More ESG regulations are coming and will expose companies that fail to take them seriously

ESG disclosure is rising higher up the priority list for shareholders, customers, politicians, and regulators. Even so, many businesses continue to underestimate its importance, as well as the impact it could have on their operations. More ESG regulations are on their way and firms would do well to pay attention…

Naming and shaming

Multiple studies which show that investors demand more disclosure on ESG related risk. In June, a coalition of heavyweight investors named and shamed more than 1,000 big firms including Berkshire Hathaway, Facebook and Tesla for failing to properly provide data on ESG risk.

Regulators are upping their focus on ESG. In addition to the EU’s ESG regulations, the US  SEC is engaged in a fierce debate on heightened disclosure requirements, in the face of stern opposition from tech firms such as Facebook and Alphabet who believe disclosing such risks could leave them open to legal challenges.

From the US to the EU, the UK and China, tighter ESG regulations are in the pipeline and naysayers are fighting an uphill battle.

Getting ready for ESG regulatory change

Those who view upcoming regulations as a box ticking exercise will struggle to keep pace. The EU’s regulation is purposefully vague to make it difficult for companies to simply treat compliance as an administrative exercise. It forces firms to look closely at every aspect of their operations to disclose how the operations impact and expose them to climate risks. A complicated task.

For financial firms it will include assessing the products they use, the service offering, and the partners they work with. For example, Tesla’s announcement that it would suspend acceptance of Bitcoin until it addresses sustainability issues demonstrates the complexity of ESG exposure. For a growing number of firms, getting involved in cryptocurrencies and blockchain technologies, for example, the carbon footprint will become an increasingly important metric.

Bitcoin’s experience should also alert firms to the financial risks involved with companies failing to meet investors’ expectations on sustainability. Tesla’s decision – along with a series of critical Tweets from Elon Musk – threw its value into reverse.

Lending decisions and ESG

Meanwhile, banks may have to consider the environmental impact of their lending decisions. For example, if approving a loan to a development company, they may have to consider to what extent that company complies with environmental best practices. This might be something to disclose but will also impact risk assessments.

This is the crux of the matter.

As with the most important changes, this is not just a question of compliance. All parties are set to take notice of a company’s credentials on sustainability. Regulators are likely to introduce increasingly tight rules as banks, investors, and other lenders are considering ESG factors when making business decisions. And, the power further lies with customers, enabling them to choose to avoid companies with a poor environmental reputation, while rather supporting the companies doing their bit to satisfy ethical goals.

From every perspective, therefore, ESG will have a fundamental impact on business operations. For all the reasons listed above, and many others, businesses would be well advised to start preparing now to put themselves ahead of the game.