ESG Compliance: Regulations, Risks, and Strategies for Businesses

ESG compliance is no longer just a regulatory requirement – it’s a business imperative. Governments worldwide are tightening environmental, social, and governance regulations, investors are scrutinizing ESG performance, and consumers expect businesses to operate responsibly. Companies that fail to comply face legal penalties, supply chain disruptions, and loss of market access.

This guide breaks down what ESG compliance means, why it matters, and how businesses can meet evolving requirements. It covers key regulations across major markets, challenges companies face in implementation, and best practices for integrating ESG into corporate strategy.

What is ESG Compliance?

ESG compliance means following laws, regulations, and industry standards that cover environmental impact, social responsibility, and corporate governance. It requires businesses to track and report on areas like carbon emissions, labor rights, anti-bribery policies, and board oversight. It can be split into the three components that make up ESG:

Environmental compliance: Meeting emission reduction targets, following waste disposal laws, and improving energy efficiency. Many companies must report scope 1, 2, and 3 greenhouse gas emissions under frameworks like the SEC Climate Disclosure Rule or the EU’s Corporate Sustainability Reporting Directive (CSRD).
Social compliance: Involves labor laws, supply chain due diligence, and human rights protections. Regulations like Germany’s Supply Chain Act (LkSG) and Canada’s Modern Slavery Act (Bill S-211) require businesses to monitor and prevent forced labor in their supply chains.
Governance compliance: Financial transparency, anti-corruption efforts, and board diversity. Companies must follow rules like the UK Bribery Act or the US Foreign Corrupt Practices Act (FCPA) to prevent fraud and unethical business practices.

In addition to complying with laws and regulations, many organizations voluntarily comply with frameworks like GRI, SASB, and ISSB to meet investor expectations and improve sustainability reporting. The reason for this is simple: ESG compliance is now a core business requirement, affecting supply chain management, risk assessments, and investment decisions. It’s therefore good practice to tick as many boxes as possible.

Why ESG Compliance Matters

Indeed, as much as ESG compliance might feel like a box-ticking exercise, it’s about far more than simply meeting specified requirements and calling it a day. Scrutiny of ESG issues, not just from regulators but also consumers and business partners, is intensifying.

Organizations must be ready to meet strict ESG requirements or face financial penalties, legal action, and reputational damage. Investors and customers now demand transparency, and those that fall behind risk losing access to capital and market opportunities.

Legal and Regulatory Risk Mitigation

Governments worldwide are expanding ESG compliance laws, shifting from voluntary guidelines to legally enforceable requirements. The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) will require large companies to assess and mitigate ESG risks in their supply chains. Germany’s Supply Chain Due Diligence Act (LkSG) fines non-compliant companies up to 2% of global turnover, while the UK Modern Slavery Act mandates annual statements on human rights risks.

Environmental compliance is also tightening. The EU’s Carbon Border Adjustment Mechanism (CBAM) puts a price on carbon, forcing companies in high-emission industries to cut emissions or pay significant costs. California’s SB 253 will require companies with over $1 billion in revenue to report scope 1, 2, and 3 emissions, data that many businesses still struggle to collect and verify.

Failure to comply with these regulations leads to more than just fines. Lawsuits, supply chain disruptions, and investor divestment are real consequences for businesses that lack ESG oversight. Companies operating across multiple jurisdictions must navigate overlapping and sometimes conflicting regulatory frameworks, requiring a structured, proactive compliance strategy.

Investor and Consumer Expectations

ESG performance is now a financial issue. Investment funds managing over $40 trillion in assets integrate ESG factors into decision-making, and failing to disclose ESG risks can limit a company’s access to financing. The Sustainable Finance Disclosure Regulation (SFDR) classifies investment funds based on ESG criteria, influencing how capital is allocated. Companies with weak ESG ratings may struggle to secure loans, attract investors, or issue green bonds.

Consumer expectations are also shifting. 78% of global consumers prefer sustainable products, and major retailers increasingly require suppliers to meet ESG standards. Companies in industries like fashion, electronics, and food must demonstrate traceability in their supply chains, comply with deforestation-free sourcing rules, and prove ethical labor practices to avoid losing contracts.

