Understanding ESG Regulations
What Are ESG Regulations?
ESG regulations are mandatory reporting requirements for companies to publicly disclose information about their environmental, social, and governance (ESG) practices. They constitute a legal framework with which organizations must comply to ensure the transparency and integrity of their reported ESG data and performance. These regulations also hold companies accountable for their impact, while promoting sustainable business practices.
Who Must Comply with ESG Regulations?
The short answer is it depends on the regulation and the jurisdiction. Some ESG regulations apply only to publicly listed companies; however, private market investors and large private companies are increasingly having to disclose performance on ESG metrics. Additionally, as large public companies work to meet mandatory disclosure requirements, they are pushing ESG data requests down their supply chains. This means private companies are now expected to report on emissions, governance practices, workforce data, and more.
Penalties for Non-Compliance
Penalties vary significantly across jurisdictions and regulations. For example, in the EU, fines under the Corporate Sustainability Reporting Directive (CSRD) can reach up to €10 million or 5% of total annual turnover. California’s SB 253 allows penalties up to $500,000 per reporting year non-compliance, while SB 164 permits fines up to $5,000 per day. Beyond financial penalties, not complying with regulations can result in reputational damage, restricted market access, and limit a company’s ability to secure investment.
Best Practices for ESG Compliance
ESG compliance involves adhering to guidelines and regulations that govern ESG standards as mandated by global regulatory bodies and frameworks. Some best practices to ensure compliance include:
- Starting early and setting the groundwork for compliance by identifying the frameworks an organization needs to report to, and taking advantage of interoperability of existing reporting frameworks to reduce reporting burdens.
- Engaging internal and external stakeholders to understand their expectations and concerns around ESG to ensure buy-in.
- Creating an ESG compliance checklist to maximize efforts. Some essential steps to include are:
- Alignment with regulatory frameworks relevant to the organization
- ESG performance assessment against targets to track progress
- Review of ESG risk management strategies based on regulatory changes, operational feedback, and other trends
- A standardized approach to data collection
- A plan for third-party data assurance
What Is ESG Data Assurance, and Why Is It Important for Compliance?
ESG data assurance is the process of independently verifying the accuracy and reliability of an organization’s reported sustainability data, reducing the risk of greenwashing or misinformation.
Many ESG regulations require third-party assurance of sustainability disclosures, though requirements vary. Assurance providers must have expertise in sustainability topics, and the International Auditing and Assurance Standards Board (IAASB) has developed a framework for standardized sustainability assurance.
Understanding Double Materiality
Double materiality is a reporting principle that requires companies to assess their sustainability matters through the lens of:
- Financial materiality: How sustainability issues can affect a company’s financial performance
- Impact materiality: The company’s effects on external aspects, such as environment and society
A topic is considered material if it meets either threshold. Double materiality assessments are central to the CSRD and differ from single materiality frameworks that focus only on financial impacts.
A New Approach to Double Materiality
Novata’s step-by-step double materiality assessment gives you the structure, tools, and guidance to move forward with clarity.
The Task Force for Climate-Related Disclosures (TCFD)
The Task Force for Climate-Related Disclosures (TCFD), established by the Financial Stability Board in 2015, was developed to guide the disclosure of climate-related risks and opportunities. The TCFD is comprised of 11 recommendations structured around four pillars: governance, strategy, risk management, and metrics/targets.
While the TCFD disbanded in October 2023, the IFRS foundation officially incorporated the full TCFD recommendations in its publication of IFRS S1 and S2 standards. TCFD as a framework continues to be the blueprint for many emerging frameworks and regulations, includingCalifornia’s SB 261. TCFD-aligned disclosures are now mandatory in many jurisdictions globally, including the UK, Japan, and New Zealand.
North American ESG Regulations
ESG Regulatory Developments in the US
The ESG regulatory landscape in the US remains fragmented. With the SEC’s Climate Disclosure Rules stayed indefinitely, most regulatory movement is occurring at the state level. States such as California, New York, and Colorado have introduced climate-related disclosure laws, while others, like Texas and Florida, are introducing legislation that restricts ESG investing practices.
The SEC’s Climate Disclosure Rules
The US Securities and Exchange Commission (SEC) finalized its climate disclosure rules in March 2024, requiring public companies to report on material climate-related risks, governance, and strategy, including Scope 1 and 2 emissions. Companies had the flexibility to tailor disclosures to material ESG topics and risk profiles.
However, the Climate Disclosure Rules have not been formally implemented due to ongoing litigation, and its future remains uncertain. As of September 2025, the Eighth Circuit ordered that the litigation would be held in abeyance pending further SEC action.
California’s Climate Accountability Package
The California Climate Accountability Package is a landmark set of climate disclosure bills (SB 253, SB 261, AB 1305) that requires companies doing business in California to report on their carbon emissions and climate-related business risks.
In September 2024, SB 253 and SB 261 were consolidated under SB 219, which retained the core requirements of the individual bills and gave the California Air Resources Board (CARB) the authority to define reporting rules to reduce administrative complexity and costs.
