Author

Tim Lambert, regional manager – Northern Europe – osapiens

Publication date
November 22, 2024

Categories

Environmental, social and governance (ESG) regulations are evolving rapidly around the world, demanding greater accountability from companies to monitor and report their environmental impact. These regulations continue to grow in number and scope.

In the UK, reporting of scope 1 and 2 emissions is mandatory, while scope 3, all indirect emissions up and down supply chains, remains voluntary. The EU goes even further; have some of the strictest ESG regulations in the world, with frameworks such as the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the upcoming EU Deforestation Regulation (EUDR).

Globally, pressure to combat the climate crisis is pushing countries to adopt similar regulations, often with harsh penalties for non-compliance. As finance and sustainability functions become increasingly interconnected, accounting departments must be prepared to meet these regulatory requirements. Implementing advanced software solutions is essential to ensure accurate reporting and prevent the risk of non-compliance.

Preparing for ESG regulations is a global imperative

Regardless of their location, businesses must assess and manage their environmental impact. This may arise from local government mandates or supply chains, subsidiaries and partnerships in regions with strict ESG reporting requirements, particularly within the EU.

Failure to comply with ESG standards can result in significant consequences, including fines, restricted access to EU markets and reputational damage. This highlights the global reach and increasing complexity of ESG regulations, particularly for companies linked to international supply chains.

EUDR: a sign of things to come

The European Union Deforestation Regulation (EUDR), adopted in 2023 and coming into force in 2025, requires European companies to ensure their supply chains are free of deforestation.

The regulation focuses on raw materials – such as coffee, cocoa, palm oil, soy, rubber, timber and livestock – as well as a large number of affected products such as chocolate, leather and paper. All market participants who import these categories of products into the European market, place them on the market, market them within the EU or export them must guarantee that they do not come from a deforested area and that they were produced in accordance with the country’s legislation. of origin (e.g. in relation to land use, labor rights, human rights) and are covered by a “duty of care”. In its current form, EUDR will affect 25% of UK businesses – reinforcing the need to source responsibly and without deforestation. goods.

Understanding the due diligence obligations that apply throughout the supply chain and manufacturing process is essential. Appropriate preparations for affected companies should include a rigorous internal audit of all manufacturing processes and the adoption of data management and risk analysis software.

In the event of non-compliance, companies face heavy sanctions, such as fines of up to 4% of turnover and confiscation of the products concerned.

The role of accounting in ESG compliance

For accounting teams, these regulations bring new responsibilities. ESG reporting requirements, particularly those set by the EU, require advanced solutions that can streamline and automate compliance. Automated, AI-enhanced ESG platforms will become essential for companies of all sizes, particularly those managing complex global supply chains or lacking dedicated sustainability expertise.

Furthermore, the UK accounting industry faces a ‘perfect storm’ of unique structural challenges which could limit the sector’s ability to adapt effectively to these new rules. According to search by Advancetrackoutsourcing specialist, almost 45% of accounting firms are “severely” or “significantly” affected by a shortage of qualified accountants, while three-quarters of firms reported that associate hours had increased. Although not a new or UK-specific problem, the problem has become worse in 2024, with the UK among the hardest hit.

Investing in technologies that integrate seamlessly with existing ERP systems can save accountants valuable time and reduce the risk of penalties by ensuring compliance with ever-changing regulations. The growing scope of the regulatory landscape makes one thing clear: inaction is no longer an option.