The Emergence of ESG Reporting
ESG reporting has become more transparent and crucial over the past 20 years, with more ESG-related information being included in regular financial reporting.
KPMG's 2022 Global CEO Outlook says that 69 percent of CEOs (up from 58 percent in 2021) see a strong demand from stakeholders for more transparency and reporting on ESG issues. On top of that, 72% think that stakeholder scrutiny of ESG issues like climate change and gender equality will continue to grow. Furthermore, over one-third of respondents think their companies have trouble telling an engaging ESG story.
Over the last ten years, there has been a substantial increase in the number of businesses that have published sustainability reports.
Seventy-nine percent of the N100 group, which consists of the top one hundred companies in each of the surveyed countries, have reported on sustainability, according to the findings of KPMG's 2022 Global Survey of Sustainability Reporting. This figure represents 96 percent of the top 250 (G250) companies in the world.
These figures, on the other hand, are likely to be significantly lower for businesses on a smaller scale. Every organisation that is in the scope of CSRD is required to initiate the process of formulating a strategy to get ready for the first reporting year that will be conducted per the new standards. This is because the CSRD is taking environmental, social, and governance (ESG) reporting to a new level.
What is ESG reporting?
"ESG reporting" refers to the process by which a company makes public disclosures of information regarding its environmental, social, and corporate governance practices. An ESG report's objective is to ensure transparency into the organization's environmental, social, and governance (ESG) activities and to measure the organization's performance in terms of sustainability. This is done so that stakeholders, including investors, consumers, and non-governmental organisations (NGOs), can make decisions that are more informed.
Environmental, Social, and Governance (ESG) considerations have received a significant amount of attention from investors over the course of the past few years. From being regarded as a niche investment only a few years ago, it is now frequently a deciding factor in whether or not an organisation succeeds or fails.
An important factor in this is the growing number of mandatory environmental, social, and governance regulations all over the world, and there are more on the horizon. An increasing number of governments have passed laws requiring ESG reporting in the last year, showing that this is not a passing fad and will remain popular.
As a result, investors are asking more and more companies to disclose their data. If you have not already been impacted, it is likely that it is only a matter of time before your company begins to collect, analyse, and report on your environmental, social, and governance (ESG) data.
We have looked into the current status of mandatory environmental, social, and governance (ESG) reporting requirements around the world in order to help you determine whether or not they apply to you. Let’s get started!
ESG reporting is a challenging endeavour.
Due to the fact that ESG reporting is a constantly evolving set of metrics, it can be difficult to understand. The future lies in ESG reporting; however, it takes a significant amount of time and money for businesses to audit all of the aspects of their operations that should be included in ESG reporting.
It is important for finance chiefs to be aware of this because businesses need to discover a uniform method to collect, standardise, and aggregate data from all employees throughout the organisation. Using AI-powered software to collect, organise, display, and share ESG data can be very effective.
Different operational systems, such as HR, IT, ERP, and supply chain, all generate ESG data for different metrics and levels of detail.
For instance, carbon emissions, energy use, or how long a product lasts may be examples of environmental data. Some examples of social metrics are employee wellness programmes, the number of women and minorities in leadership positions, and the number of high-performing employees who stay with the company. Governance data can also be gathered by reporting about the number of women and minority directors, the board's oversight of climate issues, and the pay of executives.
What issues surround mandatory ESG reporting?
In 2016, a well-known study by Carrots and Sticks found that making ESG reporting mandatory made business leaders more socially responsible. Despite the fact that this is a favourable outcome, there are still a number of concerns regarding mandatory reporting practices. Among these are:
The omission of SMEs:
The majority of mandated reporting tools are focused on catering to large or publicly traded enterprises. Small and medium-sized businesses (SMEs) that report on ESG factors do not get the required attention from governments and regulators. Small and medium-sized businesses (SMEs) make up about 90% of businesses, but only 10% of the reports in the GRI Sustainability Disclosure Database are from SMEs.
A lack of standards:
If the current voluntary reporting rules are to become mandatory, they should be flexible enough to accommodate firms of all sizes. Establishing such standards for every business is almost unfeasible, and industry-specific standards are not well-developed or universally accepted just yet.
