Need more regulation within ESG?

Is there a need for more regulation within ESG?

Environmental, Social, and Governance (ESG) has become an important topic across business. It has become an increased priority, not only to meet customer demands, but also an increasingly complex regulatory environment. Regulators around the world are expanding the legal frameworks around ESG. The EU’s European Sustainability Reporting Standards (ESRS) is probably the ESG regulation at the top of the priority list for many, but there are several others on the horizon.

Standardisation Position Green managing director Brussels Julia Staunig believes that the best route forward is for standardisation within the regulation. She noted that rather than more uncoordinated rules, with each country building their own rules, it would be far better to create alignment across ESG rules that already exist.

The lack of standardisation makes ESG processes more complex as companies try to assess and adhere to the rules of the various countries they are engaged in. A set of consistent rules would not only reduce confusion but also improve the consistency of output and enhance the impact of the regulations.

While Permutable.AI CEO and co-founder Wilson Chan was in favour of a standardisation within ESG regulation, he offered some caution regarding this approach. “Global standards often adopt a one-size-fits-all approach, which may not account for the diversity of industries, sectors, and regions. This could make it challenging for companies to tailor their ESG practices to their specific contexts.”

In terms of some specific regulations, Permutable.AI’s Chan highlighted a standardised reporting process would help streamline the evaluation of corporate performance, making it easier for investors and stakeholders to compare companies. On top of this, he added that mandatory ESG reporting requirements for all publicly traded companies, regardless of their size, would boost transparency and accountability. “Governments could also provide tax incentives to companies that demonstrate substantial ESG improvements, encouraging them to adopt sustainable practices.”

While increased regulation within the ESG space would bring greater transparency, standardisation and alignment, it could also have a negative impact. One of the biggest downsides of increased regulatory scrutiny could be compliance teams being flooded with work. This could result in companies resorting to a tick-box approach to their sustainability. Staunig said, “ESG becomes something for the lawyers, not the core business. Regulators have a crucial role to play in preventing this, if they take a balanced approach to enforcement.”

The ESG landscape is evolving fast and is likely to look very different in the coming years. Staunig believes that over the next five years disclosure and ESG data quality will continue to be a high priority for regulators around the world. She added that some regions will align with international standards and others will follow the EU’s best-practice approach. “Many actors – including major international financial players – are lobbying strongly for global alignment on ESG reporting, so I definitely see more global coordination happening over the next five years.”