ESG reporting in an increasingly volatile world - Relevance and evolution

Amid rising social inequalities, an unprecedented health crisis, mounting economic pressures, global climate crisis, Environment, Social and Governance (ESG) has emerged as an important facet in decision-making in the corporate ecosystem, with management, board, regulators and other stakeholders, each using an ESG lens in their decision making. The World Economic Forum’s annual Global Risk Report 2022 identified environmental and social risks as majority of top 10 significant risks in terms of serverity and short, medium, and long-term thread. The pendamic further exposed corporate vulnerabilities, especially in the social dimension. Similarly, investors, have demanded greater transparency around the impact of such risks on the capital, operations, and overall performance of the business.

These factors have have acted as a catalyst for the growing momentum among corporates to focus on enhanced ESG reporting. Companies that have kept pace with this rising stakeholder sentiment and proactively embraced ESG reporting have seen some early benefits with some of them going on to be a part of some ESG indices. As both investors and regulators become increasingly wary of greenwashing, the advantages of ESG reporting can only be sustained with constantly enhancing the quality and transparency of ESG disclosures, and ultimately move towards an integrated approach to corporate reporting in the near-term, integrating both the ESG and financial reports.

Existing and evolving ESG-related requirements are as varied as the jurisdictions that are required to follow them. While some focus on climate change, other cover the full set of ESG factors. With voices for climate-aware investing and carbon controls increasing the globe, the first year of mandatory reporting by companies in the United Kingdom on Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosures has been challenging for many. Reasons include complexities of data collection, the need to establish robust new processes, sometimes involving information provided by third parties in the company’s value chain, and the lack of established good reporting practice. Similarly, approximately 50,000 companies in the European Union that are gearing up for the new reporting requirements under the Corporate Sustainability Reporting Directive, are also facing similar challenges. Premium listed companies in sectors that are more subjected to climate change – have generally risen to the challenge and are broadly able to provide the TCFD disclosures.

The US Securities and Exchange Commission (SEC)’s action underscores the imperative for businesses to understand likely reporting requirements and connect them to their strategy and operations. Their proposed rules are intended to provide more consistent, comparable, and reliable information so that investors can better evaluate the impact of climate-related matters on a registrant, and are to be accompanied by assurance reports on several key elements of those disclosures.

The International Organisation of Securities Commissions (IOSCO) in its Sustainable Finance work plan 2022 reiterated the requirement of credible, consistent, and quantitative metrics in reporting practices. Parallelly, priority must be given by corporates to ensure reporting practices are complete, comparable, and consistent, to effectively inform business strategy and risks, while identifying strategic climate and ESG opportunities to capitalise on. With regulators pushing for mandatory assurance of ESG reports, it is also imperative for companies to comprehensively assess their level of readiness. To prepare for these changing demands and for the growing expectations of companies financial and non-financial reporting, action is needed now on assessing ESG risks and opportunities for their businesses and on proper ESG disclosures.

A version of this article was published on 20 March, 2023 by The Economic Times -Energyworld.com