Global governance incompatibility:
Even though many countries have imposed mandatory reporting requirements, it is impossible to tell whether the governments fairly and consistently assess the reports' quality. Unfortunately, high levels of corruption in developing countries can undermine the public's confidence in environmental effect data both domestically and internationally.
The question of whether sustainability reporting ought to be required or optional is still up for debate. Mandatory ESG reporting serves the purpose of ensuring uniformity in reporting practices among corporations. Mandatory criteria, however, put unfair pressure on companies that are only starting out in the sustainability space. According to many, the market drives voluntary reporting and gives reporting firms a competitive advantage.
The impacts and benefits of mandatory ESG reporting
As to the ECGI study, mandatory ESG reporting enhances the accessibility and calibre of ESG reporting, especially for firms that exhibit subpar ESG performance. A company can benefit from ESG reporting, as this could lead to more precise and less scattered earnings estimates from analysts if ESG reporting is mandated.
In addition, the likelihood of negative ESG incidents and a stock market crash both diminish when mandatory ESG reporting is implemented. The research indicates that mandatory ESG reporting has practical and educational advantages.
There is far more ESG performance data to report across a wider range of topics
Companies will be required to report on more than hundreds of indicators and targets starting in 2024. Organisations should be transparent about how they address biodiversity loss and reductions in resource and water usage, in addition to tracking performance on climate change, the circular economy, and pollution, if applicable or part of mandatory items required by other EU legislation. The new CSRD includes social problems such as how employees are treated both inside their own business and throughout the value chain. The G standard also applies to disclosures about business conduct policies, such as those about supplier relationship management, payment procedures, lobbying activities, and the prevention of corruption and bribery.
There is now a requirement for significantly greater transparency throughout the whole value chain, extending both the variety of indicators and the level of information that businesses must report on.
It will take time for ESG reporting to work well.
Ensuring the equal relevance of financial reporting and ESG is one of the main goals of the CSRD.
The CSRD will demand a new degree of disclosure, even though many businesses have been regularly disclosing their sustainability performance, with ESG reporting now a top emphasis at the board level. Businesses must publish information about their policies and goals in a variety of sectors, such as plans for resource conservation and carbon reduction. This transparency might be the driving force behind their decision to integrate ESG into business strategy and operations, as well as to review or develop rules and targets. They must establish procedures to collect ESG data, assess ESG performance, and provide reports per the ESRSs in a suitable, auditable manner to accomplish this.
A significant change in management initiative
ESG reporting is becoming more commonplace as the ESG performance of businesses is scrutinised more closely. For boards, monitoring and adjusting to changing sustainability regulations has become a top strategic responsibility. It is crucial to be ready by taking into account the following important factors, since some businesses only have a year before the first reporting period begins:
Assemble a governance structure headed by the board
Establish a procedure for due diligence along the whole value chain.
Include ESG in corporate risk management systems.
Get ready for assurance
Consider the short, medium, and long-term time horizons.
Even companies with more advanced sustainability reporting programmes will probably need to make major adjustments to the way they collect, handle, and disclose data on social, governance, and environmental issues throughout their whole upstream and downstream value chains.
The current state of mandatory ESG reporting requirements
Every industry is already seeing the detrimental effects of climate change on businesses, and investment decisions are becoming more and more dependent on an awareness of environmental, social, and governance (ESG) concerns. However, investors are unable to make wise and sustainable investment decisions due to the unavailability and poor quality of companies' ESG information, which slows down the shift to a greener economy.
More nations are enacting laws requiring ESG reporting in order to close the information gap between the supply of information by businesses and the demand for ESG information by investors. According to a 2021 study, 25 nations implemented laws requiring businesses to publish environmental, social, and governance (ESG) data during the studied period. The majority of these laws targeted financial institutions, state-owned enterprises, and big, publicly traded corporations. This does not absolve other firms from being impacted. In-scope financial institutions and businesses are already putting more pressure on SMEs to reveal their ESG data.
Countries and Territories where ESG Reporting Is Compulsory
Global evaluation of mandatory ESG reporting
Currently, 29 nations and territories have implemented mandatory ESG reporting laws to some extent. The extent to which institutions are required to disclose ESG data and the companies that meet the stricter requirements varies depending on regional or national policy.
The United States
With certain mandatory reporting components, the US Securities and Exchange Commission (SEC) enforces a comply-or-explain policy.
