Cross-Border ESG Regulations: Navigating the New Age of Disclosure

Posted on October 27, 2023 by Louis D. Coppola – Co-Founder & Executive Vice President – G&A Institute

#Corporate Citizenship #Corporate Governance #Corporate Sustainability #ESG #Sustainability Reporting 

By Louis D. Coppola – Co-Founder & Executive Vice President – G&A Institute

In the modern era of globalized business, the intersection of varying regulatory frameworks across jurisdictions presents a unique and challenging landscape for multinational corporations. The evolving realm of various standards, frameworks, and mandates for Environmental, Social, and Governance (ESG) disclosure is a quintessential example of this interplay.

During climate week in New York City  just a few weeks ago, G&A Institute, along with Baruch College’s Zicklin School of Business hosted the Global Reporting Initiative (GRI) for the launch event of the latest edition of the “Carrots and Sticks” research.

Carrots & Sticks was first published in 2006, and since then with regular updates has presented a comprehensive assessment of environmental, social and governance (ESG) & sustainability policy worldwide.

In this latest version the research identified and analyzed nearly 2,500 policies on ESG disclosures and broader sustainability requirements worldwide. For companies that operate across borders, understanding and complying with this labyrinth of mandates is more than a matter of legal compliance; it’s about future-proofing their operations, identifying and addressing risks, and protection of brands and corporate reputation.

One of the most significant developments in recent years has been the emergence of cross-border ESG disclosure regulations. These regulations apply to companies that operate in multiple jurisdictions, regardless of where they are headquartered.

This trend is accelerating as individual countries and regions act faster than international coordination efforts. While this growth in ESG oversight reflects rising societal expectations, the fragmented regulatory landscape creates a minefield for companies to navigate.

The Impact of EU’s CSRD Regulation

The Corporate Sustainability Reporting Directive (CSRD) of the European Union (EU) stands out as one of the most expansive and influential regulations in the ESG disclosure space. Its wide-ranging implications are felt not just within the EU’s boundaries but far beyond in places like the United States.

While the U.S. has been comparatively slow in rolling out analogous directives—with the Securities and Exchange Commission (SEC) only recently drafting its climate disclosure regulations—the CSRD has raised the bar significantly for companies in Europe and beyond EU borders.

U.S. companies that have significant operations or reach a certain financial threshold in the EU, find themselves at a crossroads. The CSRD mandates them to adhere to its directives, putting them in the precarious position of reconciling with their home country’s less stringent regulations.

Local Mandates with Global Implications

Closer to home, the State of California’s recent regulation mandating the disclosure of scope 1, 2, and 3 GHG emissions offers a snapshot of the challenges companies face.

Important to consider:  This legislation affects companies with global revenues exceeding $1 billion that operate within the state, regardless of the company’s headquarters’ location. Whether a company is based in a neighboring state or another far-off country entirely, they’re bound by California’s mandate if they wish to continue their operations there.  Also covered:  partnerships, LLCs, and other entities.

Key Drivers of Cross-Border ESG Regulations

Several key factors help to explain the surge in ESG disclosure rules with expansive geographic reach:

  • The global nature of sustainability issues – Environmental and social challenges cross borders, requiring collective action. Regulators are realizing local efforts alone are insufficient.
  • Consumer demand, most notably in the EU, is demanding governments to regulate the availability of non-sustainable products on its markets.
  • Extraterritorial authority principles – Legal doctrines like effects jurisdiction allow countries to regulate foreign conduct with substantial domestic impacts. Climate change is a salient example.
  • Governance gaps in global coordination – International bodies such as the IFRS and the OECD move slowly, prompting individual regulators to fill perceived voids domestically.
  • Competition for ESG leadership – Forward-leaning jurisdictions like the EU want to cement their position in standard setting and rulemaking. First mover advantage is rewarded.
  • Stakeholder pressure and societal demand – Citizens, investors, consumers increasingly insist on ESG transparency from all entities, regardless of jurisdiction. Regulators feel compelled to respond.

This confluence means cross-border ESG regulations will only continue to expand. Company boards and managements must navigate this complex terrain — or risk non-compliance, legal, and reputation damage.

Legal Challenges and Enforcement Conundrums

The overlay of regional, national, and international regulations naturally leads to questions about legality and enforceability.  Example:  Can an EU regulation effectively impose its will on a U.S.-based company? And, if there’s resistance, what power does the EU genuinely hold to compel compliance?

