Power of ESG Software
As well as managing ESG related regulations & obligations, leveraging ESG software can also support organisations to track, monitor and report on their ESG performance across metrics such as energy consumption, water usage, waste management, corporate governance, labour practices, and more. This helps businesses stay ahead of the competition and ensure that they are meeting the highest standards of sustainability within their industry.
As ESG software continues to evolve, businesses should take advantage of the latest GRC technology solutions with built-in ESG capabilities to set ESG goals and drive the relevant business actions to achieve them.
Not only does the ESG software from Camms allow organisations to automatically address regulatory change by remaining compliant with a growing list of global ESG regulations and climate reporting mandates, but it can also help organisations to:
- Create an ESG strategy with clearly defined goals & objectives that are broken down into smaller programmes, projects, tasks, and actions. These are then allocated out across the business for completion – making it easy for management to understand progress.
- Manage ESG related risk, by creating an online ESG risk register. Perform online risk assessments that feed directly into the tool and set a risk appetite with clear KPIs, KRIs, and risk tolerances.
- Manage ESG related incidents with best-practice incident reporting workflows. Report actual incidents and near misses as they happen, conduct investigations, determine impact, and monitor cases until closed.
- Manage ESG related projects using best-practice project management workflows that enable teams to collaborate on large projects. Map out the project scope, tasks, and actions and track completion status, progress, budget, timelines and manage any associated risks.
ESG platforms enable organisations to manage all of their ESG initiatives in one place ensuring their ESG credentials are easily demonstrable to regulators. Organisations can aggregate data from other systems and people across the business via APIs, forms, and questionnaires to collate ESG data in a consistent manner. This enables organisations to track and monitor key ESG metrics centrally, creating a single source of truth.
Organisations of all sizes are currently facing a range of complex challenges around complying with ESG regulations, and many leaders are struggling to navigate the future. The right technology can help reduce much of the complexity around ESG compliance & reporting so your business can focus on other mission-critical work.
To discover how Camms can help you plan and execute your ESG strategy and confidently report on the progress of key metrics and initiatives, simply request a demo today.