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Staying ahead of the ESG regulatory curve
5 min read
Most leaders would agree that the ability to see into the future would be a dream business advantage. A key benefit of a strategic and data-driven approach to ESG is the ability to predict some of the challenges a business might face.
With ESG rules and regulations changing at a dizzying pace, an accurate, up-to-the-minute overview of the regulatory landscape gives business decision-makers a genuine head-start. With the help of AI to do the number crunching, it’s possible to go a step further, anticipate challenges, minimize their impact and identify opportunities from being ahead of the competition.
Predicting external risks for efficient decision-making
Informed decision-making depends on reliable data. Understanding precisely how things are changing gives powerful strategic and predictive insight. Leaders can use this to deploy internal or external ESG, risk or legal resources in the most focused and effective way.
Identifying how the most relevant risks are increasing in real-time helps prepare and stay ahead of the competition, often allowing issues to be turned into opportunities with employees, customers or investors. By comparing existing regulations, voluntary initiatives and how frequently they are being discussed by stakeholders, decisions on risk can be taken ahead of time and based on verified data, rather than relying on opinion, intuition or hunches. Leaders need not get into the details, but an understanding of the capability to have an informed overview is invaluable.
Short-term vs long-term regulatory risks
The latest information on the shifting regulatory landscape, where they apply and the timelines for implementation, empowers a leadership team. Armed with this information, timely interventions can help reduce sanctions, avoid the attention of regulators or limit other negative impacts.
Having such a high-level overview is critical for strategy and C-Suite planning. The ability to delve deeper into each issue, the short-term and long-term regulatory risks and the details of each specific regulation, leads to better decisions and greater in-house ownership by teams within the business, (even if they aren’t fully qualified ESG experts).
But that is just the start of what can be achieved with such a granular understanding of the regulatory landscape.
The science behind identifying future regulation
Our data supports the overwhelming tide of academic research that identifies a strong correlation between voluntary initiatives and future mandatory regulation. There are many examples of climate change and GHG emissions regulations, to use just one example, that started out as voluntary but eventually became mandatory. The Task Force on Climate-related Financial Disclosures (TCFD) is one such precedent.
Over the last decade there has been exponential growth in voluntary initiatives on climate change and GHG emissions. The movement of travel is a strong indication that more regulations are on the horizon; understanding which of the voluntary initiatives pose the greatest risk is invaluable for long-term strategic planning.
There is no magic formula to identifying which voluntary regulations become mandatory, but there are often a number of factors are often present:
Existing mandatory regulations and voluntary initiatives are already in place, GHG emissions are an example
Voluntary initiatives are recommended consistently by the most influential voices in the field, whether they are existing frameworks or standards, independent reporting organizations - such as SASB or GRI
A growing number of organizations choose to adopt these voluntary initiatives and report them in their sustainability or even financial reports
By consistently monitoring the regulatory landscape, even at a high level, an educated prediction can be made on which will become mandatory.
Some of the factors to watch out for include: who is endorsing the voluntary initiatives; how many companies are using them in their ESG, sustainability (and sometimes financial) reports. This ensures valuable time and resources are focused on the things that have the biggest likelihood of change.
What to look out for in 2023
Climate change and GHG emissions, is just one of the 100 different topics that can be monitored to flag future risks in regulations that allows business leaders to appoint specialist teams or expertise and set deadlines and goals.
While the environment is currently being widely debated, there are sector-specific and geography-dependent elements that might not be as immediately visible. Here are some which would be flagged for closer review in 2023:
Biotech and Pharma – Customer privacy & data security, product safety and quality
Fashion & Retail – Employee diversity & inclusion
Consumer Goods – Employee diversity & inclusion
Finance – Responsible investing & financing, Ethical corporate behavior
Airlines – Natural capital
Utilities – Human rights
Construction – Critical incident management & response
Tech – Ethical corporate behavior, human rights
Taking advantage of technology to sift through the vast amounts of ESG regulatory, reporting and news data provides tailored insights in a way that is otherwise impossible. It reflects peers, the legal jurisdictions in which they operate and individual stakeholders. This empowers teams to give timely and informed advice, while leaders can cut through the noise and lead.
How can you gain a competitive advantage by making data-driven decisions on regulatory developments? Get in touch.
Continue the series with a top-level overview of the most useful frameworks, standards and regulations to consider when developing an ESG strategy.