Introduction

The extraterritorial expansion of ESG laws and policies will reach a significant turning point in 2024. Investors, government regulators, and consumers are demanding greater transparency and disclosure when it comes to a company’s internal ESG policies. Companies are now putting ESG factors into business metrics reflecting material risks to the organization that, when utilized appropriately, should serve as a business improvement tool, and provide others with tracking mechanisms.

As a result, corporate strategies for implementing ESG policies will become even more vital in 2024 to a company’s long-term success. For those with a global footprint, the varying approaches to ESG enforcement will be challenging. Increasing pressure is being placed on companies regarding the operation of their supply chains and whether they meet the evolving requirements of ESG regulatory mandates. At the same time, there is a growing wave of pushback against ESG company initiatives.

Global Risks for Business

1. Increase in demand for climate-related disclosures

Climate risk disclosure is among the most significant issues facing multinational companies and investors across the globe. Starting in January 2024, large companies operating in Europe must account for the effect of their operations on climate under the Corporate Sustainability Reporting Directive (CSRD). The directive rolls out to smaller companies over the following two years.

In the US, the Securities and Exchange Commission proposed climate-reporting rules that are expected to be adopted in 2024 – although its final form is uncertain. The proposed rules mandate disclosure of more information about a company’s climate-related risks, financials, targets, and greenhouse gas emissions. Essentially, companies will have to disclose the effect of climate change on their operations as well as the potential impact on profits.

The state of California has adopted SB 253, the ‘Climate Corporate Data Accountability Act,’ and SB 261, the ‘Climate-Related Financial Risk Act.’ SB 253 requires public and privately held companies with annual revenues greater than USD 1 billion doing business in California to report on their emissions each year starting in 2026 for scope 1 and 2 greenhouse gas emissions and scope 3 starting in 2027. SB 261 requires companies with annual revenues of USD 500 million or more to start disclosing climate financial risks on January 1, 2026, and biennially thereafter.

2. Conflicting reporting requirements

With the various and sometimes conflicting ESG mandates coming into effect, companies with cross-border operations and supply chains will have to make sure they are meeting the sustainability standards in each jurisdiction.

Currently, countries within the EU and elsewhere have differing ESG laws and directives. France’s legislation, for instance, applies to companies with more than 5,000 employees in subsidiaries, or more than 10,000 workers in direct and indirect subsidiaries. By contrast, Germany requires companies with as few as 1,000 employees in that country to engage in environmental and human rights due diligence as of January 1, 2024. In any case, the EU’s CSRD and Corporate Sustainability Due Diligence Directive – if fully adopted in 2024 – will synchronize ESG laws in EU countries when it takes full effect.

Meanwhile, India’s Business Responsibility and Sustainability Reporting Core mandates ESG disclosures for the top 1,000 listed companies on the Securities and Exchange Board of India. The BRSR Core includes India-specific considerations including job creation in smaller towns, wage distribution by location, and value chain information.

3. More litigation from ESG opponents and proponents

Not everyone supports corporate ESG policies. Several attorneys general[FM1] and state treasurers in the US have questioned corporate reliance on ESG factors, rather than on shareholder profits, when making investment decisions on state pension funds. Separately, some investors have filed lawsuits stating that ESG goals, and the use of ESG mutual funds or divestment from fossil fuel investments, were inconsistent with the fiduciary duty to obtain the best possible return on investments.

Conversely, some US states, such as New York, are requiring state retirement funds to transition portfolios to net zero emissions, apply minimum standards for climate action, develop evaluation tools for ESG, and formally integrate climate risk assessment into the investment process. Furthermore, new litigation around directors’ liabilities for failing to follow their statutory ESG duties is starting to appear and may grow more widespread.

4. Europe’s CSRD imposes new rules to prevent greenwashing

The CSRD will require companies to have their sustainability reporting independently audited and certified starting in 2024. The goal of this new reporting mandate is to curb “greenwashing,” the growing practice by companies of overstating their sustainability metrics. Additionally, in the UK, the Financial Conduct Authority is proposing new rules on greenwashing to ensure ESG claims by companies and financial firms stand up to scrutiny, consumers are not misled, and there is effective competition.

5. Scrutiny and penalties by regulators

More substantial penalties may be levied in 2024 against companies that violate ESG laws and policies, as evidenced by recent notable examples. The US SEC created an ESG Task Force and has imposed fines against companies such as Brazilian multinational mining giant Vale, which agreed to pay USD 55.9 million for ESG violations. Financial firms – such as the asset management arm of Goldman Sachs and BNY Mellon Investment Adviser – also paid penalties of USD 4 million and USD 1.5 million, respectively. Deutsche Bank subsidiary DWS Investment Management Americas, Inc. agreed to pay a USD 19 million penalty for greenwashing violations in which it made misstatements about its ESG investment process.

Global Opportunities for Business

1. Major companies are rethinking their insurance profiles
   Some large companies are, in effect, self-insured. Their incentive is to keep operations going and quickly get their own facilities back online, rather than submit an insurance claim. These companies have become motivated to develop technologies that would address climate risks and have built highly resilient supply chains.
2. Green design
   Many structures now have to incorporate “green designs” that have a minimal impact on the surrounding environment. In India, for example, hospitals are required to have their own micro-grids to sustain power and operations in the event of a storm or natural disaster that cuts off the facility from the main power grids. That technology has started to be adopted in the US.
3. Retrofitting of existing facilities
   More companies are reviewing their structures to see if they should retrofit them to withstand extreme weather conditions and natural disasters or build entirely new facilities. This is especially important for companies that are disaster providers, i.e. that deliver goods in emergency situations and cannot afford to have any ‘down’ time. It is also necessary for smaller companies that need to build facilities in one region, in case there is a disaster in another area.
4. Retaining weather experts

There is a trend of companies hiring forensic meteorologists to mitigate climate-related disasters and gain a competitive advantage, especially when collecting information for an insurance claim or litigation. Storm reports may not contain information that is accurate to the specific project location. Professional meteorologists who recognize the inherent problem with reporting procedures can aggregate and interpret storm data for applicability and accuracy.

5. Technology is transforming the insurance claims process
   Businesses are using pre-loss and post-loss technologies to limit the cost of the insurance claims process. One example of the former is monitoring via early warning systems. Post-loss technology can include ground penetrating radar, drones, satellite imagery, and even underwater remote-controlled vehicles to see the extent of damage following an extreme weather event or natural disaster.
   
   Insurers are using automated claims processing to quickly review and assess claims and reduce the time it takes to settle them. Insurance firms are also using mobile reporting which allows customers to report claims and submit photos and videos of the damage for faster processing.

Top Takeaways

1. Companies with cross-border business must take special care to ensure they are meeting the ESG requirements of each jurisdiction in which they operate, particularly as it applies to supply chains.
2. As the US has lagged in the adoption of a national standard for ESG reporting, companies relying on a US-focused approach could put themselves at risk on the global stage.
3. Litigation is proliferating from regulators and parties who support corporate ESG policies, but anti-ESG sentiment is on the rise in the US and is likely to spawn its own litigation.
4. For companies with cross-border natural resource interests, application of ESG policies in developing countries presents unique opportunities for improved economic equity and labor conditions.
5. Companies that successfully monitor and meet the various and evolving ESG mandates will benefit most by avoiding regulatory issues and enhancing their reputation with consumers.