The Impact of the ESG Regulations on Entity Management in North America

Environmental, Social and Governance Disclosure Obligations 

Lately, there has been a great deal of news in the media about the potential for ESG (Environmental, Social, and Governance) reporting regulations to soon become mandatory for North American entities, and in fact, on June 16, 2021, the U.S. House of Representatives enacted legislation that imposes both due diligence and disclosure requirements on companies that are publicly traded. Indeed, the COP26 Summit, the United Nations Climate Change Conference 2021, has highlighted not only the importance of tackling the globe’s long-term shift in temperature and weather patterns as a direct result of human activity, but also the vital role of business in this struggle.

Indeed, at the COP26 conference, the International Sustainability Standards Board (ISSB) was created with the aim of facilitating a global and harmonized system of specific sustainability disclosure standards. With ESG representing the philosophy that companies should look to align their operations with values that support sustainable economic development, there is valid concern that this will create risks and onerous obligations that may potentially impact on the ability of a company to create long-term value. This is linked to disquiet not only about climate change, but also connected issues such as resource scarcity and social criteria related to a company’s business relationships, governance, and its treatment of employees.

How Legal Technology Facilitates ESG Compliance 

Yet ESG and the forthcoming regulatory requirements provide a unique opportunity for legal entities to benefit from the operationalization of ESG standards and disclosure requirements. It is legal technology that will provide your legal or business organization with the crucial ingredient for the implementation of ESG principles in your corporate strategy, and this ultimately depends upon successful integration. This will involve the organization-wide incorporation of ESG into numerous matters, including the enactment of workforce diversity and inclusion policies, the business credentials of partners and your investment strategy, as well as your organization’s approach to compensation and the identification of ESG risks. 

This is undeniably a great deal of work, and there is a lot to consider. There are, however, unquestionable benefits for a firm that incorporates a more integrated approach to ESG. Indeed, to name just one compelling reason to implement ESG principles in your organization, there is significant evidence that sustainable corporate practices tend to result in increased performance.   An open and integrated approach to working on the basis of ESG principles will also be undoubtedly effective in enhancing your reputation. The reverse of this approach has proven to be devastating for companies; an organization’s failure to ensure visibility into its own activities can result in the imposition of legal fines, lost profits, director liability, and a damaged reputation. Indeed; the impact of “high ESG controversy” events has been shown to result in the underperformance of shares even a distance of two years later.

The previous voluntary and essentially market-led practice under which organizations provided their own data and disclosures, and which were often not even externally verified, will no longer be acceptable. To this end, the use of legal technology to facilitate the integration of ESG principles in your organization will be crucial. With the explosion of new data sources, business models, and external forces, we are finding ourselves in unchartered territory where traditional corporate governance may not be sufficient to address the risks involved. The ESG and corporate social responsibility concerns that impact how companies interact with stakeholders including employees, customers, shareholders, and suppliers mean that any attempt by law firms and the legal departments of organizations to track these requirements manually will be a recipe for disaster.

Yet many legal departments are already weighed down by heavy workloads and budgetary restrictions and lack the capacity to properly manage the extra tasks imposed by the requirements of ESG compliance.  Often, the tax and finance departments are brought in to support the legal team, but they are likely to be struggling with their own pressures and priorities. While some firms do possess internal solutions to entity management, they are often bespoke and lack the scale, convenience, and responsiveness of an off-the-shelf software solution.

Legal Technology and the Integration of ESG Factors 

It is fortunate, therefore, that software entity management provides a vital means for the proper centralization of your organization’s data, and for ensuring that your ESG goals and forthcoming disclosure requirements are met. Entity management can be used to integrate ESG regulations into the day-to-day operations of a company. As the world grows ever more global, organizations will need to focus on building awareness of social and environmental responsibility.

Indeed, entity management software provides a means by which organizations can collect, benchmark, and report ESG data in a seamless and flexible manner. Its comprehensiveness means that it is easy to create dashboards and reports that measure and report accountability across all organization units so that lawyers and executives can see where improvements are needed quickly, effectively, with robust metrics reports. 

Entity management software, through interactive dashboards and reports, means that organizations can proactively identify risk. It also helps to drive business operations, ultimately leading to increased sales and market share. By the inclusion of multiple ESG considerations within your organization’s internal policies or procedures, the associated processes are delivered through the software entity management system, monitoring compliance with automation specifically designed to integrate and analyze your data. Crucially, the software streamlines process time by avoiding the delays caused by manual processes, eliminating the need for IT staff to maintain multiple spreadsheets or different information technology systems. 

Implementing Entity Management Software in Advance of ESG Disclosure Requirements

The imminent requirement that ESG disclosure will soon be required of SEC-listed companies means that entity management organization should no longer be overlooked, given the huge value it provides. Through an automated workflow, an entity management solution will enable an automated workflow for all governance and ESG activities, providing a centralized foundation that will ensure an organization’s compliance with all legal and financial requirements. With a leading legal entity management system in place, you will reap the benefits of the most up-to-date legal technology. The previous time and effort expended on monitoring compliance of legal and business functions across jurisdictions will finally be eliminated, ensuring that you stay ahead of the game and are in place to meet all ESG compliance and reporting obligations.

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