Is ESG Reporting Mandatory? Yes and No.
Often it isn’t required by regulation, but there is a strong de-facto requirement, driven by financing, supply chain requirements or other non-legislated demands.
The critical question that should be asked and answered before launching an ESG Reporting program is:
- Will an ESG Report create value for my business?
- How?
- What can we do to extract more value from it?
ESG is all about value – never forget that
For many businesses, perhaps most, it is not a legislated or regulatory requirement. Yet. The regulations and legislation requiring ESG reporting is increasing every year.
For many other businesses, ESG reporting is a good idea. It can improve relationships and communications with key internal and external stakeholders, including regulators, markets and even employees.
ESG reporting also forces companies to take a look at their ESG and Sustainability impact and issues.
Stakeholders, including public, governmental and market interests have increasing expectations regarding the social and environmental performance of business. Businesses that do no consciously take these expectations into account face increased risk on many dimensions.
Producing an ESG Report helps business to better understand and manage this critical area.
Now, let’s take a quick look at regulatory and legislatively mandated ESG Reporting requirements – which is on the rise and expected to continue that trend.
The Current State of Mandatory ESG Reporting
Environmental, social, and governance (ESG) reporting is becoming increasingly important for companies around the world. ESG reporting is the disclosure of environmental, social, and corporate governance data.
Its purpose is to shed light on a company’s ESG activities while improving investor transparency and inspiring other organizations to do the same.
While a universal standard does not yet exist, ESG reporting does exist in the form of regional reporting frameworks, voluntary standards, and national legislation that vary significantly across jurisdictions and industries.
ESG Reporting Mandates in The US
In the United States, overall ESG reporting is seldom mandatory, but that is changing. In March 2022, the US Securities and Exchange Commission (SEC) proposed climate-risk disclosure requirements, which would expand the annual reporting requirements of publicly traded companies.
ESG Reporting Mandates in The EU
In the European Union, the Corporate Sustainability Reporting Directive (CSRD) requires EU and non-EU companies with activities in the EU to file annual sustainability reports alongside their financial statements.
These reports must be prepared in accordance with European Sustainability Reporting Standards (ESRS). The ESRS soon will become law and will apply directly in all 27 EU member states, but not in the UK . Companies will need to report in compliance with these new ESRS as early as the 2024 reporting period
Is ESG Reporting Mandatory for All Companies?
ESG (Environmental, Social, and Governance) reporting is a way for companies to disclose their non-financial performance to stakeholders. The regulations regarding ESG reporting vary by jurisdiction and industry and are evolving rapidly.
According to a report by the Swiss Finance Institute, countries with common law origins and higher per capita carbon emissions are more likely to adopt mandatory ESG reporting regulations. As of now, 29 countries and territories have some degree of mandatory ESG disclosure regulation.
In the European Union, ESG reporting is not mandatory for all organizations. However, some organizations are required to make disclosures under two pieces of legislation – the Non-Financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR).
In the United States, the Securities and Exchange Commission (SEC) has proposed climate-risk disclosure requirements for publicly traded companies.
The degree of difference in ESG reporting standards between public and private companies depends on the jurisdiction and industry. For example, in India, the new ESG reporting format applies to the top 1,000 listed companies by market capitalization, regardless of whether they are public or private.
Are ESG Reporting Standards Different for Public and Private Companies?
ESG (Environmental, Social, and Governance) reporting standards may differ for public and private companies depending on the jurisdiction and industry. For instance, in India, the new ESG reporting format applies to the top 1,000 listed companies by market capitalization, regardless of whether they are public or private.
In the United States, the Securities and Exchange Commission (SEC) has proposed climate-risk disclosure requirements for publicly traded companies .
In the European Union, ESG reporting is not mandatory for all organizations. However, some organizations are required to make disclosures under two pieces of legislation – the Non-Financial Reporting Directive (NFRD) and the Sustainable Finance Disclosure Regulation (SFDR).
Can Companies Be Penalized for Not Complying With ESG?
Yes, companies can be penalized for non-compliance with ESG regulations. The penalties for non-compliance vary by jurisdiction and industry. For instance, the German Supply Chain Due Diligence Act imposes financial penalties of up to 2% of the annual average revenue for in-scope organizations who are aware of violations of the Act and who do not take remedial actions.
Who Sets the Standards for ESG Reporting?
The standards for ESG reporting are set by various organizations and regulatory bodies. For example, the Global Reporting Initiative (GRI) provides a widely used framework for sustainability reporting. The Sustainability Accounting Standards Board (SASB) provides industry-specific standards for ESG reporting. The Task Force on Climate-related Financial Disclosures (TCFD) provides recommendations for climate-related financial disclosures.
Conclusion: Is ESG Reporting Mandatory?
Mandatory ESG (Environmental, Social, and Governance) reporting regulations vary by jurisdiction and industry. According to a report by the Swiss Finance Institute, countries with common law origins and higher per capita carbon emissions are more likely to adopt mandatory ESG reporting regulations. As of now, 29 countries and territories have some degree of mandatory ESG disclosure regulation.
In the United States, the Securities and Exchange Commission (SEC) has proposed climate-risk disclosure requirements for publicly traded companies .
In the European Union, the Corporate Sustainability Reporting Directive (CSRD) requires EU and non-EU companies with activities in the EU to file annual sustainability reports alongside their financial statements.
The degree of difference in ESG reporting standards between public and private companies depends on the jurisdiction and industry.
ESG reporting is a way for companies to disclose their non-financial performance to stakeholders. The regulations regarding ESG reporting vary by jurisdiction and industry. The standards for ESG reporting are set by various organizations and regulatory bodies.
For example, the Global Reporting Initiative (GRI) provides a widely used framework for sustainability reporting.
The Sustainability Accounting Standards Board (SASB) provides industry-specific standards for ESG reporting. The Task Force on Climate-related Financial Disclosures (TCFD) provides recommendations for climate-related financial disclosures.
ESG, Sustainability & CSR should be as much a business value driver as it is a social and environmental value driver. If it gets out of balance it creates risk and makes the CSR and indeed, even the business itself, potentially less sustainable.
Business is about creating value. CSR is also about creating value; value for society, for
environment and for shareholders.
Thanks for reading
Wayne Dunn
Founder and President