ESG considerations and the ease of doing business
The Global Business Complexity Index 2023 (GBCI) provides an authoritative overview of the complexity of establishing and operating businesses around the world. It explores factors driving the success or failure of international business, with a focus on operating in foreign markets, and outlines key themes emerging globally as well as local intricacies across 78 jurisdictions.
The research for the report explores 292 different indicators relating to business complexity, to provide in-depth insight of the global and local challenges that impact on the ease of doing business across the world.
This year’s analysis has revealed three global trends that impact upon business complexity: geopolitical and economic turbulence, global compliance challenges, and environmental, social and governance (ESG) considerations.
We explore the latter in greater depth in this article, examining how the increasing importance of ESG criteria means that authorities are further defining what is required of businesses, in particular around the environment, diversity and inclusion.
ESG requirements increasing in importance
Environmental, social and governance criteria are becoming increasingly prominent, with companies now required to abide by at least one ESG requirement in the majority of jurisdictions. In fact, only four jurisdictions (Curaçao, the BVI, Venezuela and Uruguay) don’t require companies to abide by and/or report on any ESG requirements related to their activities, demonstrating the global reach of these criteria.
Requirements on consumer protections and human rights (eg modern slavery) are the most common for businesses to abide by, which is unsurprising given that these are embedded in the way the majority of companies do business. Nearly half of jurisdictions require companies to report on environmental factors: 44% on greenhouse gas emissions and 46% on sustainability and reducing waste. These requirements are higher among EMEA jurisdictions (54% for both) and lowest in North America (29% and 36%, respectively).
Global focus on environmental sustainability and diversity and inclusion
In recent years, many governments and authorities have made concerted efforts to lead the way in holding businesses to account in reducing their carbon footprint. In Malaysia, the government’s ambition to achieve carbon neutrality by 2050 is particularly progressive relative to other ASEAN countries. Companies in Malaysia are actively pursuing ESG programmes, and multinational corporations have energy consumption as a key focus in ESG commitments.
Another ESG legislative area which is becoming increasingly important is guaranteeing diversity in the workforce. Half of jurisdictions (51%) require companies to abide by laws relating to diversity of the workforce, with over one quarter (27%) requiring companies to report on it.
Almost half (49%) of jurisdictions require all companies to submit reports on employee demographics to government authorities, which has continued to grow year on year (28% in 2020, 41% in 2021, 47% in 2022). In South America, 80% of jurisdictions require all companies to report on employee demographics, followed by 64% of jurisdictions in APAC.
France mandates reporting based on diversity, including disability and gender pay gap. Although EU legislation is more demanding when looking at diversity and inclusion, France was an early adopter of such legislation and leads the way for European jurisdictions. Similarly in New Zealand, there is more onus in reporting diversity and inclusion metrics for listed companies when preparing audited financial statements.
Burden of ESG reporting lies with listed companies, but private companies increasingly reporting on ESG voluntarily
Currently the burden of reporting and abiding by ESG legislation largely falls on public and listed companies. To provide an example, as of January 2022, new rules in Switzerland require companies of public interest, such as listed companies or large companies regulated by the Swiss Financial Market Supervisory Authority (FINMA), to issue public annual ESG reports.
Interestingly, there is a trend for private companies to report on their ESG activities voluntarily. This is partly to be prepared for more widespread mandatory ESG reporting in the coming years, but it is also driven by consumer expectations for businesses to operate in a more sustainable, responsible and transparent way.
Even if it's not mandatory, the biggest companies are enabling and creating programmes of ESG initiatives. The directors of those companies are recommending that others join this initiative. So even though it is not mandatory, it has a good reception within the industry, because it's being promoted by the owners of the businesses.
In certain jurisdictions, some private companies, including small and medium sized enterprises, will be required or already are required to report on ESG indicators. The main reasoning behind this is that these companies are part of the supply chain or are businesses linked to larger entities, so need to be also transparent on their main ESG risks and impacts, in order to allow the larger entities to be able to use their data for their own ESG-related reporting.
Fast rise of ESG reporting means clients are unprepared for new requirements
Despite the rising importance and requirements for ESG reporting, TMF Group experts say that clients are generally unprepared for new and expected ESG legislation. This is the case for 42% jurisdictions globally, with this being highest in EMEA (51%) and South America (50%).
With reporting requirements for ESG likely to increase, and not just for public and listed companies, it is likely that companies will continue to feel the pressure. Not only will there be a pressure to navigate the new and upcoming legislation, but there is also an administration and resourcing cost implication which is affecting large and listed companies in multiple locations (cited, for example, by our experts in South Africa).
As the importance of ESG continues to grow, companies will have to navigate new requirements beyond simple box-ticking exercises and commit to reporting on their ESG indicators. However, given that ESG requirements are in their infancy in many jurisdictions, the impacts and future of ESG reporting remain unclear.
Finding the right partner with the right ESG reporting tools, technology and knowhow will be important. Proper reporting in line with new requirements that could apply to the specific clients. Understanding how to act and report in order to be compliant, especially for foreign companies with limited knowledge of local regulations.
ESG of interest to private wealth, family office, funds and capital markets clients
TMF Group experts from jurisdictions that offer PWFO services note that these individuals are increasingly interested in investing in ways that incorporate ESG considerations. Although there may currently be a more limited impact of ESG on how PWFO clients do business, new and expected ESG legislation will require clients to seek assistance with specialist providers.
In jurisdictions with significant capital markets activity, green financing initiatives, such as bank-issued green bonds and sustainable loans are becoming increasingly common. For example, in Colombia, there is a law that regulates green initiatives and sustainability-linked bonds, and the government announced a plan to incentivise ESG-related investment.
As part of the EU, Ireland must comply with all of the EU regulations around ESG. This will make reporting more difficult for large companies. It also impacts the fund and capital markets industries, as both will want to attract investors by being ESG compliant.
Over the past year, TMF Group experts report that 77% of jurisdictions with significant funds activity have seen an increase in fund manager interest in sustainable and socially beneficial funds, demonstrating the continuing interest in ESG for funds clients. In India, our experts report that priority players stress their ESG parameters, as it makes the investments more lucrative for global investors.
Two thirds (67%) of those jurisdictions with significant funds activity have committed to the EU’S level 2 Sustainable Finance Disclosure Regulation (SFDR) reporting implemented in 2022. It means asset managers and fund providers need to provide sustainability-related disclosure obligations, as well as complete mandatory reporting with the aim of boosting transparency.
Outside of the EU, we also see steps towards ensuring transparency within the funds space. For example, in Hong Kong, an amended circular came into effect in January 2022 providing guidance to asset managers on enhanced disclosure expectations for funds which incorporate ESG factors as a key investment objective or strategy.
In one third (31%) of funds jurisdictions, there is legislation that regulates the marketing of funds claiming to have a positive ESG impact, which aims to limit companies, especially large and listed ones, from ‘greenwashing’. Although the act of greenwashing is increasingly scrutinised, the challenge remains to prove that investments are truly focused on ESG.
Despite the growing importance of ESG, there is still work to do in prioritising this over other business objectives. For example, in the Cayman Islands, our experts point to the challenge of convincing investment managers that ESG should be a factor in decision making for their funds, as their main objective is to maximise profits.
Although driving profit is key, ESG is increasingly part of the makeup of major corporations. The focus on ESG is set to continue pushing towards greener and more ethical ways of working, despite the associated complexities.
The Global Business Complexity Index 2023
This article is an extract from TMF Group’s latest report: The Global Business Complexity Index 2023.
Explore the GBCI rankings, analysis and global trends, to help you cut through the layers of corporate compliance complexity – download the report in full here.
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