ESG regulatory context: impact on performance and risk management

May 20, 2024

The regulatory context surrounding sustainability, summarised under the term ESG (Environmental, Social and Governance), has been evolving rapidly in recent years, notably with the European Green Deal and the CSRD and CS3D directives. These developments are having a major impact on companies’ overall performance and risk management.

A rapidly changing regulatory environment

The European Green Deal, launched in 2019, aims to make Europe the first carbon-neutral continent by 2050. As part of this, new directives are being introduced, such as the CSRD (Corporate Sustainability Reporting Directive). Applicable from 2024, the CSRD requires companies with more than 250 employees to publish annual non-financial reports in accordance with harmonized standards. It replaces the NFRD, which was deemed insufficient.

The CS3D (Corporate Sustainable Due Diligence) directive, due to be adopted in 2023, goes even further by requiring companies to be reasonably vigilant about ESG impacts throughout their value chain.

Increased risks in the event of non-compliance

Failure to comply with these directives exposes companies to significant legal and reputational risks :

  • In many European countries, failure to appoint a statutory auditor or properly certify ESG information according to CSRD requirements may expose company directors to legal sanctions, the severity of which could vary by jurisdiction.
  • Stakeholders (customers, investors, employees, NGOs, etc.) are increasingly sensitive to ESG issues and can potentially punish companies deemed to be less than virtuous.

The biggest risk, however, is the impact of climate change on business performance. Droughts, floods, supply chain disruptions… all events likely to affect results.

Opportunities to seize

Taking ESG issues into account in business models and strategy also creates opportunities:

  • Improved corporate image and reputation 
  • Building loyalty among customers and talent, who are increasingly sensitive to these issues
  • Market share gains in growth segments (green products, circular economy, etc.)
  • Cost optimisation (energy, raw materials, etc.)
  • Easier access to financing (banks, markets, etc.)

Impact on overall performance

Integrating ESG risks and opportunities into strategic and financial planning is becoming essential. This requires:

  • Precise identification of ESG risks throughout the value chain
  • Modelling climate scenarios and their economic impact 
  • Aligning strategy and business models with a low-carbon trajectory

Corporate Performance Management (CPM) solutions, such as Talentia CPM, make it possible to carry out these scenario analyses and integrate ESG dimensions into management processes.

Enhanced risk management

The directives also impose a duty of vigilance regarding ESG risks throughout the value chain. This implies:

  • Precise identification of risks and their likelihood of occurrence
  • Implementing appropriate control and mitigation plans 
  • Regular monitoring of the effectiveness of the measures put in place

Talentia CPM enables ESG risks to be mapped and the associated controls to be managed effectively.

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Conclusion

The regulatory context in terms of CSR requires companies to evolve rapidly, or risk exposing themselves to major business and legal risks.

This change requires not only an adaptation of reporting processes, but also a cross-functional integration of ESG issues into management activities: simulation of climate scenarios, strategic alignment, risk management.

Frequently Asked Questions

What are the main risks of non-compliance with ESG regulations?

There are three types of risk: legal (criminal sanctions), business (impact of climate change) and reputational (loss of stakeholder confidence). 

What are the business opportunities arising from good ESG management?

It helps to improve the company’s image, build customer and talent loyalty, win market share and optimise costs.

How can the ESG dimension be integrated into performance management processes?

By modelling climate scenarios and analysing their impact in performance management tools (CPM).

How do you meet the requirements of reasonable vigilance on ESG risks?

By accurately mapping risks and managing the associated control plans using dedicated risk governance solutions (GRC).