Corporate buyers are also under pressure. Many firms require their suppliers to complete ESG assessments before entering into procurement agreements. Suppliers with poor ESG scores may be excluded from supply chains entirely.

Competitive Advantage and Reputation Management

Regulatory and stakeholder pressures aside, ESG compliance offers a strategic advantage. Companies with strong ESG policies secure better supply chain relationships, lower financing costs, and improved risk management.

Greenwashing – making misleading sustainability claims – is under heavy scrutiny. The EU Green Claims Directive will impose strict penalties on businesses that can’t substantiate their environmental claims. Regulatory bodies in the US (SEC), UK (CMA), and Australia (ASIC) are investigating companies for deceptive ESG reporting.

Beyond compliance, ESG programs drive operational efficiencies. Companies that optimize energy use, reduce waste, or transition to circular economy models cut costs and improve resilience against resource shortages. ESG-aligned businesses are also better positioned to win government contracts, as many public procurement policies now require suppliers to meet sustainability criteria.

Key ESG Regulations Around the World

Regulations vary dramatically by region, but they all point to a clear trend: governments are imposing stricter reporting and due diligence requirements. Organizations with international operations must comply with overlapping and sometimes conflicting rules, making global ESG compliance a strategic but necessary challenge to overcome.

ESG Compliance in the European Union

The EU has the most comprehensive and enforceable ESG compliance framework, covering corporate disclosures, supply chain due diligence, and sustainable finance.

Corporate Sustainability Reporting Directive (CSRD): Requires detailed ESG disclosures from large EU and non-EU companies operating within the bloc. Expands reporting obligations under European Sustainability Reporting Standards (ESRS) and aligns with ISSB and TCFD frameworks.
Corporate Sustainability Due Diligence Directive (CSDDD): Mandates human rights and environmental due diligence across global supply chains. Large EU firms (and non-EU companies with significant EU revenue) must identify, mitigate, and report on ESG risks in their operations, subsidiaries, and supply chains. Failure to comply can result in fines and liability for damages.
EU Taxonomy: Defines what qualifies as a sustainable economic activity, guiding investors and businesses. Companies seeking green financing must align with EU Taxonomy criteria, which determine eligibility for green bonds, loans, and sustainability-linked investments.

Additionally, the EU Deforestation Regulation (EUDR) bans imports of deforestation-linked commodities like soy, palm oil, coffee, and rubber unless organizations can prove their supply chains are deforestation-free.

United States ESG Regulations

The US lacks a single federal ESG law, and with the SEC climate disclosure rule on hold, several state-level ESG laws are emerging, including New York’s proposed climate disclosure rules and Colorado’s ESG reporting standards for financial institutions.

California SB 253: The Climate Corporate Data Accountability Act mandates scope 1, 2, and 3 emissions reporting for companies with over $1 billion in revenue operating in California. It’s the strictest climate disclosure law in the US and will likely influence federal regulations.
Dodd-Frank Act (Conflict Minerals Rule): Requires US-listed companies to disclose sourcing of tin, tungsten, tantalum, and gold (3TG) from conflict-affected regions. A key part of supply chain ESG compliance, non-compliance can lead to penalties and reputational risk.

UK & Canada ESG Regulations

The UK has moved ahead with mandatory ESG disclosures, particularly in climate risk reporting and sustainable finance. Meanwhile, Canada has introduced measures focusing on forced labor risks.

UK Modern Slavery Act requires companies with annual revenues above £36 million to publish an annual slavery and human trafficking statement. Businesses must assess forced labor risks across supply chains, detail mitigation efforts, and disclose actions to prevent human rights abuses.
Canada’s Bill S-211 requires companies to report on forced labor risks in supply chains, similar to the UK Modern Slavery Act. Applies to public and private businesses meeting revenue and operational thresholds.

Challenges in ESG Compliance Implementation

Complying with ESG regulations and standards is no easy process, not least when you’ve got to meet the requirements of several. Regulations are also evolving fast, and organizations must adapt to new requirements while managing data inconsistencies, resource constraints, and supplier compliance gaps.

Data Collection and Standardization

Many organizations struggle to collect accurate and verifiable ESG data, especially for scope 3 emissions and supply chain risk assessments. Unlike the scope 1 and 2 categories, which are under an organization’s direct control, Scope 3 emissions depend on external suppliers and partners, making reliable data collection difficult.

