International ESG Regulation Will Intensify, Presenting Challenges…and Opportunities

ESG and sustainability disclosure regulations are constantly changing-and will continue evolving as the demand for more robust disclosure grows. According to a report by The Conference Board, this complex regulatory landscape poses greater operational challenges and legal risks for companies. But this also presents them with opportunities for better sustainability reporting, being ahead of the curve in regard to regulatory developments, and more.

The report comes at a time when companies are managing multiple disclosure requirements due to emerging national and international standards. The challenge of meeting varying disclosure obligations can expose organizations to compliance risks, drive up operational costs, and overburden staff responsible for reporting.

"International ESG disclosure will continue gaining momentum-and many companies are not fully prepared to successfully navigate its unique complexities. Effective reporting and compliance require a multi-layered governance structure, entailing internal groups that are accountable to each other and coordinate across the company," said Anuj Saush, coauthor of the report and Leader of The Conference Board EU ESG Center.

The challenges posed by this regulatory landscape can be broadly categorized into three areas: 1) rapidly evolving regulations and a variety of reporting frameworks or initiatives; 2) internal and external alignment; and 3) complex data and resource management.

1-Rapidly Evolving Regulations and a Variety of Reporting Frameworks/Initiatives

The landscape of ESG disclosure regulations is constantly changing, with new requirements and standards emerging at both the national and international levels:

• Despite efforts to harmonize or ensure interoperability between various ESG reporting frameworks and initiatives, differences still exist. These differences lead to a lack of comparability between reports, double reporting, and higher workloads.

"Companies that proactively track evolving regulations will be better positioned to adapt and comply. To meet future requirements, firms must identify the necessary team skills and capabilities, and allocate the right resources to manage compliance effectively. Assessing global trends, business requirements, and best practices will also help consolidate information, track the status of disclosures, and identify implementation gaps," said Rebecca Grapsas, Partner and co-leader of the ESG & Sustainability practice at Weil, Gotshal & Manges LLP.

2-Internal and External Alignment

ESG reporting requires involving the entire organization, as cross-functional data is crucial for compliance. It also requires alignment beyond company walls, extending to suppliers:

• Ensuring all departments meet ESG reporting standards can be challenging, as many may not have previously been subjected to the same strict data collection and/or reporting requirements.
• Moreover, cross-functional collaboration requires breaking down departmental silos and fostering collaborative efforts.
• Companies are increasingly required to assess material sustainability impact throughout their supply chain and ensure reliable disclosures. For example, the European Union Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) call for a significant uplift in supplier due diligence.

"To achieve internal and external alignment on sustainability reporting, bridging the ESG knowledge gap is essential. Stakeholders hold diverse viewpoints on ESG definitions, practices, regulations, and reporting. Companies must proactively foster ESG knowledge and proficiency across all organizational levels to establish a common language and terminology to avoid potential confusion," said Merel Spierings, coauthor of the report and Senior Researcher at The Conference Board ESG Center.

3-Complex Data and Resource Management

Fragmented data collection and reporting processes can create delays and inconsistencies when adapting to new ESG disclosure requirements, including international ones:

• Managing the extensive data required for ESG reporting involves assessing data availability and quality against disclosure requirements, identifying new data and data owners within the organization, building data exchange systems, and ensuring accuracy of disclosed information.

The insights come from a meeting held under the Chatham House Rule with approximately 100 executives in the governance, legal, and sustainability areas. The report was produced in collaboration with the law firm Weil, Gotshal & Manges LLP.

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