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Complex ESG policy will heighten regulatory and reputational risks - Moody's analysis


The Environmental, Social and Governance (ESG) landscape is becoming increasingly complex and companies and investors are facing a difficult and sometimes conflicting patchwork of regulations and views related to ESG disclosures and investing practices. This is according to Moodys, the credit rating agency, who believe that the complexity of the ESG landscape will heighten regulatory and reputational risks for companies and investors in 2023.


One of the challenges companies are facing is that more jurisdictions are proposing or enforcing ESG-related disclosure requirements, which raises regulatory and market scrutiny into companies' practices. In addition to this, some companies in the US in particular, are facing growing pressure to exclude or minimize the integration of ESG considerations in business and investment decisions if they are perceived to come at the expense of shareholder returns.


In 2022, several US states passed laws blocking financial institutions that incorporate ESG considerations into their decision-making from participating in the management of state pension funds or doing business with the state altogether, heightening reputational and financial risks for affected companies. As a result, legal, regulatory and reputational risks stemming from ESG positioning and potential misrepresentation will likely rise in 2023.


Moodys expect ESG disclosure requirements and oversight of sustainable investing practices to continue to dominate the agenda of financial regulators in 2023. For example, in the US, the Securities and Exchange Commission's proposed rule requiring ESG funds to disclose goals, strategies and key progress indicators is set to be finalized in 2023, although potential legal challenges could delay its implementation.


Overall, the complexity of the ESG landscape is expected to raise compliance costs and potential reputational risks for companies and asset managers. However, in the long term, regulatory developments that add transparency and boost investor confidence will help support market growth. Companies and investors should stay vigilant and stay informed about changes in the ESG landscape to navigate the increased regulatory and reputational risks in 2023.


One way for companies to navigate the complexity of the ESG landscape and mitigate regulatory and reputational risks is by using a sustainability compliance software such as Cloudsyte. Cloudsyte is a platform that streamlines the ESG reporting process and enables companies to better understand and track their sustainability performance. It can help companies with the following:

  • Collecting and consolidating data from multiple sources to create a comprehensive sustainability report

  • Automating data collection and reporting, reducing the time and resources needed to comply with ESG regulations

  • Providing an easy-to-use interface, which can help companies to identify potential compliance issues early, mitigate potential risks and avoid costly penalties.

  • Enhance overall transparency by providing a standardized way of documenting and reporting key ESG data to various stakeholders, which can boost the credibility of companies’ sustainability claims.

Using a software like Cloudsyte can also help companies to keep track of the ever-evolving regulatory landscape, stay up-to-date with compliance requirements and ensure they are meeting the expectations of investors and stakeholders. By leveraging technology, companies can have a more accurate and automated way of tracking and reporting their sustainability performance and avoid any potential reputational risks.


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