A new combination of three fundamental forces will mean that any company seeking to maintain a reputable and defensible position concerning sustainability must address European Sustainability and ESG requirements. June of 2023 will see the release of the European Sustainability Reporting Standards (ESRS), the prescriptive reporting framework for the Corporate Sustainability Reporting Directive (CSRD). Companies headquartered outside the European Union (EU) who thought this ambitious European legislation didn’t apply to them need to think again.
The Brussels Effect
In 2012, a professor at Columbia Law School coined the term The Brussels Effect, where laws made in the EU become de facto global standards driven by market forces. Companies outside the EU find it easier to comply with EU ESG regulations and adopt these standards globally than to maintain lower standards in markets outside the EU.
This has played out across various legislative areas, including antitrust, chemical, airplane emission, data privacy and consumer goods (think REACH, GDPR, Conflict Minerals, and even iPhone chargers). We are now seeing this emerge in sustainability and ESG reporting as companies opt to uniformly meet the highest regulatory obligation to which they are subject rather than operate a patchwork of production, licensing, delivery and sales standards.
Interoperability
A second driver is what the multiple standards setters call interoperability, the efforts to align reporting and disclosure frameworks as much as possible to minimise the burden on corporates. This will see, for example, the US SEC paying close attention to what IFRS and European regulatory bodies require and following this model where possible. A convergence of standards is in everyone’s best interest and is likely to mean that rules made in Brussels will have an impact in Washington and Beijing.
CSRD
A third element is supercharging this trend. The CSRD requires certain non-EU headquartered companies to report using the ESRS. Companies that meet the following criteria will be required to prepare reporting compliant with the ESRS:
- Companies that have listed securities, such as stocks or bonds, on a regulated market in the European Union
- Companies with an annual EU revenue of more than €150 million and an EU branch with net revenue of more than €40 million
- Companies with an EU subsidiary that is a large company, defined as meeting at least two of these three criteria: more than 250 EU-based employees, a balance sheet above €20 million or local revenue of more than €40 million
Recent data from Refinitiv, featured in the Wall Street Journal, suggests that around non-EU 10 000 companies will fall into this category: 30% American, 13% Canadian, and 10% British.
The EU’s Corporate Sustainability, Due Diligence Directive, provides teeth to the CSRD, with power delegated to member state authorities to apply fines and compliance orders to companies, including non-EU companies, who fail to meet sustainability risk management and disclosure standards. Victim compensation claims are also enabled.
So, with the combined impact of the Brussels Effect, the convergence and alignment of multiple global standards, and the explicit legal requirement of the CSRD, many US and other non-EU firms will have incentives or obligations to adopt these EU ESG regulations.
Anti-ESG
While a pushback against ESG has emerged in some quarters, particularly the more free market-focused sectors of the US economy, arguments are emerging that EGS provides a valuable lens to identify and manage business risk, which it intended to do.
“We’re starting to see a backlash in the [United States] to measures that would restrict investors from taking into account long-term business risks in their portfolios,” Republican strategist Ron Bonjean told USA Today. “There is a clear business and financial case to these measures’ failures: the free market depends on investment decisions that take material risks into account.”
Recent reporting in USA TODAY suggests that the anti-ESG movement does not have widespread public support. The Penn State’s Center for the Business of Sustainability and communications firm ROKK Solutions surveyed voters and found 63% said the government should not set limits on ESG investments—Democrats because ESG investments are a social good and Republicans because doing so would interfere with free markets. The anti-ESG movement will likely find itself on the wrong side of history, with the tide already beginning to turn.
Solutions and Opportunities
As a solution provider, Benchmark Digital has seen extensive evidence from Benchmark Gensuite® platform subscribers that systematic EHS, Sustainability, and ESG disclosure practices generate real business value. Far from being a constraint or a cost burden, an effective strategy and deployment can help reduce costs, create value and prepare the organisation for future challenges.
This will provide a competitive advantage in a rapidly changing business environment where transparency and scrutiny are reaching unprecedented levels. (The Climate Trace project, using satellite data to make detailed emissions data freely available, is just one example of this scrutiny. Is your facility listed?)
The challenges are growing. Business strategy must address growing regulatory obligations and voluntary reporting trends, increasing demands from investors and other stakeholders, and pressure on resources as the climate crisis begins to bite.
But solutions are rapidly emerging too. An integrated, enterprise-wide technology platform provides a powerful tool to manage data, deliver business intelligence, and report to the growing numbers of stakeholders demanding information. Using automated data collection processes, Machine Learning, AI technology, and business analytics, today’s sustainability practitioners have an unprecedented capability to understand their business and drive operational performance.
In the past, the EHS profession has been slow to adopt technology to meet its goals—in contrast to finance or retail—but that gap has closed. Companies that recognise the risks facing their business from climate, biodiversity and other sustainability aspects can adopt powerful tools that underpin a holistic, cross-functional, integrated management capability.
