Even for companies at the forefront of the ESG movement, the process of tracking and reporting on ESG measures is still in its infancy. Following set regulations and ESG requirements to maintain compliance is an even more recent development.
Businesses that operate internationally must stay current on the regulations of the countries they operate within. The company's profitability will eventually be impacted by the fines and damage to their reputation if they don't take following regulations seriously. But the discussion doesn’t stop at the impact of inaction on companies. With the increasing rise of heat and water levels, the repercussions of not taking action become even more crucial for society as a whole.
Below, we outline the existing ESG regulations that companies must follow. We’ll also discuss how Keter can help you stay abreast of regulations and achieve consistent compliance despite the ongoing changes.
What Are ESG Regulations?
ESG regulations refer to the rules, standards, and guidelines that govern business operations' environmental, social, and governance (ESG) aspects. The purpose of these regulations is to hold companies accountable for their impact on the environment, society, and corporate governance practices.
Purpose of ESG Rules
and Regulations in the U.S.
ESG regulatory requirements provide investors with awareness of the environmental, social, and governance impacts of the companies they may support through financial investments. The goal of ESG regulations and compliance is to ensure companies back up what they say about sustainable business practices with their actions. It also creates a standard by which companies can make sustainability claims. Investors are then able to make better decisions about which establishments to support.
More Than An ESG Regulation Checklist
Complying with ESG regulations, however, needs to be about more than just following a checklist. If companies view regulations simply as boxes to tick off, rather than a commitment to change, company-wide sustainable practices won’t be effective.
What Can Companies Do to Meet ESG Requirements and Regulations?
Following ESG regulations requires time, work, and resources that become significantly easier with the right strategies for collecting and analyzing data. Companies who invest in ESG reporting technology tools that simplify data collection and processing will find that less manual effort and resources are required to achieve quality results.
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Companies may use other tools to assist with third-party vendor assessments and response collection to establish a system of checks along their supply chain.
With the right technology in place, data collection, KPI tracking, and remaining compliant requires less effort, which helps companies spend less time collecting data and more time driving organizational change toward sustainability.
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Who Is Required to Comply With ESG Guidelines?
In the U.S., the financial services industry—asset managers, issuers, and financial advisors—are required to follow regulations set forth by the SEC, including ESG regulations
Current U.S. ESG Regulations
While historically lagging behind Europe in establishing sustainability and ESG regulations, the U.S. has made progress. The following sessions cover some of the most current U.S. ESG standards and regulations.
Sustainability Accounting Standards Board (SASB) Standards
The SASB’s standards guide ESG-relevant issues for 77 specific industries and assist companies in disclosing their sustainability data to investors. The SASB was founded in 2011 to create consistent language surrounding sustainability and finance for businesses and investors.
Securities and Exchange Commission (SEC) Disclosure Regulations
In March of 2022, the Securities and Exchange Commission (SEC) presented the sustainable disclosure regulations, with proposed rules addressing risk-management processes for climate-related risks. It requires the disclosure of GHG emissions from both sides of a supply chain, plus specific reporting measures. Those already following compliance for the Taskforce on Nature-Related Disclosures will find many similarities with this framework.
Nasdaq Board Diversity Requirements
To be on Nasdaq’s U.S. exchange, companies must use a standardized template to disclose their board diversity statistics each year. A minimum of two diverse directors is the recommendation. Companies that still need to meet this requirement must explain why they don't have a diverse board.
Department of Labor (DOL) Legislation for Financial Advisors
One of the only current Federal level ESG initiatives, this action is a reversal set forth by President Biden to change Trump-imposed regulations. During Trump's presidency, the administration prioritized economic needs over environmental concerns. As a result, those who had authority over investments, assets, or shareholder voting rights had to focus on returns instead of ESG data. Biden’s proposal through the DOL aims to make both financial returns and ESG factors of equal weight.
Global Reporting Initiative (GRI) Standards
The Global Reporting Initiative created a set of ESG standards that any public or private company, regardless of size, can easily apply. The modular system includes three standards: the GRI Universal Standards, the GRI Sector Standards, and the GRI Topic Standards. The standards include disclosures that provide a structured way for organizations to report information about themselves and their impacts.
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Current EU Regulations
The EU is the world leader in establishing ESG regulations. It has become an integral part of the European financial services industry. Some examples of their regulations include the following:
- The Sustainable Finance Disclosure Regulation provides ESG disclosure requirements for financial market participants to help facilitate transparency around the sustainability of their products and services.
- The EU Taxonomy Regulation establishes a classification system to assist companies, investors, and policymakers. Both companies and financial market participants are required to disclose the extent to which they meet the Taxonomy criteria.
- Additional EU proposals are also in the works, for instance, the Corporate Sustainability Reporting Directive, the Supply Chain Directive, and the Green Bond Standard.
Asia-Pacific Region ESG Regulations
ESG regulation within the Asia-Pacific Region is disjointed and lacks a consistent taxonomy or consistent use of any ESG frameworks. Even so, ESG is still on the minds of Asia-Pacific business leaders, and some preliminary work is underway. For example, the Association of Southeast Asian Nations (ASEAN) released a taxonomy for sustainable finance in late 2021 serving as an ESG framework for discussion. Where China is concerned, officials are working with the EU to align their markets over green investment taxonomies to create an environmental credential classification system.
Consequences of Non-Compliance With ESG Regulations
The consequences of not taking ESG initiatives seriously go far beyond concerns about business reputations over non-compliance. The real risks to economic development (and human survival!) result from not taking action toward sustainable business practices as climate changes become more severe and happen more rapidly than expected.
The Task Force on Climate-Related Financial Disclosures provides c guidance for understanding the corporate risks of inaction across two domains: physical and transition-related.
Transition risks refer to the policy, legal, technology, and market changes expected as we transition to a decarbonized economy. The physical risks include acute and chronic risks; acute include extreme weather conditions, like unprecedented heat waves, hurricanes, floods, and drought, while chronic risks refer to the long-term changes leading to sea-level and temperature rises.
With the World Economic Forum identifying the top three global risks as climate action failure, extreme weather, and biodiversity loss, the best time to start taking action was yesterday, but the second best time is now.
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Address ESG Regulations With Keter
At Keter, it’s our job to monitor the changing regulatory landscape. We help companies achieve and maintain ESG compliance in many ways. Our end-to-end data tracking, analysis, and reporting that help companies reach their waste and recycling management goals is just one way. When you’re ready to make a lasting, sustainable change in your company, reach out to us to find out how we can help.
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