SB 253 (The Climate Corporate Data Accountability Act):
SB 253 requires US companies with over $1 billion in annual revenue doing business in California to disclose assured Scope 1, 2, and 3 emissions data starting in 2026. As of November 2025, the limited assurance requirement for SB 253 has been removed for first year reporting.
SB 261 (The Climate-Related Financial Risk Act):
US companies with over $500 million in revenue doing business in California are required to publish biennial climate-related financial risk reports aligned with TCFD. In November 2025, the Ninth Circuit Court of Appeals granted an injunction pending appeal, temporarily pausing enforcement of SB 261 ahead of the January 2026 reporting start date. Hearings are still underway.
AB 1305 (Voluntary Carbon Market Disclosures):
Companies that make claims about carbon neutrality or buy, sell, market, or make emissions reductions with voluntary carbon offsets must disclose detailed information about those offsets annually.
Key ESG Regulations in Canada
Canada has taken a significant step in developing its national ESG regulations with the landmark Canadian Sustainability Disclosure Standards (CSDS). Developed by the Canadian Sustainability Standards Board (CSSB), the CSDS is aligned with IFRS 1 and IFRS 2, with the initial framework comprising:
- CSDS 1: General Requirements for Disclosure of Sustainability-related Financial Information
- CSDS 2: Climate-related Disclosures
The CSDS, currently a voluntary framework, aims to align Canadian ESG disclosures with global best practices and empower Canadian entities to thrive in a landscape where sustainability is increasingly linked to business resilience and competitive advantage.
Stay Up to Date on Changing Regulations
See what regulations your organization is in scope for and keep up with evolving reporting requirements, with Novata’s free Regulatory Navigator.
European ESG Regulations
Europe has been at the forefront of regulatory reporting globally, introducing legislation to increase transparency and accountability of disclosures. Key regulations include:
Sustainable Finance Disclosure Regulation (SFDR)
The Sustainable Finance Disclosure Regulation (SFDR) is a mandatory ESG regulation for financial market participants and financial advisors that market or intend to market their products in the EU. The goal of the SFDR is to improve transparency around the sustainability claims of investment products and services and prevent greenwashing in sustainable finance.
Articles 6, 8 and 9 Under the SFDR
Articles 6, 8, and 9 are classification categories under the SFDR that distinguish financial products based on their sustainability characteristics.
- Article 6: Covers conventional financial products without a sustainability scope. However, sustainability risks and their integration into funds must still be disclosed.
- Article 8: Covers products that promote environmental or social characteristics and require companies to follow good governance practices.
- Article 9: Covers funds that have sustainable investment as their primary objective and face the most stringent disclosure requirements.
What Are PAI Indicators?
The principal adverse impact (PAI) indicators measure the negative impacts of investment decisions on sustainability factors and enable comparison across financial products. Financial market participants must assess the sustainability of their investments using 18 mandatory indicators (along with one additional climate- and social-related indicator each), covering topics such as carbon emissions, biodiversity impacts, and board gender diversity.
Completing a PAI Statement
A PAI statement is an annual public disclosure published on financial market participants’ websites by June 30 each year, covering a reference period between January 1 to December 31 of the previous year.
The PAI statement is disclosed at the product level (fund level) and entity level (firm level), which includes the aggregation of data across all fund types (i.e., Articles 6, 8, and 9).
The PAI statement includes:
- Quantitative data on the 18 mandatory PAI indicators
- Descriptions of the PAIs, and steps taken or planned to mitigate their negative effects
- References to international standards or internationally recognized standards for due diligence and reporting
- Historical comparison of up to five previous periods
Who Needs to Prepare a PAI Statement?
PAI disclosures are mandatory for financial firms with 500 or more employees, and smaller entities below this threshold must adhere to the “comply or explain” principle. Financial entities that consider PAIs in their investment decisions must explain how they do so (“comply”), while those that do not must describe why and whether they intend to consider them in the future (“explain”).
Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) is a comprehensive EU legislation requiring companies to report detailed sustainability information aligned with the European Sustainability Reporting Standards (ESRS). In December 2025, EFRAG released a final revision of its simplified ESRS, significantly changing the scope and reporting requirements for the CSRD.
ESRS Omnibus Update: What the New Draft Means
Watch this webinar for a practical briefing on EFRAG’s draft Simplified European Sustainability Reporting Standards (ESRS), including what’s changing, what’s ahead, and how to stay aligned with evolving reporting requirements.
Corporate Sustainability Due Diligence Directive (CSDDD)
The Corporate Sustainability Due Diligence Directive (CSDDD) is an EU directive that mandates large companies to conduct thorough due diligence to identify, prevent, mitigate, and account for their impacts on human rights and the environment throughout their entire value chain. The CSDDD holds companies accountable for impacts beyond their direct operations.