Regulations of the New York Stock Exchange (NYSE) mandate that companies that are listed must publish codes of ethics and corporate behaviour. To keep up with a dynamic market and give stakeholders comparable, traceable data, the SEC proposed in March 2022 to improve and standardise climate-related disclosures for investors.
Malaysia
In 2016, Malaysia made environmental, social, and governance (ESG) reporting standards mandatory for all publicly traded companies. The establishment of policies regarding equity, diversity, and human rights, as well as policies regarding anti-bribery and anti-sexual harassment and practices regarding sustainable development, are all included in this list of responsibilities.
Additionally, there have been recent suggestions to gradually align Malaysia's environmental, social, and governance (ESG) reporting standards with those that the Financial Stability Board's Task Force on Climate-Related Financial Disclosures (TCFD) has established.
The United Kingdom
Certain businesses, such as those with more than 500 employees or annual turnovers of more than £500 million, are required by law in the United Kingdom to disclose climate-related financial information in their annual strategic reports. Other guidelines, such as Section 172 of the Companies Act, mandate that directors of companies based in the United Kingdom take into consideration a variety of factors, including the rights and disclosures of employees, community relations, and issues pertaining to anti-corruption and anti-bribery.
Hong Kong
While Hong Kong continues to operate under a "comply-or-explain" system, companies that fall under the Main Board Listing Rules are required to comply with certain mandatory ESG reporting standards. These include statements from the board about how ESG issues are overseen, managed, and reviewed for progress; details on how the reporting principles of materiality, quantitativeity, and consistency were used to make the ESG reports; and a list of the entities that were included in the reports and why they were included.
Singapore
In 2016, the Singapore Exchange Ltd. established a framework for environmental, social, and governance (ESG) reporting that requires companies to either comply or explain their actions. In January 2022, mandatory reporting rules applied to certain listed companies. Certain entities from a variety of industries will be required to present climate-related disclosures beginning in 2023, in addition to their board diversity policy. The Singapore ESG reporting rules also stipulate that directors leading Singapore-listed companies are required to attend sustainability training.
The Philippines
Memorandum Circular 4 has been in effect since 2019, and it has been the basis for the Philippines' national ESG reporting regulations. In accordance with these guidelines, publicly traded companies are required to submit an annual report detailing their ESG performance.
Laws that are pertinent include standards for establishing relationships with stakeholders, which include the communities in which businesses operate, employees, customers, creditors, investors, suppliers, and the government of the local area. In addition, the Securities and Exchange Commission (SEC) of the Philippines strongly recommends that publicly traded companies adopt reporting practices in order to make their environmental, social, and governance (ESG) policies public.
A Step Towards Establishing Global ESG Reporting Standards
Although a number of nations have already implemented measures that mandate environmental, social, and governance (ESG) disclosures, the issue has not yet reached a global forum. As a result of the widespread demand for the ESG reporting process to be standardised, steps have been taken to establish a global framework for ESG reporting standards. This is a consequence of inconsistencies on the part of the entities that participated, as well as an effort to achieve transparency and accountability.
The International Financial Reporting Standards Foundation (IFRS Foundation) published an announcement in November 2021 regarding the establishment of the International Sustainability Standards Board (ISSB). The International Sustainability Standards Board (ISSB) will develop global sustainability standards for investors in 140 countries that are participating. The International Financial Reporting Standards (IFRS) have also merged two frameworks that were previously independent into a single organisation known as the Value Reporting Foundation. These frameworks are the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB).
It is highly probable that this will serve as the model for future developments in a global ESG reporting framework. This is because the existing standards of the International Financial Reporting Standards (IFRS) have been fully adopted in more than 144 jurisdictions.
It's clear that this is more than just a trend; it's a transformative movement reshaping the landscape of corporate accountability and sustainability. Around the globe, nations are not only recognising but actively enforcing the need for transparent, responsible business practices. This shift towards mandatory ESG disclosures reflects a deeper societal demand for ethical stewardship and environmental care, marking a significant step in our collective journey towards a more sustainable future.
In this rapidly evolving scenario, staying informed and proactive is key. Whether you're a business leader, an investor, or a concerned citizen, understanding the implications of mandatory ESG reporting is crucial. We encourage you to keep the conversation going, stay engaged with the developments, and play your part in shaping a sustainable, equitable world.
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