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 interesting for investors. Therefore, 25% of investors intend to make ESG investments by 2025. However, 30% of investors admit they still struggle to find attractive ESG investment opportunities.
Looks like ESG compliance is to gain more attention from company owners and investors in the near future.
To learn more about this compliance and how to implement it in your company, read this guide to ESG compliance.
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.
Therefore, ESG compliance is an important aspect of corporate governance for publicly-traded companies since investors now more often opt for socially-responsible investing. Thus, a company’s chances of benefitting from outside investment increase if it pursues ensuring ESG compliance.
ESG certifications
Certifications recognizing ESG compliance are legal assurance for regulatory bodies that a company adheres to ESG risk and compliance practices.
Furthermore, ESG certifications serve as a guarantee that an organization uses sustainable practices in its operations and follows the anti-bribery, anti-forced, and enslaved labor laws.
ESG strategies
Environmental, social, and governance strategies represent company’s ESG compliance goals and priorities.
Simply put, these are policies companies adopt to ensure compliance as a part of a corporate strategy.
The table below demonstrates an example of what ESG efforts look like.
| Environmental | Use renewable energy sources Minimize waste Limit the usage of harmful chemicals Minimize the company’s carbon footprint Pursue lower greenhouse gas emissions |
| Social | Encourage staff gender equity Support LGBTQIA+ rights Establish policies to prevent social misconduct Pay fair wages Operate in ethical supply chains |
| Governance | Ensure corporate board diversity Ensure corporate transparency Root out corruption and bribery Ensure someone other than the CEO is the board chairman Ensure fair and reasonable executive remuneration |
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.
Now let’s briefly review the most common ESG frameworks and standards companies should seek to be ESG-compliant.
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.
- Climate Disclosure Standards Board (CDSB). The CDSB focuses on the “E” in ESG and aims to standardize the company’s data related to climate change and environmental impact.
Common ESG compliance standards
- International Sustainability Standards Board (ISSB). The main goal of the ISSB is to develop a set of accounting disclosure standards to introduce transparency to financial markets. They also collaborate with many other organizations, such as Global Reporting Initiative and the World Economic Forum.
- European Financial Reporting Advisory Group (EFRAG). The EFRAG has two focus areas — sustainability and financial reporting.
- Sustainability Accounting Standards Board (SASB). The SASB provides standards that focus on financial information that would be 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 review how the organization performs in terms of ESG factors.
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
Non-Financial Reporting Directive (NFRD)
According to the non-financial reporting directive, large EU companies are required to provide regular updates on how they maintain the ESG compliance process. Organizations can choose the framework or standard for reporting obligations.
This is what information companies must disclose according to NFRD:
- Bribery and anti-corruption measures
- Diversity across the company
- Environmental issues
- Social issues and attitude towards employees
- Respect for human rights
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 when handling compliance and ESG.
1. Multiple ESG frameworks and standards
Companies involved in ESG corporate compliance commonly stumble over a huge number of ESG frameworks and standards and experience difficulties when choosing which to follow. No wonder, there are many regional or industry-specific standards and no single global framework.
Solution. To narrow down a selection, a company should clearly identify what environmental, social, or governance issues matter inside the organization. Whether they prioritize staff diversity or want to reduce carbon emissions, they should focus on frameworks and standards that are concerned about that particular issue. Additionally, it is important to take the regional aspect into account.
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. By 2030, Microsoft commits to becoming carbon negative. They are also investing in energy-efficient technologies and renewable energy and reducing their water consumption. Additionally, Microsoft prioritizes inclusion and diversity initiatives.
- Unilever. Unilever focuses on reducing its environmental impact and enabling social initiatives. They work on reducing greenhouse gas emissions and are committed to sourcing agricultural materials sustainably. Additionally, they promote gender equality and support small farmers.
- 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 to be ESG-compliant, it is now more of an obligation than a trend. Non-compliance or poor compliance can lead to high employee turnover, difficulty with attracting new candidates, and low investors’ interest in a company. Additionally, it can ruin the company’s reputation because our modern society is focusing more on issues such as high carbon print, gender pay gap, unhealthy equality balance, and bad waste management.
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 that are required by regulatory bodies.
Therefore, ESG compliance is essential for organizations to manage risk and stay competitive. Being ESG compliant does not mean only being aware of the environmental impact and taking care of social issues inside the company. It also means demonstrating concern for global problems, being active in trying to solve them, and staying in demand in investment markets.
If your company is considering implementing ESG compliance practices, iDeals Board can be a great help with ESG compliance management.