Tackling ESG Regulation Across Multiple Jurisdictions – A Conundrum for Multinationals

By Maria Cronin and Fred Kelly

As ESG-related legislation and regulation becomes an ever-increasing focus for governments and regulators across the globe, companies with international operations face complex ESG-related challenges and potential exposure across multiple jurisdictions. The key to ensuring compliance with the fast-changing rules and regulations across the various countries in which they operate, is for multinational organisations to continue to scan the horizon for new developments and adapt their business practices accordingly.

A Web of ESG Rules and Regulations

The intricate web of rules and regulations across different jurisdictions means that that there is no single or one-size-fits-all solution for multinational organisations when it comes to ESG compliance. Corporates and senior executives must therefore give careful consideration to ensuring they are compliant with the diverse and ever-changing ESG-related requirements they face. Indeed, Thomson Reuters recently reported that 71% of C-Suite and functional leaders anticipate the growing significance of ESG in corporate performance, with one executive commenting that there were close to 40 regulations on their radar.”^[1]

One such development is the introduction of the FCA’s anti-green washing rule, which comes into force on 31 May 2024. The FCA announced the introduction of this rule in November 2023, as part of a larger package of measures on Sustainability Disclosure Requirements and investment labels. This new anti-green washing rule will require authorised firms to ensure that when communicating with clients in the UK or when communicating any financial promotion to a person in the UK, that references to the sustainability characteristics of a product or service the firm offers are consistent with the sustainability characteristics of the product or service, and are fair, clear and not misleading. 

This is just the latest regulatory development in the UK and evidences the increased focus regulators are placing on ESG-related issues. We can expect that if FCA-authorised firms fall foul of these new requirements, then the FCA will take supervisory or enforcement action. Indeed, the FCA has explained that it has introduced this new rule to ensure that when it wants to challenge firms in relation to any misleading sustainability-related claims about their products or services, it can now do so on the basis of an explicit rule, rather than relying on its previous guidance on providing information that is fair, clear and not misleading.^[2]

As well as dealing with the sheer volume of new ESG-related rules and requirements, organisations also face challenges relating to divergences in approach and guidance between jurisdictions. For example, the new EU Deforestation Regulation requires companies that trade in seven common commodities (e.g. coffee, cattle, and wood) and multiple derived products to comply with local ESG laws (i.e. in the country of production) and to follow a prescribed method of transparency with respect to due diligence. Failure do so, or if a product is not ‘deforestation free’, will preclude that product from being sold in the EU. Ensuring compliance with this Regulation, including adhering to local ESG laws potentially across multiple jurisdictions, is likely to impact business operations, resource allocation and profits.

Keeping Up with Legislative and Geopolitical Developments

Multinationals are also having to manage the conflicting political agendas surrounding ESG. For instance, while some countries have climate-related incentives and subsidies for businesses, other countries are slower to implement similar advantages. In addition, change at the ballot box or a sudden political U-turn could have a massive impact on the rate of ESG-related policy and legislative changes. This could mean that, where multinationals have proactively focussed on implementing ESG-related changes to their processes before any overarching legislation is in place, those companies could be at a competitive disadvantage if, for example, a new government were to delay or even abandon anticipated ESG reforms.

By way of example, the U.S. Inflation Reduction Act has committed approximately US$400 billion in subsidies over the next 10 years for business investment into green technologies and employment in this sphere. This contrasts with the enactment last year of ‘anti-ESG’ legislation in Florida. Similar political differences with respect to ESG are also visible in Europe.

Corporates also face hurdles from shareholder and climate activism. There has been a significant uptick in claims brought by minority shareholders and NGOs for failure to address ESG-related risks and climate change objectives, particularly where state enforcement has been markedly absent. This has forced companies to adopt new ways of operating and to assess ESG-related risk.

Adaptability and horizon scanning key 

The need to grapple with ever-changing web of ESG-related legislation and regulation, combined with the shifting sands of political attitudes towards ESG itself, means that corporates are investing proactively in both internal and third-party solutions to stay abreast of their ESG-related requirements. This includes conducting internal investigations into vendors and suppliers, collecting data, and contracting with consultants to improve business operations.

Adaptability is the key to navigating this intricate web of ESG risks, and each multinational must work to find solutions that suit its own business model and operations.

About the Authors