What is ESG Regulatory Assessment?
Environmental, Social, and Governance (ESG) regulations are rules and laws that drive sustainability and responsible business management across various sectors.
ESG regulatory assessments are conducted by various entities, such as regulatory bodies, consulting firms, and financial institutions. For instance, in real-time, entities such as the Carbon Disclosure Project (CDP) assess the environmental impact of an organization by evaluating its carbon footprint, which helps estimate climate change and assess a company’s real ESG impact on the environment. Statutory entities such as the Security Exchange Board of India (SEBI) regulate ESG reporting by mandating that a group of companies operating in India comply with nine principles under the Business Responsibility and Sustainability Reporting (BRSR) format.
The importance of ESG Regulatory Assessment within the Current Market Scenario
ESG regulatory assessment helps organizations streamline sustainability objectives and goals by ensuring regulatory effectiveness, identifying regulatory gaps, & promoting compliance that fosters responsible business practices and helps them create robust corporate governance; it additionally aids in mitigating ESG-associated risks, such as climate change, supply chain management, & human rights management, at an organizational level. By maintaining compliance through ESG regulatory assessment, companies can foster innovation through the development and incorporation of green technologies across industries.
Social impact solutions that help an organization consider social impact and the advancement of these solutions are the need of the hour. These nurture community engagement & diversity through investments and innovative management. ESG regulatory assessments through the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) metrics drive community engagement initiatives and enhance diversity by helping organizations disclose specific activities related to these areas.
Sustainable investment practice is another area that stimulates the achievement of Sustainable Development Goals (SDGs) for a firm that adopts ESG regulatory assessment. Creating engagement and advocacy to inculcate sustainable business practices at an organizational level provides investors with standardized and reliable data on sustainable practices for setting future goals. Apart from non-fiscal gains, ESG regulatory assessment also enables companies and organizations to create long-term value, thereby helping the companies achieve sustainability and business goals simultaneously.
The significance of compliance and risk oversight is increasing for various global firms due to the development of regulatory guidelines for ESG activities regarding disclosure. Although several frameworks, such as ISSB, SASB, and GRI, continue to co-exist in the ESG data reporting space, their purposes seem to overlap within voluntary ESG disclosure settings. The year 2023 saw the rise of a few mandates in ESG reporting for company disclosures from the U.S. Securities Exchange Commission (SEC) and under the Corporate Sustainability Reporting Directive (CSRD) in Europe. Although these regulations are not well-defined, the paradigm shift of ESG disclosure from a voluntary one to a regulated one is clear.
How ESG Regulatory Assessment Adds Value to Your Company
The growing importance of risk and compliance within ESG is likely to standardize a risk-based ESG approach for companies, business partners, and suppliers globally. Developing a risk-based approach will be the fundamental aspect of establishing an ESG compliance program or regulatory assessment that involves a range of stakeholders.
- Financial institutions, capital markets, and investors: As of 2022, the investment industry alone has witnessed 1,000+ ESG-specific regulations, according to research by PRI. The impact of investment decisions is subject to high scrutiny by stakeholders, including investors, as even customers hold banks to maintain high ESG standards. To meet their ESG expectations, banks are beginning to systematically adapt information technology systems for collecting and aggregating ESG data. For instance, the credit approval process that integrates ESG considerations has several ESG checks/screenings for which leaders in the banking sector need to integrate ESG data governance in accordance with social & environmental needs. Regulatory shifts across the globe are expected to increase compliance for banks, and this means ESG due diligence or regulatory assessment can add value for financial institutions to become positive change agents, helping create large financial capital for companies to spearhead their sustainability efforts.
- Public firms: Under the new rules or disclosure requirements announced by the US SEC, a significant portion of public companies are mandated to improve and standardize their reporting related to climate change. Notably, the companies are required to disclose their scope 1 and 2 emissions, how they govern their risk management process, and how firms would tackle severe weather events that would occur from their operations. ESG regulatory assessment allows companies across various geographies to align their reporting in accordance with compliance requirements globally.
