Compared to traditional financial reporting, the way each country measures corporate social responsibility and sustainability is evolving in different formats and rates. Standardisation is necessary for achieving the targets by the Sustainable Development Goals.
This article was originally published on 5 July 2021. It is one of the top ten most read articles published in Australian Outlook in 2021.
Consumers’ expectations around Environmental Social Governance (ESG) have steadily increased over the past ten years. According to a recent study from the Economist Intelligence Unit commissioned by World Wildlife Fund for Nature, some surveys conducted by different organisations show that there has been an increase in searches for sustainable goods by 71 percent since 2016, and 66 percent of the respondents consider sustainability when making a purchase. Moreover, ESG performance has become a key area of focus for investors interested in impact investing.
Environmental factors include greenhouse gas emissions, waste management, renewable energy, and clean technology. On the other hand, social factors encompass the company’s relationship with its workers and the rest of the community, including, for instance, compliance with international labour standards, diversity, inclusion, and a sustainable supply chain. For businesses to work towards a positive environmental and social and impact, they need to put effective governance in place consisting of business strategies, internal policies, and procedures that truthfully reflect the organisation’s practices.
Due to the changing digital world, stakeholders seem to have more access to information from businesses than ever, mainly through social media platforms and Google searches. Still, the lack of comparability and standardisation around ESG disclosures creates information asymmetries and difficulties when making an informed and accurate decision about a company’s ability to build long term value. Several international organisations are aiming to establish and harmonise some global frameworks for ESG disclosures. Some of the most recent ones include the Task Force on Climate-related Financial Disclosures (TCFD), the United Nations, and the World Economic Forum (WEF).
While the proactive role of companies is critical in the evolution of sustainable business practices worldwide, some governments are starting to consider ESG metrics as part of their mandatory reporting to overcome the lack of comparable quality data in this field. Regulation on mandatory sustainability reporting is also part of some governments’ efforts in becoming carbon neutral by 2050.
The UK, for instance, has recently opened consultations on climate-related financial disclosure for listed companies and may become one of the first countries to implement the recommendations made by TCFD on compulsory reporting by 2022. Indeed, the UK already requests mandatory disclosures for certain companies on non-financial matters through a strategic report that includes information on global emissions, respect for human rights, social issues, and anti-corruption.
On the other hand, sustainability reporting in the US is not mandatory yet. However, public companies must disclose relevant information to key stakeholders, such as ESG risks and opportunities. It is important to note that there have been recent conversations about this topic since the November 2020 elections.
When looking at comprehensive tools for adopting standardised definitions and processes, the EU is playing an important role. The Taxonomy Regulation in force since July 2020 is a classification system that states what economic activities are environmentally sustainable based on the data disclosed as required by the current legislation on non-financial statements reporting. The Corporate Sustainability Reporting Directive (CSRD) proposal extends the scope of non-financial statements to more organisations and amends the existing reporting requirements. Both directives have the primary focus on environmental metrics, while social and governance factors play a secondary role and are understood as components for the sustainability metrics.
With regard to Australia, there is not compulsory sustainability reporting as such. Similar to what happens in the US, companies are required to disclose any information that shareholders would reasonably need to make an informed assessment of an entity’s operations and business strategies. There are also recommendations on corporate governance practices around environmental and social risks for publicly listed companies in Australia. The current legal requirements for certain entities in terms of disclosing non-financial information are related to specific federal acts, such as the Modern Slavery Act, the Workplace Gender Equality Act, or the National Greenhouse and Energy Reporting Act.
Common to the developed countries and organisations mentioned above are that there is no universal categorisation for ESG factors yet and that, generally, reporting seems to be more focused on climate change and environmental factors than social aspects. This is probably related to the fact that many developed and developing countries have committed to achieving net-zero emissions within the next few decades. However, most countries may struggle to reach other ambitious but necessary objectives within the Sustainable Development Goals that all 193 member-states of the United Nations adopted in 2015.
Australia is already behind some of the world trade leaders in monitoring the environmental impact of businesses. While compulsory reporting, when in place, is generally addressed to large public corporations in Australia, the CSRD proposal presented by the European Commission extends the scope of the regime to all large companies, listed or not. Moreover, Australia is missing an all-embracing act that integrates ESG factors into a single reporting compared to other jurisdictions.
The Australian framework allows those companies that want to create business advantage and distinguish themselves from their competitors to be proactive and lead the initiative of voluntarily disclosing the positive impact of their operations. Consequently, some Australian businesses are already considering business strategies that embed corporate social responsibility due to the long-term financial returns such as brand reputation, risk reduction, and increase in revenue.
What seems to be clear is that ESG reporting is part of most developed countries’ future, either as voluntary disclosing or as a mandatory reporting imposed by the government.
Iris de Orte Júlvez is a qualified lawyer in Spain and work in compliance at Polyglot Group. Her international experience in law ranges from Germany to Belgium as well as Spain, both in private plus public entities, including the Council of the European Union. She holds a LLM European Master in Law and Economics and has completed a Certificate IV in Compliance and Risk Management.
This article is published under a Creative Commons License and may be republished with attribution.