Authored By: Saurabh Goel
City St George's, University of London
Environmental, Social, and Governance (ESG) considerations have rapidly transformed from voluntary corporate traditions into regulatory requirements in global markets. The transformation ranks among the most extensive shifts in corporate compliance frameworks in recent decades. As governments across the world implement stricter ESG disclosure and performance requirements, businesses face daunting tasks of adapting their businesses, governance structures, and reporting frameworks. This article examines the current state of ESG regulations, explores how companies are responding to this trend, and considers the implications for corporate law departments.
The Changing Regulatory Landscape
The regulatory landscape of ESG has expanded dramatically over the past few years. What was once voluntary in nature has increasingly hardened into legally enforceable commitments with real enforcement mechanisms. That is a reflection of rising awareness among policymakers that market pressures may prove to be insufficient in response to urgent environmental and social issues.
Greatest strides have taken place within the European Union regulatory framework. EU Taxonomy Regulation sets out a taxonomy of economically sustainable activities environmentally, and Corporate Sustainability Reporting Directive (CSRD) demands elaborated sustainability details from some 50,000 companies[1]. Additional information regarding what and how they should disclose comes in the shape of the European Sustainability Reporting Standards (ESRS)[2].
In the United States, the regulatory reaction has been less extreme but is increasing. The Securities and Exchange Commission (SEC) has issued rules requiring publicly traded companies to disclose climate risk and greenhouse gas emissions.[3] Other states have enacted their own ESG-specific legislation, creating a patchwork of standards companies must adhere to.
Asian economies have also seen high regulatory developments, with China implementing mandatory environmental disclosure requirements, Japan revising its Corporate Governance Code, and Singapore implementing mandatory climate reporting for listed companies[4].
This worldwide regulatory expansion presents high compliance challenges for multinational corporations to overcome, which must implement various requirements by jurisdiction. Inconsistency in ESG metrics contributes to the difficulty of compliance processes.
Corporate Adaptation Strategies
Faced with this advanced regulatory environment, companies are taking various steps to comply while trying to derive strategic advantages from their ESG initiatives. These adaptations span organizational structures, governance frameworks, data management systems, and stakeholder engagement approaches.[5]
Governance and Organizational Structure
Many companies have transformed their governance frameworks to incorporate ESG considerations into core decision-making. Board-level ESG committees are now prevalent, with dedicated responsibility for sustainability strategy and performance. As of a 2023 survey, 75% of Fortune 100 companies now have board committees with explicit ESG mandates[6].
Compensation structures at executive levels have also been aligned with ESG data to establish rewards for senior managers to drive the sustainability agenda forward. Organizations are creating specialized teams for sustainability comprising technical professionals, and the office of Chief Sustainability Officer has been gaining prominence.
Data Management and Reporting Systems
The ESG regulation data requirements pose huge operating challenges. Companies must collect, verify, and report considerable quantities of non-financial information. Companies are investing in specialist ESG data handling platforms and computer programs that assist in collecting, processing, and reporting information[7].
Companies are also building up their internal controls around ESG information with the same quality of rigor heretofore afforded to financial information. With increasing and ever greater regulatory control over disclosures about ESG, the reliability and veracity of the information has taken on a special legal significance.
Supply Chain Management and Due Diligence
ESG regulations continue to extend well beyond a firm’s direct activities to encompass the entire value chain of the company. In response, companies are implementing more robust supplier assessment and surveillance systems, including broad supplier codes of conduct, regular audits, and contractual arrangements with specified ESG terms[8].
Stakeholder Engagement and Communication
As ESG requirements concentrate on transparency, companies are enhancing their practice of engaging with stakeholders. These include more complete communication with regulators, customers, staff members, and investors about ESG performance and ESG strategies[9]. Investor relations teams have increased in size to address growing interest in ESG performance, while employee engagement is evolving through campaigns and training programs internally.
Legal Department Implications
Corporate legal departments are important in helping organizations move through the complicated ESG regulatory environment. Their work has grown beyond classic compliance functions to encompass advisory functions on a strategic level concerning ESG issues.
Legal teams now have a larger role in making ESG disclosure decisions, helping determine materiality levels and review sustainability reports for legal risk. Contract management is now more complex with ESG considerations being brought into commercial agreements. Legal teams must develop and negotiate ESG-related contractual language, ensuring enforceability and synchronization with the organization’s broader sustainability objectives.[10]
Legal functions are also increasingly involved in ESG due diligence for acquisitions and mergers. Given that sustainability risks can have a material impact on transaction value, comprehensive assessment of ESG performance is now a standard aspect of M&A activity.
Most significantly, perhaps, legal functions must keep up with rapidly evolving ESG regulation in a number of jurisdictions. A number of legal functions have assigned ESG experts or established dedicated teams to manage these responsibilities.