Differences Between the CSRD and CSDDD
The CSRD and CSDDD are complementary, as both aim to enhance value chain transparency within the EU. However, the CSRD focuses on the disclosure of ESG risks and opportunities, while the CSDDD emphasizes operational conduct and action-oriented obligations.
The CSRD also applies to a broader range of companies and covers the full value chain, including all internal operations and upstream and downstream activities. The CSDDD, on the other hand, focuses on a smaller group of value chain activities, such as upstream supply chain and downstream activities, but not end-consumer impacts.
The EU Taxonomy
The EU Taxonomy is a science-based classification system defining which economic activities can be considered environmentally sustainable across six environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
It also sets out four conditions that an economic activity must meet to be recognized as Taxonomy aligned:
- Making a substantial contribution to at least one environmental objective
- Doing no significant harm to any other environmental objective
- Complying with minimum social safeguards
- Complying with the technical screening criteria
Why the EU Taxonomy Is Important
By providing a common language and establishing clear criteria for what can be considered sustainable economic activities, the EU Taxonomy provides a framework to support investors and companies in the transition to climate neutrality. It also protects against greenwashing and ensures that capital is redirected to activities aligned with European Green Deal objectives.
UK Sustainability Reporting Standards (SRS)
The UK Sustainability Reporting Standards (SRS) is a regulation that aims to help UK businesses standardize their sustainability disclosures and enhance corporate transparency. The developing UK SRS is aligned with the ISSB Standards, specifically IFRS S1 and S2.
As of September 2025, the UK government has proposed 6 minor amendments to the standards (UK SRS S1 and SRS S2) to reflect their use in a UK context, which are now under consultation and review.
Asia Pacific ESG Regulations
What ESG Regulations Exist in Asia Pacific?
ESG regulations across Asia Pacific vary widely by country but are rapidly evolving toward more standardized sustainability reporting. Many markets—including Japan, Singapore, Hong Kong, Australia, and New Zealand—have introduced mandatory or “comply-or-explain” climate and sustainability disclosures, often aligned with the TCFD.
Several jurisdictions are now transitioning to ISSB-aligned standards, including Malaysia and China, signaling greater regional convergence in ESG reporting expectations.
Hong Kong Financial Reporting Standards (HKFRS)
The Hong Kong Financial Reporting Standards (HKFRS) are accounting standards issued by the Hong Kong Institute of Certified Public Accountants. The HKFRS are based on the ISSB Standards but contain disclosure requirements aligned with Hong Kong’s local business and legal environments.
All main board-listed companies on the Hong Kong Stock Exchange must comply with the new climate-related disclosure requirements on a “comply or explain” basis, effective January 1, 2025. Hong Kong will prioritize the application of the HKFRS by large publicly accountable entities (PAEs) under a phased approach, with the aim of fully adopting the standards by 2028.
How Are the ISSB Standards Being Incorporated into Global ESG Regulations?
The International Sustainability Standards Board (ISSB) Standards (IFRS S1 and S2) are gaining global regulatory adoption, with over 36 jurisdictions committed to adopting or aligning with them. The ISSB Standards provide a global baseline for companies to disclose decision-useful climate-related information, with the aim of improving transparency and reducing reporting complexity.
For example, the EU and ISSB have worked together to improve the interoperability of their respective disclosure requirements. Companies in scope for the CSRD can meet ISSB requirements with minimal effort, as both share aligned climate disclosure requirements and materiality definitions, marking a significant shift toward standardizing sustainability reporting.
Preparing for ESG Compliance
Understanding which regulations apply to your organization is a great first step, but establishing processes to meet reporting deadlines is equally crucial. Some tips to help you prepare include:
- Plan for the real time commitment: ESG reporting is resource-intensive. Data collection, assurance, and report preparation all take time. Start early, map regulatory requirements to internal owners, and build in time for review cycles and audit readiness.
- Leverage interoperability to reduce reporting burdens: Many ESG regulations and standards overlap. Identifying areas of interoperability, such as between global frameworks and regional regulations, can significantly reduce reporting burden and duplication of efforts.
- Use technology and expertise strategically: ESG software can help centralize metrics, automate workflows, and create audit trails. Pair technology with experienced internal teams or external advisors who understand evolving regulatory requirements. The right partners can help reduce risk, increase accuracy, and accelerate readiness.
- Treat compliance as a strategic investment: High-quality ESG data provides insights into operational efficiency, risk exposure, portfolio performance, and long-term value creation. When integrated into decision-making, regulatory reporting can become a competitive advantage.
How Novata Supports ESG Compliance
Novata helps organizations navigate ESG regulatory compliance by combining regulatory guidance, structured data management, and reporting workflows in one platform. Novata supports a wide range of global and regional ESG regulations and standards, including CSRD, SFDR, TCFD, ISSB, IFRS S2, and other evolving private-market requirements.
These regulatory standards and frameworks are continuously maintained by Novata’s dedicated Metrics & Regulations team, who monitor regulatory change and translate it into clear, actionable requirements within the Novata platform.
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