Why is ESG reporting mandatory?

Why is ESG reporting mandatory?

Are you looking for the right CSRD solution?
Use our guides and database with +100 CSRD solutions.
Learn more
Need help with CSRD? Here is an overview.
Do you have to comply with CSRD?
Download our Free CSRD Guide now.
Learn more

Environmental, Social, and Governance (ESG) reporting requirements vary by jurisdiction. In the U.S., the SEC proposed mandatory climate-risk reporting for publicly traded companies, including disclosure of Scope 1 and 2 GHG emissions. California has introduced a bill requiring companies with over $1 billion in gross annual revenue to disclose all greenhouse gas emissions. In the UK, large private companies and publicly listed companies are mandated to include climate disclosures consistent with the TCFD in their annual reports. Globally, countries like Canada, Japan, and New Zealand are tightening their ESG disclosure requirements for companies.

The Growing Importance of ESG Reporting

ESG reporting involves the public disclosure of a company's environmental, social, and governance data. Its primary goal is to offer transparency for stakeholders to make informed decisions.

The increasing number of countries implementing mandatory ESG regulations signifies its growing importance. In 2021, 25 countries had introduced mandates for ESG disclosure, mostly affecting financial institutions, state-owned companies, and large, listed companies. This trend indicates that ESG reporting is becoming a standard expectation rather than an optional practice.

UK: Enacted two mandatory ESG disclosure laws in April 2022, requiring certain companies to provide climate-related financial disclosures.

EU: The Non-Financial Reporting Directive (NFRD) was replaced by the Corporate Sustainability Reporting Directive (CSRD), expanding the scope of mandatory ESG reporting.

US: The Securities and Exchange Commission proposed amendments to promote consistent, reliable ESG information, though not yet mandatory at the federal level.

Canada: The 2022 federal budget included plans for mandatory climate-related reporting for federally regulated banks and insurance companies.

Malaysia and New Zealand: Both countries have implemented mandatory ESG reporting for specific business categories.

In modern business practices, ESG reporting is significant and there is a growing pressure on companies globally to comply with these evolving standards.

The Evolution of ESG Reporting

From 2024, nearly 50,000 companies, including non-EU firms operating within the EU, will be mandated to report on sustainability using the European Sustainability Reporting Standards (ESRSs). These standards are more rigorous than the previous Non-Financial Reporting Directive (NFRD) and require disclosure of numerous metrics and targets.

The evolution of ESG reporting over the past two decades is highlighted, showing increasing transparency and integration into mainstream financial reporting. CEOs acknowledge the growing stakeholder demand for greater ESG transparency. The new CSRD requirements extend the range of topics companies need to report on, demanding greater transparency across the entire value chain. These include climate change, biodiversity loss, worker treatment, and business conduct policies like anti-corruption measures.

Effective ESG reporting under the CSRD necessitates a significant shift in how companies operate, making it a board-level priority. It involves a substantial change management exercise, requiring companies to establish robust governance structures, due diligence processes, and integrate ESG into corporate risk management systems. Even for companies with advanced sustainability reporting, this represents a substantial upgrade in data gathering and reporting processes.

In conclusion, ESG reporting is becoming increasingly mandatory across jurisdictions. Companies are facing growing pressure to disclose their environmental, social, and governance data to meet regulatory requirements and stakeholder expectations. The evolving standards and regulations necessitate a shift in corporate practices, making ESG reporting a board-level priority and requiring companies to establish robust governance structures and integrate ESG into risk management systems.

A step-by-step guide to selecting the right CSRD solution.

Screen around 100 CSRD solutions in minutes not weeks, and create an individualized list of solutions.

A laptop showing the CSRD solution finder guide.