The lack of standardized ESG reporting frameworks adds another layer of complexity. Organizations must navigate the CSRD, TCFD, GRI, SASB, and ISSB standards, each with different disclosure requirements. This inconsistency makes data comparisons difficult and increases the risk of non-compliance when reporting across multiple jurisdictions.

Keeping Up with Regulatory Changes

Governments are tightening ESG laws, introducing mandatory reporting, stricter supply chain due diligence, and financial penalties for non-compliance. Those operating in multiple regions must track regulatory updates in real time to avoid falling behind.

Efforts to harmonize global ESG standards, such as the ISSB’s IFRS S1 & S2, aim to create a single global baseline for sustainability reporting. While this reduces long-term complexity, companies must still adjust their reporting processes to align with these new frameworks. Transitioning to these standards requires investments in data collection systems and training compliance teams to interpret evolving requirements.

EcoVadis’ ESG Regulations Round-Up

A monthly take on the latest news on sustainability disclosure and due diligence regulations.

Supply Chain Due Diligence

Most ESG risks occur outside an organization’s direct operations, making supply chain due diligence a major compliance challenge. Identifying ESG risks beyond Tier 1 suppliers can be difficult due to limited visibility into subcontractors and raw material sourcing.

Many suppliers, particularly in emerging markets, lack the resources or expertise to meet ESG compliance standards. Large companies are expected to audit, train, and support suppliers in meeting due diligence requirements, which can be resource-intensive. Non-compliant suppliers pose legal, financial, and reputational risks, and failing to enforce ESG standards in the supply chain can result in penalties under CSDDD or the UK Modern Slavery Act.

Best Practices for ESG Compliance

ESG compliance requires a structured approach that integrates risk management, data collection, governance, and supplier oversight. Businesses that implement clear policies, leverage technology, and engage suppliers effectively are better positioned to meet regulatory requirements and stakeholder expectations.

Establishing an ESG Compliance Framework

This begins with identifying material risks and aligning corporate policies with global standards.

Materiality assessments help determine which ESG issues pose the greatest financial, operational, and reputational risks. This process ensures that businesses prioritize compliance efforts where they matter most.
Organizations should align with recognized ESG reporting frameworks like GRI, TCFD, SASB, and ISSB. These standards provide structured reporting guidelines that meet investor and regulatory expectations.
Organizations must embed ESG compliance into corporate strategy, ensuring that executives, legal teams, and procurement managers work together to integrate sustainability into operations.

Strengthening Governance and Reporting Practices

ESG compliance requires clear accountability and independent verification to ensure credibility and prevent greenwashing risks.

Assigning a Chief Sustainability Officer (CSO) or ESG Compliance Lead ensures ESG policies are enforced across departments and compliance efforts are coordinated with financial and legal teams.
Third-party ESG audits provide independent verification of sustainability reports, supply chain due diligence, and emissions tracking. Many regulations, including the CSRD and California SB 253, require external assurance for reported data.
Board oversight and executive incentives linked to ESG performance help drive accountability. Organizations that tie executive compensation to ESG goals are more likely to implement effective compliance measures.

Supplier Engagement and Risk Management

As we highlighted earlier, many ESG compliance risks come from supplier operations. This makes supplier engagement an important component of any ESG compliance strategy.

Establishing Supplier Codes of Conduct aligned with the CSDDD, UK Modern Slavery Act, and forced labor laws sets clear ESG expectations for vendors. These codes should include minimum labor standards, environmental targets, and ethical sourcing requirements.
Companies should train suppliers on ESG compliance, providing capacity-building programs and sustainability workshops to help smaller vendors improve environmental and human rights practices.
Supplier ESG performance assessments – including on-site audits, self-assessments, and third-party evaluations – help businesses identify high-risk suppliers and take corrective actions before violations occur.

Managing ESG compliance is complex, but it doesn’t have to slow you down. EcoVadis provides trusted ESG ratings, supplier risk mapping and AI-driven analytics to help you meet global regulations. With 150,000+ companies already onboard, our platform simplifies reporting, strengthens due diligence, and prepares you for audits – all in one place.