In theory, a jurisdiction could block companies that don’t comply from doing business within its borders. But, in practice, the economic interdependencies and the potential ramifications of such drastic measures complicate matters. The legal tussles that are bound to arise will pave the way for precedents that could reshape the global ESG landscape.

A Unified Path Forward?

The growing prominence of ESG considerations — fueled by both societal expectations and the tangible risks and opportunities they present — suggests that these disclosure requirements are here to stay, and will likely intensify. Many experts agree:  companies would benefit from a more harmonized set of global standards.

The good news is that efforts are underway in this direction, with institutions such as the International Financial Reporting Standards (IFRS) Foundation, GRI and even the European Standard developer EFRAG are working on interoperable global sustainability reporting standards. But until such standards are universally adopted, companies will have to adeptly navigate the varied regulations of the lands they operate in.

Strategic ESG Disclosure: More Than Just Compliance

Companies need to recognize that ESG disclosure isn’t just about ticking regulatory boxes. It’s an opportunity to demonstrate commitment, showcase resilience, and build trust among stakeholders. And, last but not least it offers a wealth of internal management information.

Proper ESG reporting can enhance brand value, foster investor confidence, help to attract long-term, patient capital, and create competitive advantages in the marketplace.

Achieving this requires a strategic approach. Rather than viewing ESG reporting as a patchwork of disparate mandates, companies can adopt a holistic approach. This involves understanding the underlying essence of these regulations—the reach for greater transparency, accountability, and fostering sustainable operations—and embedding the strategies and goals into the company’s core ethos.

The Impact of Cross-Border ESG Disclosure Regulations

Cross-border ESG disclosure regulations have a number of implications for companies. First, they increase the complexity of ESG compliance. Companies that operate in multiple jurisdictions need to be aware of the different ESG disclosure requirements that apply to them and ensure that they are in compliance with all of them. The earlier mentioned Carrots&Sticks database is a good, free source for this information.

Second, cross-border ESG disclosure regulations can increase the costs of compliance. Companies may need to invest in new systems and processes to collect and report ESG data. They may also need to hire additional staff with expertise in ESG reporting.

Third, cross-border ESG disclosure regulations can create new reputational risks for companies. Companies that fail to comply with ESG disclosure requirements could face negative publicity and investor backlash.

Challenges and Opportunities

The rise of cross-border ESG disclosure regulations presents a number of challenges for companies. However, it also presents a number of opportunities.

For example, companies that are early adopters of ESG disclosure can gain a competitive advantage by attracting and retaining customers, investors, and employees who are committed to sustainability.

Companies can also use ESG disclosure to improve their performance and reduce their risks. By disclosing and managing ESG risks, companies can improve their operational efficiency, reduce their costs, and enhance their resilience to shocks.

The Bottom Line

Cross-border ESG regulations create huge challenges but equally sizable opportunities for companies that can demonstrate leadership. Forward-looking multinationals will view this not simply as a compliance exercise, but as a value creation lever for their business.

First movers can gain advantage by helping shape better-aligned global standards over time. Constructive engagement and collaboration will benefit companies and regulators alike. But action cannot wait for perfect coordination.

Cross-border ESG disclosure regulations are a growing challenge for companies. However, by taking a proactive approach to ESG compliance, companies can gain a competitive advantage and improve their performance and resilience.

How G&A Institute Can Help

At G&A Institute, we help clients turn regulatory complexity into competitive advantage. Our experts track emerging regulations worldwide and partner with organizations to craft integrated, strategic ESG disclosure programs.

G&A Institute is committed to helping companies to navigate the increasingly complex ESG disclosure landscape. We offer a range of solutions to help companies to comply with ESG regulations, improve their ESG performance, and communicate their ESG achievements to their stakeholders.

In this intricate world of ESG disclosure, expertise and guidance are invaluable. This is where the G&A Institute shines. With a team that has multiple decades of experience in closely tracking and analyzing sustainability reporting trends — and helping corporations address the ever-evolving requirements — we’ve cultivated a nuanced understanding of the field.

The G&A Institute’s seasoned experts can assist companies in not just achieving compliance but in leveraging ESG disclosures as strategic assets for the enterprise. In the face of global regulations that may sometimes seem in conflict, we offer clarity, direction, and a path to navigate this complex domain.

ESG disclosure is not a transient trend but a reflection of a global paradigm shift towards greater corporate sector, capital markets, and societal sustainability.

And as this landscape continues to evolve, companies that are proactive, informed, and strategic in their approach will not just survive but thrive.  Contact us today to futureproof your business.