Paola Fonseca and Roberto Randazzo illuminate the path for businesses navigating the complex terrain of global ESG implications

The European Union’s ambitious ESG legislative framework, including the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD), with its European Sustainability Reporting Standards (ESRS), the Corporate Sustainability Due Diligence Directive (CS3D), and the EU Taxonomy for Sustainable Activities, has set a high bar for corporate sustainability and transparency. These regulations are not just altering the business landscape within Europe. Still, they also exert an extraterritorial influence (reminiscent of the General Data Protection Regulation (GDPR) in data protection), necessitating both EU and non-EU companies to implement an integrated “sustainable corporate governance” to avoid risks and liabilities. 

Paola Fonseca emphasises the “Mandatory Self-Regulation” concept as a pivotal response to these regulations. “In a globalised economy, the EU’s ESG regulations compel companies worldwide to adopt a holistic approach to sustainability, intertwining their operations, supply chains, and corporate governance with ESG principles, irrespective of their geographic location. This creates a de facto global standard, as companies must comply not just to operate within the EU but to maintain their competitive edge globally.”

Roberto Randazzo reflects on the challenges and opportunities these regulations present. “SFDR, CSRD, along with its ESRS and the EU Taxonomy have fundamentally changed how companies report on sustainability, pushing them towards greater transparency and accountability. While adapting requires a significant overhaul of existing practices, it also opens avenues for innovation in sustainability, offering companies a chance to redefine their value proposition in a greener economy. For instance, companies need to assess the readiness to the newly introduced obligations and strategically implement a sustainable corporate governance, comprising a sustainable procurement system and an ESG data governance. Although requiring a (necessary) big effort, such measures give the chance to manage ESG impacts across the supply chain. At the same time, voluntarily aligning corporate governance and practices to ESRS, under a best-in-class perspective, may boost business relationships with direct recipients of the ESG legal framework and attract investments. Further, it will strategically anticipate the application of the CS3D, which will introduce legal obligations with respect to due diligence measures to identify, prevent, mitigate or bring to an end adverse impacts, potential or effective, on human rights and the environment. The extent of these new obligations is stressed by their application to both, upstream and downstream activities of the recipients, triggering a ripple effect from large companies to SMEs.”

Global ESG Implications: Beyond the EU

The dialogue expands to consider the global landscape of ESG, where jurisdictions outside the EU, such as Australia, Canada, and Singapore, are introducing their sustainability regulations. Australia’s climate disclosure standards and Canada’s CSA climate disclosures illustrate the growing consensus on the importance of ESG reporting. Similarly, Singapore’s Green Finance Action Plan and the Monetary Authority of Singapore’s (MAS) environmental risk management guidelines highlight the increasing integration of sustainability in financial services.

“Global companies must navigate a mosaic of ESG regulations, underscoring the need for a nuanced understanding of local and international mandates,” Randazzo notes. “This complexity underscores the importance of legal expertise in assisting companies across different jurisdictions while leveraging these requirements for strategic advantage. Moreover, it has to be considered that CSRD requires disclosure of upstream and downstream value chain information, extending its impacts beyond EU borders. Non-EU companies, part of the value chain of EU direct recipients, will then face pressure from contractual ESG clauses entailing obligations and penalties related to the accuracy and authenticity of ESG data provided.

The Role of ISSB Standards in Harmonizing Global ESG Reporting

The International Sustainability Standards Board (ISSB) IFRS S1 and IFRS S2 standards are significant strides towards harmonising global ESG reporting standards. “These standards are a cornerstone for global sustainability reporting, providing a framework that aligns with the EU’s ambitions and beyond, facilitating a more uniform disclosure landscape,” Fonseca states. “They exemplify how regulatory convergence can enhance transparency and comparability for investors worldwide, driving more informed and sustainable investment decisions.”

Steward-Ownership: A Sustainable Business Model for the Future

The conversation then shifts to steward ownership, a model that encapsulates the ethos of sustainable business practices, by including the concept of profit in social and environmental matters. “Steward ownership offers a blueprint for businesses to insulate their mission and values from the pressures of the market, ensuring that they can pursue sustainability goals with unwavering commitment,” Randazzo elaborates. “It’s a model that resonates with the principles of the ESG legal framework, embedding purpose and sustainability into the very structure of a company. Also, considering that “SFDR” and Taxonomy aim to direct investments towards a sustainable economy, implementing sustainable corporate governance may not only be strategic to better face the new ESG legal obligations but also to attract investments.”

Conclusion: A Unified Vision for a Global and Impactful Legal Guidance

The journey toward global ESG corporate governance is a challenging yet transformative path, marked by the convergence of regulations, the growing importance of sustainability in corporate strategy, and the need for legal expertise to navigate this new terrain. Lawyers specialising in positive impact law, impact finance, ESG legal verification, sustainable corporate governance and strategies are becoming crucial guides in this journey, fostering the growth of all businesses – now impacted regardless of their size, jurisdiction or sector. 

The work of the Global Alliance for Impact Lawyers (GAIL) highlights the importance of these efforts, as it champions projects with a positive impact worldwide. Professionals like Paola Fonseca, Chair of GAIL Latam, and Roberto Randazzo, Emeritus Director of GAIL, decipher complex regulatory frameworks to enable the realisation of impactful projects, thereby facilitating the creation of positive transformations. 

Their expertise in navigating regulatory frameworks facilitates inclusive participation and secures sustainable, equitable benefits that align with social progress. As Fonseca humorously puts it, “Legal is not sexy, but you cannot be sexy without legal.” This light-hearted remark belies a more profound truth: the role of legal counsel in ESG is not merely a bureaucratic necessity but a strategic asset that opens doors to opportunities and benefits.

The emergence of “Mandatory Self-Regulation,” as championed by Fonseca, is a prime example of this. It compels Latin American companies, among others, to elevate their practices to meet the EU’s ESG standards, reshaping their internal operations and enhancing sustainability across their value chains. This is more than just compliance; it’s about strategically and actively participating in a global movement toward responsible business practices.

The evolution of the legal profession within the framework of extraterritoriality supports the global impact of ESG principles and a sustainable economy. Adopting International Sustainability and Climate Standards, such as IFRS S1 and IFRS S2, or the already entered-into-force ESRS, introduces a new dimension in accounting that includes environmental and social considerations, reflecting a holistic approach to business valuation.

While the U.S. Securities and Exchange Commission’s disclosure regime progresses steadily, it’s clear that the trend towards transparency and the disclosure of sustainable practices is irreversible, as shown by the consultation on ESG disclosure guidelines opened by the three main China stock exchanges. The intersection of European and U.S. regulations and the introduction of international accounting standards creates a complex yet fertile landscape filled with opportunities for legal professionals equipped with the knowledge and dedication to navigate it.

This expertise is essential for empowering companies, particularly in Latin America, to proactively comply with emerging regulatory requirements, ensuring their inclusion in the opportunities presented by the Just Transition and enhancing business relationships with direct recipients of the ESG legal framework. The significance of ESG lawyers in this region is thus amplified; their strategic guidance on the implications of legal frameworks is critical to accessing impact capital and propelling sustainability.

In conclusion, the role of impact lawyers is becoming increasingly pivotal in shaping a sustainable future. As Fonseca asserts, the nuanced legal setting created by the confluence of different regulations offers ample opportunities to drive sustainability and foster corporate responsibility throughout Latin America and beyond. The global alliance for impact lawyers stands ready to support this evolution, highlighting the instrumental role of legal professionals in the broader context of global sustainability and the ESG principles that underpin it.