- Private companies: Similar to public firms, private firms, as their business develops or at a later stage of development, would have significant pressure to increase their ESG scoring and reporting. In 2022, the U.S. proposed the Federal Supplier Climate Risks and Resilience Rule that expects businesses with federal contacts to report & reduce their GHG emissions and disclose data in accordance with the Task Force on Climate-related Financial Disclosures (TCFD). Other legislations, such as the Climate Corporate Data Accountability Act in California, U.S., and the CSRD in the EU, have similar requirements for private companies, which increases the scrutiny of the sustainability of these firms. Furthermore, ESG compliance assessments can help companies prepare for an IPO by assessing opportunities and risks involved in shareholder engagement and sustainability disclosures.
- Business partners and suppliers: Among the few major reporting changes mandated by the SEC, The Uyghur Forced Labor Prevention Act is likely considered to have the highest impact on companies, partners, and suppliers globally, as this law prohibits imports of products produced using forced Uyghur labor in the Xinjiang region into the U.S. In Europe, the Corporate Sustainability Due Diligence Directive (CSDDD) proposed by the EU for companies operating in “high-impact” sectors to mitigate risks to human rights and climate change by adopting mechanisms & policies across their value chain already expects suppliers and partners to hold high standards in terms of their business practices. Under the CSDDD, companies are required to conduct due diligence on their suppliers to ensure they follow ESG measures.
How NeoImpact can help
Stakeholder engagement/empowerment
To build a capable and effective ESG system or ESG strategy, companies need to engage key stakeholders such as legal representatives, NGO representatives, & government officials in identifying and incorporating dynamically changing legislative requirements. NeoImpact offers practical answers to help companies transition and adopt critical ESG regulatory requirements that may widely vary based on their operations across different geographies and areas of operation.
Supporting policy interventions
While countries and states across the world are adopting policies that are constantly evolving to ensure environmental and social sustainability, NeoImpact provides a qualitative and quantitative assessment of regulatory and compliance risks that companies might face due to the nature of their operations and improves overall governance.
Climate-related risk assessment and scenario analysis
The CDP is an example of an international system that helps companies report and analyze urgent climate change risks. NeoImpact helps identify financial risks related to climate change and aids climate-related scenario analysis, development of climate-related disclosures, & development of best practices for environmental as well as climate-related risk management.
Assessing ESG compliance within the supply chain
Proactively identifying ESG compliance standards within the supply chain is key for a company’s success, and NeoImpact can identify and assist in bridging ESG compliance gaps within the supply chain, identify potential risks, and help companies to drive effective and sustainable decision making.
ESG/sustainability disclosure
NeoImpact’s robust and tailor-made reporting team can assist companies in building CSR reports, Business Responsibility and Sustainability Reporting (BRSR), Integrated Reports, and SDG Reports aligned with local and global regulatory requirements.
ESG impact and risk assessment
ESG regulatory assessments play a vital role in promoting ESG-based impact investing and drive responsible & ethical behavior among firms to attract ESG investment. Impact investors are keen on screening investments by understanding the compliance of these firms toward ESG practices. NeoImpact’s taxonomy integrates diverse metrics, including corporate ethics, controversies over various topics such as human rights, community welfare, compliance metrics, good governance, and corporate transparency.
Aligning ESG/corporate sustainability reporting with the EU taxonomy
Apart from aligning corporate sustainability reporting with disclosure requirements and informing ESG strategy, NeoImpact integrates various frameworks in its taxonomy, including SASB, CDP, TCFD, GRI, & UNSDGs, to improve standardization and corporate sustainability reporting. This further helps in improving regulatory compliance for firms operating across different industries and various geographies.
Third-party assurance and external verification of ESG data
External verification and validation of key ESG disclosure is the final step and the most important part of conducting an ESG regulatory assessment. NeoImpact offers support with ISO certifications, assists corporates with documentation and audit processes by external auditors, and further extends support in internal audit mechanisms for both small-scale and large-scale firms. NeoImpact improves the overall validity and comprehensiveness of regulatory requirements for firms through custom-made consulting solutions.
