Complex ESG reporting rules challenge EU firms
While the European Union firms are under increasing pressure to fall in line with the strict new rules on environmental, social, and governance regulations, many firms are finding it extremely hard to grapple with these rules. Firms across Europe view the newly implemented reporting requirements of ESG as “ridiculously complex” as wide-ranging concerns about risk management, compliance, and operational efficiency mount. Business landscapes keep changing so fast, and it is of great importance that companies reassess their risk appetite and build sound strategies that could help them meet these increasing ESG mandates.Here’s what SMEs need to know about ESG reporting and how to manage compliance challenges effectively.
Increasing importance of compliance with ESG
ESG reporting has now become the focal point, especially for companies in the EU, driven by both the European Green Deal and regulatory drives to make Europe the world’s first climate-neutral continent by 2050. This quest is part of the tripod policy thrust for the EU: to reduce environmental impact, ensure social responsibility, and institute good governance practices. Many companies welcomed the idea of ESG, but the increasingly complicated rules are proving Herculean to comply with.
All large companies and SMEs are required to adopt specific ESG reporting frameworks, which capture their environmental impact, structure of governance, and social practices. The increasing stringency of regulations makes sustainability reporting active for businesses rather than just a question of compliance with the mere basics. This shift demands great detail in operational procedures, data management, and risk strategy.
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In this world of precision and transparency, companies would have to work out the operational headache of schemes while making sure sustainability becomes their big ticket. Fully designed solutions like ESG reporting may become key to lightening the administrative load.
Understanding the complex world of ESG regulations
ESG regulations have, however, proven to be excessively intricate for most EU companies. Take the EU Taxonomy Regulation, which categorizes economic activities as being environmentally sustainable, for example; it requires firms to report on over two-thirds of their environmental indicators. Indeed, such a requirement has meant substantial data collection and analysis with huge financial and operational implications.
Moreover, matters are made even more complicated by the fact that there is no standardisation of ESG reporting frameworks. For instance, companies have to grapple with a number of reporting frameworks, each commanding its requirements- the GRI, TCFD, and SASB, among others. This contributes to greater administrative compliance burdens, hence making it even harder for companies to align their practices with various regulations.
Companies do this to stay competitive but avoid costly penalties while seeking solutions that will make the process of reporting efficient, integrate data, and reduce risks.
Rethinking risk management and business strategy
Changing regulations on ESG, in turn, force organisations to reconsider their risk appetites. What is referred to here as risk appetite means how much risk an organization is ready to accept in pursuit of its goals. In a more risky regulatory environment for ESG compliance, companies rethink how they balance risk management with business strategy.
While environmental sustainability may take centre stage in many industries, other industry sectors may have a number of significant social and governance-related practices that would need to be diligently handled. Non-compliance could result in fines, damage to reputation, and even disruption in business operations. Companies will, in turn, need to rework their internal processes and set up new tools that will enable them to manage the associated risk and stay compliant with updated regulations.
In such an environment, where the pace is continuously increasing, the tooling that makes ESG reporting effortless and aligned with current regulations like Klimado is about to become indispensable. This reduces the complexity of the data and compliance management burden, freeing firm resources for more productive uses and creating a path toward business model sustainability and resilience.
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This article is referenced from What’s your risk appetite? EU firms grapple with ‘ridiculously complex’ ESG reporting rules by Aaron Nicodemus
Editor’s Note: The opinions expressed here by the authors are their own, not those of impakter.com — Cover Photo Credit: Vitaly Gariev
