A Tough Row: The Challenges of Implementing an ESG Program

Companies face several challenges when implementing Environmental, Social, and Governance (ESG) programs. These can vary by region but tend to include three issues: A lack of certainty in the regulatory environment, the expense of compliance, and multiple operational challenges to reaching success. To boards and executives, creating an ESG program may appear to be a very tough row to hoe. Let’s survey these 3 challenges to ESG program success.
A Lack of Certainty
There is a lack of certainty in ESG regulations and where they are headed. In the U.S., the regulatory landscape for ESG is still evolving. ESG goals are lofty and continue to evolve, The U.S. Securities Exchange Commission published its final ESG disclosure rules in March this year in an 866-page document but those are on hold while the inevitable litigation plays out. In Canada, there are some regional mandates, like climate-related disclosures, but no nationwide uniform ESG regulatory framework. The European Union (EU) has been more proactive with regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy. However, these rules are complex and require significant resources to ensure compliance, especially for non-EU companies doing business in Europe.
Hentie Dirker, the Chief ESG and Integrity Officer for AtkinsRéalis, explains that this uncertainty is a layered challenge. “There is a lot of uncertainty in companies and in the world about what ESG really is,” he says. Regional differences are another layer of the regulatory onion. Dirker confirms this point: “Staying on top of all the various reporting frameworks and requirements is also quite challenging since its fast moving and dependent on the breadth and size of an organizations footprint globally it could have profound implications in how data needs to be collected, reports be filed, etc.” In this way the uncertainty of what is required of companies complicates the operational challenges.
The Expense
Implementing an ESG program requires significant upfront investment in infrastructure, staffing, and technology. For smaller companies and those with low margins, these costs can be prohibitive. It is challenging to align long-term ESG goals with short-term business objectives, such as profitability. This is especially true for publicly traded companies that are driven by quarterly results. Complying with stringent regulations in Europe is costly, requiring companies to upgrade their operations, hire additional personnel, and license systems to meet climate and sustainability reporting obligations. Companies may struggle to justify these costs when the financial return on investment for ESG initiatives isn’t always clear or tends to be long- not short-term.
The Operational Challenges
Implementing an ESG program is an operational struggle. Jon Drimmer, a partner with Paul Hastings and previously the Chief Compliance Officer of Barrick Gold, notes that the biggest challenge for clients in implementing an ESG program is scope as companies “may be impacted by product, geography, program maturity and other factors. Addressing those risks across the globe is hugely challenging.”
Data Collection and Reporting: Gathering reliable, standardized, and comparable ESG data across different regions is one of the highest hurdles. Many companies lack the necessary tools, systems, or frameworks to collect and report on ESG metrics effectively. The various reporting frameworks such as the GRI (Global Reporting Initiative), the ISSB (International Sustainability Standards Board) reporting framework, and the European Corporate Sustainability Reporting Directive (CSRD) make it challenging to align global operations, particularly for multinational corporations. Hentie Dirker of AtkinsRéalis confirms that success in this area is an intensive effort that requires cross-functional support. He notes that “Separately standing up a control environment around everything that needs to be disclosed is also quite a lot of work and support from the finance group is needed to get this done.”
Measurement of ESG Impact: CEOs want to know what success looks like but quantifying the impact of ESG initiatives, particularly in the short term, can be tricky. Companies often struggle to link ESG metrics to financial performance, which can lead to skepticism about the business case for ESG. This is exacerbated when ESG ratings from different providers conflict due to varying methodologies used, leading to confusion over how a company's ESG performance is assessed.
Global Supply Chain Issues: Companies with complex global supply chains face difficulties in ensuring that ESG principles are upheld at every level. Under the new EU Supply Chain Due Diligence Directive (SC3D), large companies operating in the EU are required to identify and address both adverse human rights and environmental impacts in the company’s operations, its subsidiaries, and their business partners. Some companies will struggle with implementing the SC3D, especially those in industries such as fashion, electronics, or agricultural industries, where oversight of labor practices, environmental impact, and ethical sourcing can be challenging.
Integrating ESG into Business Strategy: Companies may struggle to fully integrate ESG into their core business operations especially when ESG programs are siloed into separate departments like corporate social responsibility (CSR), sustainability, ethics & compliance, or human resources, rather than being woven into overall corporate strategy and decision-making.
Greenwashing Risks: As ESG gains more attention, companies face increasing scrutiny for potentially overstating their environmental or social achievements (greenwashing). A misstep in communication or transparency can harm a company’s reputation and reduce investor trust. The lack of universal standards exacerbates this risk, as companies may inadvertently engage in misleading claims while trying to navigate the complex regulatory landscape.
Expertise Gap: Finding leadership to manage an ESG program is also an issue as ESG is a relatively new field there are few professionals with a trifecta of expertise in sustainability, human rights, and governance. This can slow the development and implementation of effective an ESG program.
Stakeholder Expectations and Pressures: Companies are facing pressures from a wide range of stakeholders, including investors, customers, and employees, to adopt ESG programs. These stakeholders often have conflicting priorities. For example, investors might prioritize climate change, while employees may focus on DEI (diversity, equity and inclusion) principles.
Cultural and Regional Differences: Attitudes toward ESG can vary widely between regions, making it hard for multinational companies to implement uniform policies. Issue bias is reflected in a region’s regulations. For instance, European firms may be more focused on sustainability and climate goals due to stringent EU regulations, while U.S. companies may emphasize governance or DEI principles.
Conclusion
Implementing an ESG program requires all hands on deck to navigate the complex regulatory landscape, manage stakeholder expectations, and integrate ESG principles into company day-to-day operations. In spite these challenges, Hentie Dirker of AtkinsRéalis is positive and advises that by aligning ESG strategies to focus on the areas which will have the most meaningful impact, companies can implement as ESG program that will realize benefits both for their business and long-term sustainability. It’s a tough row indeed but as Nelson Mandela said, “It always seems impossible until it’s done.”
General Counsel