Multinationals spread ESG responsibility across the business as rules simplify

The EU advisory group responsible for drafting sustainability reporting standards has delivered its proposals to simplify those rules. The European Financial Reporting Advisory Group (EFRAG), which advises the European Commission on corporate reporting and designs the European Sustainability Reporting Standards, has submitted its technical advice on draft simplified sustainability reporting standards. For employers, the question is what that redesign means in practice: who remains in scope, how responsibilities are shared across organisations, and how sustainability is integrated into day-to-day operations rather than treated as a standalone compliance exercise. 

The latest proposals sit within a broader simplification exercise underway across the EU. They include fewer mandatory datapoints, more flexibility around narrative reporting, clearer guidance on materiality and phased implementation, all designed to make the system more workable for companies without stripping it of substance.

At the same time, this simplification is happening against a backdrop of regulatory divergence. While the EU is refining its approach, other jurisdictions are moving at different speeds and in different directions. For multinational employers, that doesn’t remove complexity, rather it changes its shape. Compliance becomes less about centralised reporting teams and more about embedding sustainability responsibilities across functions, including HR, risk, operations, and finance.

Another important consequence is scope. Higher thresholds would mean fewer companies are subject to mandatory reporting, but that doesn’t mean sustainability drops off the agenda altogether. For the largest organisations, obligations remain significant. For others, expectations are likely to be voluntary, market-driven, or contractual, particularly through supply chains and workforce standards.

Some people are calling this an ESG rollback, others say it’s just simplification. Is this really deregulation, or is it something else and what does it mean for employers in practice? I put that to sustainable finance and ESG regulation expert James Hay:

James Hay: “So look, whether you believe that this pullback on sustainability means a reduction in compliance burdens or outright deregulation partly depends on your political viewpoint but, ultimately, for companies the streamlining of sustainability regulation means that they can be more proportionate in how they integrate sustainability into their business strategy and operations. So this is not the end of sustainability regulation, but certainly a recalibration to be more competitive.”

Joe Glavina: “So, James, does that mean responsibility for sustainability compliance is now being spread across the organisation rather than sitting with one central sustainability team, and what does that look like for HR?”

James Hay: “That's correct, yes. So in fact, I think, again, one of the key messages here is sustainability and responsibility is being dispersed throughout an organisation. So we're not seeing one central sustainability function taking charge of all sustainability compliance matters but really seeing that HR professionals are understanding how sustainability impacts what they're doing day to day, and also how to comply with these new regulations that are coming out. So it's much more of a delegated model of responsibility across the firm.”

Joe Glavina: “And for multinationals, James, is the bigger issue now that different regimes are pulling in different directions which is making compliance strategies harder to manage?”

James Hay: “Yes, there are different regimes around the world that multinationals will have to comply with but, in reality, this isn't a new issue. There are different employment laws in different jurisdictions. There are greater protections, for example, in Europe, compared to the US so it's not unusual for companies to have to follow different rules in different jurisdictions. However, there was generally a push towards greater harmonisation in sustainability regulation across different jurisdictions and the fact that this is now somewhat breaking down obviously makes compliance strategies across different regions and countries more challenging for companies to deal with.”

Joe Glavina: “Can you talk me through what the simplification exercise actually does, and which companies will still be caught by the new requirements?”

James Hay: “I think it's important to recognise what the new rules, the simplification exercise, actually does. Essentially the new rules that have been proposed significantly increase the scoping thresholds for when companies will be required to comply with these new regulations. Of course, that means that many fewer companies will actually be caught by the new obligations. So for example, in relation to sustainability reporting, the latest rules actually reduce the number of companies in scope by up to 90% which sounds like a very large number. Now, you have to understand that it doesn't mean that companies now falling out of scope will not engage in any sustainability reporting at all. In fact, it's very likely that medium sized, smaller, companies will still take some action on sustainability. Essentially, this means that there is this dual system of mandatory compliance for the very largest companies and voluntary compliance for everyone else and, no doubt, we may see different outcomes between these different groups. So again, this doesn't mean that companies don't have to take any action on sustainability. There are a lot of regulations and laws in relation to employment matters, in relation to health and safety matters, so there is definitely that foundation of sustainability compliance that companies will have to think of going forward. However, if you fall more into the smaller company category, you will be less burdened by these additional regulations that sit on top of that.”

Joe Glavina: “Can you tell me about the work you’re doing with clients to integrate sustainability in a way that’s about business strategy, not just compliance?”

James Hay: “We're working with UK companies and international companies and really thinking about how we integrate sustainability into their business strategy in a way that is not just purely focused on compliance for compliance sake. Again, one of the benefits of this regulatory simplification is the fact that companies are now recognising we're not just complying with obligations because that's the requirement, but actually we're really seeking to manage risks that may face our business, or actually enhance our business value, through a better business strategy. So some of the work that we're doing is identifying some of those more sophisticated approaches to sustainability across the business, dealing with the issues and making sure that where businesses can preserve value by integrating sustainability that they do so.”

James is already working with a number of employers on the practical implications of these changes, including the challenges facing multinational organisations. If you would like help in this area then please do contact James – his details are on the screen for you.