Voluntary environmental policies, regulations, roadmaps, acts, standards, laws, and directives for sustainability exist all over the world, although it is often confusing to clearly understand the differences and parallels in such disparate frameworks across countries, states, and other jurisdictions. Until now, sustainability disclosure has been voluntary in the US, with many pioneering organizations commenced their sustainability journeys a decade back including pioneers such as Google, IKEA, and Walmart anticipating the future challenges and capitalizing on benefits and opportunities. While acts and laws are both legally binding, laws define specific principles and regulatory rules that acts may not. Rules, policies, and regulations are not laws, but they are still binding through codes of conduct and may carry legal implications. Standards and directives are legal or voluntary guides to help maintain certain standards in different functional areas of a company.
While the environmental health and safety (EHS) initiatives of a company pertain to clean air, water, hazardous waste disposal acts and standards compliance, acts and laws of the Environmental Protection Agency (EPA) at a local level within the organization, sustainability initiatives go steps further in terms of organizational strategy, solutions, resources tracking, compliance, and scaling across industries. For instance, EHS can handle compliance, ISO 14001, and other EPA routine compliance standards and life cycle assessment (LCA) as a precursor to a more sophisticated corporate sustainability roadmap.
At the global level, governments are enacting legislation to integrate sustainability and ESG more broadly into business processes. Countries are rolling out regulations that mandate environmental reporting, diversity disclosure, and responsible governance practices. These regulations carry legal consequences for non-compliance, underscoring the significance of sustainability initiatives in the eyes of the law. International agreements, such as the United Nations Global Compact, created ESG principles that encourage businesses to align with 17 Sustainable Development Goals (SDGs). It is now mandated to report Scope 3 emissions under the EU’s Corporate Sustainability Reporting Directive, and will likely impact more than 3,000 US and 1,300 Canadian companies. The directive is aimed at driving change in the business behavior of companies that operate in the EU, which includes US companies with EU subsidiaries that meet certain criteria. The Sustainability Stock Exchange worldwide is currently operated by the UN. In 2021, IPCC’s (International Panel for Climate Control), limiting temperature increases to 2 degrees, began the race to Net Zero in the Paris Climate Accord across nations now backed by Science Based Targets (SBTs) data for target setting across industries backed by UNGC, WWF, and WRI.
At the national level, industry-specific guidelines further augment and create possibilities and solutions for sustainability. Organizations within certain sectors are developing best practices that cater to the unique challenges they face. The Securities and Exchange Commission (SEC) has recently adopted rules to Enhance and Standardize Climate-Related Disclosures for Investors. One such framework is the Task Force on Climate-related Financial Disclosures (TCFD), which encourages businesses to provide comprehensive disclosure about their climate-related risks and opportunities in financial reporting. While there are other reporting directives that exist like the Global Reporting Initiative (GRI), which expanded its metrics in the past decade, there are many more such as the Sustainable Accounting Standards Board (SASB), Carbon Disclosure Project (CDP), among others. At the federal level, the Greenhouse Gas Reporting Program (GHGRP) serves as the primary national regulator of emissions data. At the state level, California, Oregon, and Washington have implemented more stringent reporting requirements for in-state companies and facilities. Each state has its own emissions threshold for data reporting. Companies based in California have created their own GHG reduction initiative after President Trump exited the Paris Climate Accord, with companies required to report if they emit more than 10,000 metric tons per year, while in the state of Oregon this number is 2,500 metric tons. The Regional Greenhouse Gas Initiative (RGGI) comprises of 12 US eastern states with their own GHG program. RGGI sets a declining limit on carbon produced by power plants, puts a price on carbon, and invests in communities, resulting in more jobs and better health outcomes. Though there is mandatory GHG reporting rule by the EPA at the national level, there is still no clear breakdown of threshold data for reporting in 50 states and ICB classification of industries. An interesting turn in accounting and reporting is outsourcing these activities to boutique companies globally for more time-consuming activities, while corporate sustainability professionals stick to crucial objectives such as strategy, solutions, and benchmarking.
Within ESG, the legal responsibilities in the social realm of labor and human rights, safeguarding dignity and labor are foundational. Businesses are accountable for upholding employee rights, ensuring safe working conditions, and fostering fair labor practices. This extends to issues such as minimum wage compliance, reasonable working hours, and protection against discrimination and harassment in the workplace. Supply chain management (SCM) adds another layer of this interwoven web. Companies must ensure that their suppliers and partners adhere to similar labor and human rights standards for a responsible supply chain. Failure to address these concerns can result in reputational damage, legal repercussions, and potentially violating laws such as the Modern Slavery Act, which requires transparency about efforts to combat forced labor and human trafficking. The need for diversity, equity, and inclusion (DEI) has prompted legal considerations that extend beyond moral boundaries. Anti-discrimination laws prohibit bias based on race, gender, age, religion, and other protected characteristics. Businesses must navigate these laws to create inclusive workplaces where individuals are judged based on their merits while discriminatory practices are prohibited. Equal opportunity regulations led to the creation of policies that promote diversity in recruitment, retention, and promotion. These frameworks encourage companies to actively seek diverse perspectives, resulting in a more inclusive workforce representing the broader society. Companies must provide shareholders with transparency of executive compensation packages. Governance including board composition, executive compensation, and shareholder activism, is now part of corporate social responsibility (CSR) reporting. Companies who do an effective job with compliance also benefit from improved brand reputation, positive media coverage, and improved investor relations.
Financially speaking, with the rise of impact investing, the world market for carbon offsets or credits is growing rapidly, currently at $851 billion and growing, many boutique companies offer tailored offset projects. The carbon exchange market has yet to kick off in the US, which represents a large potential opportunity in the future. Green bonds are continually on the rise with $90 billion in the US in 2021. Impact investors are increasingly relying on proprietary ESG guidance from MSCI, KLD analytics for rising ESG stock markets such as FTSE4good and DJSI in the US. The Dow Jones Sustainability World (DJSI) Index comprises global sustainability leaders as identified by S&P Global through the Corporate Sustainability Assessment (CSA). It represents the top 10% of the largest 2,500 companies in the S&P based on long-term economic, environmental, and social criteria. The FTSE4Good Sustainability Index belongs to the FTSE4Good family, run by the Financial Times Exchange and this index groups companies worldwide that include solid ESG practices. The Green Impact Exchange (GIX) will in the future be the first registered green exchange in the US, and will be dedicated to bringing together green investors and public companies who are committed to green corporate governance. The global sustainable finance market size reached $5.3 billion in 2023. Looking forward, IMARC Group expects the market to reach $23.6 billion by 2032, exhibiting a compound annual growth rate of 17.96% during 2024-2032. President Biden has awarded $20 billion and identified key areas in large and small banks that qualify for the same this year.
Amidst a dynamic regulatory and compliance requirement for corporate sustainability, opportunities abound for companies who can effectively navigate the landscape, providing benefits to their investors, employees, customers, and other stakeholders while creating innovative business practices that can also be beneficial to society and the environment.
