Lately, ESG compliance has become an essential part of corporate strategy.
Being ESG compliant for a company does not only mean being aware of its environmental impact but also staying attractive for investors. ESG investing has moved from a niche consideration to a mainstream expectation: according to PwC, ESG-oriented assets are projected to account for more than a fifth of global assets under management through the mid-2020s. Yet many investors still report difficulty finding credible, high-quality ESG investment opportunities—underscoring the importance of robust compliance practices.
ESG compliance is set to gain even more attention from company owners and investors as reporting obligations expand globally. To learn more about this compliance and how to implement it in your company, read this guide.
What is ESG compliance?
Environmental, social, and governance (ESG) compliance refers to a set of guidelines and standards a company implements in internal policies that are mandated by regulatory bodies.
For a company, being ESG-compliant means following ESG principles and taking action in three dimensions:
- Environmental. Environmental criteria imply a company’s impact on the environment and the risk management practices it takes to reduce it. This includes the company’s carbon footprint, its practices to address climate change, toxic chemicals’ usage in manufacturing, and sustainability efforts that make up its business and supply chains.
- Social. Social ESG considerations take into account the way a company improves its social impact and manages relationships with employees, customers, stakeholders, suppliers, and communities in the area of its operations. Among the ESG issues that this criterion tackles are racial diversity, LGBTQIA+ equality, work ethics, and inclusion programs.
- Governance. Governance regarding ESG practices considers everything related to the way the company is managed and led and how the management drives positive changes. It includes executive pay, shareholders’ rights observance, and internal controls to promote corporate transparency.
ESG compliance is an important aspect of corporate governance for publicly-traded companies since investors now more often opt for socially-responsible investing. A company’s chances of benefitting from outside investment increase if it pursues robust ESG compliance.
ESG certifications
Certifications recognizing ESG compliance are legal assurance for regulatory bodies that a company adheres to ESG risk and compliance practices. ESG certifications serve as a guarantee that an organization uses sustainable practices in its operations and follows anti-bribery, anti-forced, and anti-enslaved labor laws.
ESG strategies
Environmental, social, and governance strategies represent a company’s ESG compliance goals and priorities. Simply put, these are policies companies adopt to ensure compliance as part of a corporate strategy. The table below demonstrates an example of what ESG efforts look like.
| Dimension | ESG strategy examples |
|---|---|
| Environmental |
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| Social |
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| Governance |
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To ensure compliance, a company should also:
- Appoint a chief sustainability officer to be responsible for establishing company-wide ESG goals and work together with professional reporting and compliance teams.
- Integrate ESG goals into a corporate strategy, including short- and long-term compliance business practices.
- Establish a compliance roadmap that will be regularly updated.
ESG compliance frameworks and standards
Before delving into the essence, it’s important to explain the difference between an ESG compliance framework and standard.
- ESG framework is a broader concept. It stands for the set of principles that guide and build the understanding of a particular issue. A framework provides a direction for reporting but doesn’t provide a concrete methodology.
- ESG standard is a more specific requirement. It provides detailed criteria of what actions should be taken for reporting and dictates what data can be collected and how it can be structured.
Common ESG compliance frameworks
- Carbon Disclosure Project (CDP). This framework focuses on forest health and preservation, water security, and a carbon footprint of an organization. It asks companies for voluntary disclosure of data that isn’t related to financials, such as company environmental performance and greenhouse gas emissions.
- Global Reporting Initiative (GRI). Reporting principles of this framework include various ESG factors, such as inclusiveness and diversity of stakeholders, integrity, and sustainability.
- Bloomberg Terminal ESG Analysis. This framework aggregates and assesses a company’s data from publicly displayed CRS reports, annual and sustainability reports, and on official websites.
- Sustainalytics. This framework aggregates and assesses the company’s data based on media reports and public findings.
Common ESG compliance standards
- International Sustainability Standards Board (ISSB). The ISSB’s main goal is to develop a set of accounting disclosure standards to introduce transparency to financial markets. The ISSB absorbed the work of the former Climate Disclosure Standards Board (CDSB) in 2022 and collaborates with organizations such as the Global Reporting Initiative and the World Economic Forum. IFRS S1 and S2 — the ISSB’s first two standards — came into effect in January 2024.
- European Financial Reporting Advisory Group (EFRAG). The EFRAG oversees the European Sustainability Reporting Standards (ESRS), which underpin the Corporate Sustainability Reporting Directive (CSRD). It has two focus areas — sustainability and financial reporting.
- Sustainability Accounting Standards Board (SASB). The SASB provides standards that focus on financial information relevant for investors. The SASB is essential in ESG investments since it provides the U.S. Securities and Exchange Commission (SEC) with information investors can use to evaluate an organization’s ESG performance.
ESG compliance requirements
Typically, ESG compliance regulatory requirements are divided into four categories:
- For organizations to reveal their ESG regulatory compliance practices
- For investors to take ESG regulations into account when planning investments
- Specific regulations that partially concern ESG reporting obligations but aren’t focused on ESG compliance
- For organizations to manage their business or supply chains based on ESG frameworks and standards
Below are two examples of ESG transparency and ESG reporting compliance requirements companies face.
