In recent years, the focus on Environmental, Social, and Governance (ESG) criteria has come to rival traditional financial metrics like EBITDA in importance within corporate finance and tax departments worldwide. This shift is driven by increasing global interest in sustainability and an array of legislative measures aimed at enforcing corporate responsibility regarding environmental, climate, and human rights issues. The introduction of various new directives, such as the Corporate Sustainability Due Diligence Directive and the EU Deforestation Regulation, alongside emerging global sustainability standards from the International Financial Reporting Standards’ International Sustainability Standards Board (ISSB), has forced multinational businesses to grapple with extensive reporting requirements. This transition reflects a growing recognition that sustainability-related activities have direct implications on financial health and balance sheet risks, pushing ESG into a multidisciplinary arena that impacts the overall bottom line and necessitates collaborative efforts across various departments.
The ISSB has emerged as a defining influence in the realm of corporate sustainability reporting since its inception at the COP26 climate conference in November 2021. The board issued its first significant reporting frameworks, the IFRS S1 and S2 standards, in June 2023. The S1 standard advocates for the inclusion of essential sustainability disclosures in financial statements, while the S2 standard focuses specifically on climate-related disclosures, requiring companies to articulate their climate-related plans, metrics, and targets. Over 30 jurisdictions globally have committed to adopting these standards by integrating them into national regulations, signaling a shift toward uniformity in sustainability reporting expectations. Starting in January 2025, businesses operating in these jurisdictions will be required to adhere to these protocols, emphasizing the growing demand for transparency and accountability in corporate sustainability endeavors.
However, the regulatory landscape remains murky, especially in the United States, which has yet to formally adopt the ISSB’s standards. The U.S. Securities and Exchange Commission (SEC) has its own climate disclosure standards that mirror certain ISSB components but have recently faced legal challenges that threaten to delay implementation. In March, a stay was granted by the U.S. Court of Appeals for the Fifth Circuit, casting uncertainty on the SEC’s climate rules amid ongoing litigation in other circuits. As the regulatory environment evolves, especially with a shift in leadership at the SEC, corporate leaders find themselves in a difficult position, trying to anticipate the future of compliance and disclosure requirements amidst this confusion.
Similar delays and complications arise within the European Union as member states struggle with the implementation of the Corporate Sustainability Reporting Directive (CSRD) and Deforestation Regulation. Technical issues relating to the speed of transposing these directives into national law have resulted in stalling and postponements that could last for months or even years. This lack of clarity regarding implementation timelines complicates preparation efforts for tax and finance departments eager to understand their future compliance obligations. As a result, businesses are left in a predicament, knowing that regulations are imminent but lacking specific details on what they entail or when they will be enacted. This enigma generates challenges for corporate leaders who must prepare for compliance under unclear conditions.
As the business environment becomes increasingly convoluted, the need for companies to reevaluate their operational structures grows more critical. The traditional siloed approach to business operations—where teams focus exclusively on their respective tasks, whether tax compliance or legal oversight—has led to inefficiencies in an era demanding agility and responsiveness to evolving regulatory requirements. Corporate finance, legal, and compliance teams now face unprecedented pressure to monitor and adapt to a complex web of regulations simultaneously. To navigate this multifaceted landscape successfully, companies must cultivate a more interconnected flow of information that allows various departments to share insights, collaboratively approach compliance challenges, and develop a unified strategy for meeting diverse regulatory demands.
To effectively manage this transition period, organizations must prioritize the collection, analysis, and organization of a wide array of data pertinent to ESG and sustainability. By gaining a comprehensive understanding of the information needed for compliance—ranging from emissions data to insights regarding supply chain dynamics and associated climate risks—companies can position themselves to navigate the regulatory flux with an informed perspective. The sooner they can harness this data and prepare for potential shifts in regulatory expectations, the greater the likelihood they will thrive in this evolving environment. In the ultimately opaque landscape of ESG regulation, companies need to ensure they have systems and frameworks in place capable of adapting to change while maintaining compliance with emerging standards—thereby securing their reputations and operational viability well into the future.
