Ask an EMS’r: Will ESG be enforced on the private sector?

The legal enforcement and integration of comprehensive environmental, social, and governance (ESG) criteria into corporate operations and reporting is inevitable and likely around the corner.?

Governments and regulatory bodies worldwide are increasingly mandating that companies disclose their ESG performance in a standardized and transparent manner. The shift aims to ensure that sectors and businesses are accountable not just for their financial performance, but also for their impact on the surrounding environment and society. Such regulations are expected to drive companies to adopt sustainable practices, reduce carbon emissions, improve workforce conditions, and enhance overall governance. Additionally, note that the drive is being bolstered by investor demand for greater transparency in ESG metrics, as stakeholders become more conscious of the long-term risks associated with unsustainable practices. As a result, companies will be encouraged to innovate and implement more sustainable business models, contributing to a more resilient and sustainable global economy. For those who choose not to embrace ESG, indicators show that the push-back from different stakeholders will ultimately impact their primary goal: The bottom line.

Considering the above, where should the private sector concentrate their energy? A good basis for evaluation is the criteria that regulators will likely enforce:

Environmental factors will depend on the sector in which you operate; where logistics companies need to focus on route efficiency and sustainable transport, industrial factories may need to look at operational optimization and carbon recapture. In a generic sense, environmental criteria focus on a company’s impact on the natural world. This includes carbon emissions, energy usage, waste management, resource depletion, and biodiversity impacts. Regulations are being developed to ensure companies measure and report these factors, pushing them to adopt cleaner technologies, reduce their carbon footprint, and manage resources more efficiently.

Wellness is on the rise, with several regulatory bodies setting up certifications to govern the social aspects of ESG. Social criteria examine a company's relationships with employees, suppliers, customers, and the communities in which it operates. This includes labor practices, diversity and inclusion, human rights, and community engagement. New regulations are likely to require companies to improve labor conditions, ensure fair treatment and wages, and contribute positively to the social fabric of their communities. Furthermore, workplace efficiencies have already been evolving into 'must-haves' within top tier spaces; looking at greenery, fresh air and indoor air quality.

Governance criteria pertain to the internal systems of practices, controls, and procedures a company adopts to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Governance also includes the transparency of the company's operations and executive compensation. Enhanced regulations in this area will be set to maintain benchmarks, ensure companies maintain high standards of accountability and integrity and keep a clear oversight mechanism/transparent reporting practice.

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Further note:

Investor demand is a significant driving force behind the change in attitude we will see in the private sector. Investors are increasingly aware of the financial risks associated with unsustainable business practices, such as regulatory fines, reputational damage, and the physical impacts of climate change. As a result, they are seeking more comprehensive ESG data to make informed investment decisions that would not backfire in the 3-5 year period.

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Advancements in regulation we see today:

The European Union's Sustainable Finance Disclosure Regulation (SFDR) and the Corporate Sustainability Reporting Directive (CSRD) are prime examples of these regulatory advancements. These frameworks require companies to provide detailed ESG information, which will be publicly available and comparable across industries and countries. Similarly, in the United States, the Securities and Exchange Commission (SEC) is considering new rules for climate-related disclosures, which would significantly enhance the transparency of corporate environmental impacts. The MENA is following suit in most of these advancements, making pledges to the global community and striving to be at the forefront of sustainability and ahead of the curve. This trend towards robust ESG reporting is expected to drive innovation and the adoption of sustainable practices within businesses in the MENA region, particularly the GCC. Companies need to plan the integration of sustainability into their core strategies, not just as a compliance exercise but as a fundamental aspect of their operations. This will involve investing in green technologies, adopting circular economy principles, and prioritizing long-term resilience over short-term gains.

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Omar K. Bushnaq

Director of Strategy | Energy Independence Department

EMS Middle East