Modern Slavery Act 2015
This is the UK law that focuses on preventing forced labor, modern slavery, and human trafficking in the supply chains on the territory of the UK. According to this law, organizations should annually communicate their ESG practices to prevent forced labor and all other forms of human rights violations.
This is what a company should disclose to meet the requirements of the Modern Slavery Act:
- Company’s structure, as well as its business and supply chains
- Internal policies regarding human trafficking and other human rights violations
- Due diligence processes regarding human trafficking and other human rights violations
- Business parts and supply chains with the risk of human trafficking and other human rights violations
- Company’s efficiency in securing the absence of human trafficking and other human rights violations in its business and supply chains measures by such performance indicators as the company considers appropriate
Corporate Sustainability Reporting Directive (CSRD)
The CSRD replaced the Non-Financial Reporting Directive (NFRD) and significantly expands the scope and detail of sustainability reporting required of companies operating in the EU. It began phasing in from January 2024 for large public-interest entities and will extend to additional companies through 2026–2028.
Under the CSRD, companies must report according to the European Sustainability Reporting Standards (ESRS) and disclose:
- Environmental impact, targets, and transition plans
- Social policies, including employee working conditions and human rights in the supply chain
- Governance structures and anti-corruption measures
- Double materiality: both the company’s impact on people and the environment, and the financial risks ESG factors pose to the company
ESG compliance solutions to common challenges
The process of ESG compliance management can be challenging. Below, we list the three most common obstacles a company might face.
1. Multiple ESG frameworks and standards
Companies involved in ESG corporate compliance commonly face difficulties when choosing which of the many frameworks and standards to follow. There is no single global framework, and regional or industry-specific requirements continue to multiply.
Solution. To narrow down a selection, a company should clearly identify what environmental, social, or governance issues matter most within the organization. Whether they prioritize staff diversity or want to reduce carbon emissions, they should focus on frameworks and standards concerned with that particular issue. Taking the regional aspect into account is also critical — for example, EU-based companies must now follow the CSRD/ESRS regime.
2. Identifying ESG goals and principles
The next step is to define the ESG goals a company wants to achieve and make them part of its strategy. Many organizations struggle with setting goals without understanding how they will be achieved.
Solution. For successful ESG and compliance, it’s recommended to hire ESG specialists who can assist with setting ESG goals, and that will help to meet ESG requirements.
3. Managing ESG data and metrics over time
Understanding ESG goals and what frameworks and standards a company should follow is only half the battle. It’s also important to clearly define ESG metrics to realize how progress will be measured. Additionally, a company should have a solution for ESG data collection and management.
Solution. Using board portals can be the best answer. Board meeting management software enables the collection and safe storing of large volumes of data and allows stakeholders to access and evaluate that data. Additionally, it’s possible to conduct meetings from within the software, which greatly simplifies ESG compliance management.
Companies that achieved ESG compliance
Below are a few examples of international companies that have already committed ESG in compliance strategies:
- Microsoft. Microsoft is known for its strong ESG performance and leadership in sustainability. The company remains on track toward its 2030 goal of becoming carbon negative and continues to invest in energy-efficient technologies, renewable energy, and water conservation. Microsoft also prioritizes inclusion and diversity initiatives across its global workforce.
- Unilever. Unilever focuses on reducing its environmental impact and enabling social initiatives. The company works on reducing greenhouse gas emissions and is committed to sustainably sourcing agricultural materials. Unilever also promotes gender equality and supports smallholder farmers in its supply chain.
- Natura & Co. As a cosmetics brand, Natura & Co. commits to reducing its environmental impact and implementing lots of social initiatives. They address climate change and protect the Amazon rainforest, support local communities, and promote biodiversity. The company is also known for its strong governance practices and transparency.
- Salesforce. Salesforce prioritizes ecosystem restoration, carbon removal, and emissions reduction. The company has also implemented the board portal software that helps track and report on its ESG performance. It enables collecting and analyzing ESG data in real-time, and thus, improves ESG reporting and transparency.
How can companies become ESG compliant?
For a company today, being ESG-compliant is more of an obligation than a trend. Non-compliance or poor compliance can lead to high employee turnover, difficulty attracting new candidates, and low investor interest. Additionally, it can damage the company’s reputation as modern society increasingly focuses on issues such as carbon emissions, gender pay gaps, and ethical supply chains.
To be ESG compliant, a company should choose what initiative to commit to and understand such technical aspects as how to prepare for ESG issues and how to create an ESG plan.
To conclude
Environmental, social, and governance compliance refers to a set of guidelines and principles a company must follow as required by regulatory bodies. The regulatory landscape has evolved significantly: the EU’s CSRD now sets a new global benchmark for disclosure depth, and the ISSB’s IFRS S1 and S2 standards are being adopted in jurisdictions worldwide.
ESG compliance is therefore essential for organizations to manage risk and stay competitive. Being ESG compliant does not mean only being aware of environmental impact and social issues. It also means demonstrating concern for global challenges, taking active steps to address them, and remaining attractive in investment markets.
If your company is considering implementing ESG compliance practices, Ideals Board can be a great help with ESG compliance management.