Challenges and Future Directions
As good as the progress has been in adapting to ESG policies, there are still massive challenges for companies. Possibly the greatest barrier is fragmentation of regulation by jurisdiction, with complexity in compliance.[11] Reliability and availability of data pose continued challenges, particularly for Scope 3 and social metrics.[12]
In the first place, a variety of trends are likely to shape the ESG regulatory landscape. Mandatory disclosure requirements will extend further, enforcement tools will further intensify, and integrating sustainability factors into financial regulation will become faster.[13]
Companies that take an active effort to transform with these trends will be more likely to successfully navigate the shifting regulatory environment. By embracing ESG rules as a source of innovation rather than as a compliance effort, companies can create long-term value while complying with the law.[14]
Conclusion
The expansion of ESG regulations is a paradigm shift in business legal architecture. As issues relating to sustainability transform from being optional to mandatory, corporations must remake their model of governance, process, and system of compliance.
In-house legal functions play a pivotal role in such adaptation, advising businesses through the intricacies of regulatory requirements and shaping decision-making on ESG matters. With specialized knowledge and sound compliance frameworks, legal functions can enable their organizations to thrive in a rapidly sustainability-oriented regulatory landscape.
As ESG regulations continue to evolve, the most successful companies will be those that move beyond compliance to embed sustainability as a business principle, addressing the most pressing global issues that ESG regulations aim to address.
Bibliography
- Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 [2020] OJ L198/13
- Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting [2022] OJ L322/15
- European Financial Reporting Advisory Group, ‘European Sustainability Reporting Standards’ (EFRAG, 2022)
- PwC, ‘Annual Corporate Directors Survey: ESG oversight and board practices’ (PricewaterhouseCoopers LLP, 2023) https://www.pwc.com/us/en/services/governance-insights-center/library/annual-corporate-directors-survey.html
- Securities and Exchange Commission, ‘The Enhancement and Standardization of Climate-Related Disclosures for Investors’ (Proposed Rule) 87 FR 21334 (11 April 2022)
- European Commission, ‘Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937’ COM(2022) 71 final, 23 February 2022
- EY, ‘Global Institutional Investor Survey: How will ESG performance shape your future?’ (Ernst & Young Global Limited, 2022) https://www.ey.com/en_gl/media/podcasts/better-finance/2020/11/season-3-episode-4-how-will-esg-performance-shape-your-future
- World Business Council for Sustainable Development, ‘ESG Disclosure Handbook: Asia Pacific regulatory developments’ (WBCSD, 2022)
- Deloitte, ‘Global survey on ESG reporting trends and technologies’ (Deloitte Touche Tohmatsu Limited, 2023) https://www2.deloitte.com/content/dam/Deloitte/tw/Documents/about-deloitte/2023-deloitte-global-impact-report.pdf
- McKinsey & Company, ‘The ESG premium: New perspectives on value and performance’ (McKinsey & Company, 2022) https://www.mckinsey.com/capabilities/sustainability/our-insights/the-esg-premium-new-perspectives-on-value-and-performance accessed 28th April, 2025
Reference(S):
[1] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 [2020] OJ L198/13
[2] Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 [2020] OJ L198/13
[3] Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting [2022] OJ L322/15
[4] European Financial Reporting Advisory Group, ‘European Sustainability Reporting Standards’ (EFRAG, 2022) accessed 27th April, 2025
[5] PwC, ‘Annual Corporate Directors Survey: ESG oversight and board practices’ (PricewaterhouseCoopers LLP, 2023) https://www.pwc.com/us/en/services/governance-insights-center/library/annual-corporate-directors-survey.html accessed 26th April, 2025
[6] PwC, ‘Annual Corporate Directors Survey: ESG oversight and board practices’ (PricewaterhouseCoopers LLP, 2023) https://www.pwc.com/us/en/services/governance-insights-center/library/annual-corporate-directors-survey.html accessed 26th April, 2025
[7] Securities and Exchange Commission, ‘The Enhancement and Standardization of Climate-Related Disclosures for Investors’ (Proposed Rule) 87 FR 21334 (11 April 2022)
[8] European Commission, ‘Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937’ COM(2022) 71 final, 23 February 2022
[9] EY, ‘Global Institutional Investor Survey: How will ESG performance shape your future?’ (Ernst & Young Global Limited, 2022) https://www.ey.com/en_gl/media/podcasts/better-finance/2020/11/season-3-episode-4-how-will-esg-performance-shape-your-future accessed 27th April 2025
[10] Securities and Exchange Commission, ‘The Enhancement and Standardization of Climate-Related Disclosures for Investors’ (Proposed Rule) 87 FR 21334 (11 April 2022)
[11] World Business Council for Sustainable Development, ‘ESG Disclosure Handbook: Asia Pacific regulatory developments’ (WBCSD, 2022)
[12] Deloitte, ‘Global survey on ESG reporting trends and technologies’ (Deloitte Touche Tohmatsu Limited, 2023) https://www2.deloitte.com/content/dam/Deloitte/tw/Documents/about-deloitte/2023-deloitte-global-impact-report.pdf accessed 27th April 2025
[13] European Financial Reporting Advisory Group, ‘European Sustainability Reporting Standards’ (EFRAG, 2022) accessed 27th April 2025
[14] McKinsey & Company, ‘The ESG premium: New perspectives on value and performance’ (McKinsey & Company, 2022) https://www.mckinsey.com/capabilities/sustainability/our-insights/the-esg-premium-new-perspectives-on-value-and-performance accessed 28th April, 2025
