ESG reporting – Is it mandatory?

Written by Laura Amoi

Are ESG reports mandatory?

 

Depending on the jurisdiction in which they operate, companies may be required to report non-financial information on the way they operate and manage environmental and social impacts and governance issues. As explained in our article “ESG disclosure – What is it and why is it important“, ESG reports varies in terms of the scope of impacts reported, the target audience and the reporting framework used. Although reporting is mostly voluntary, various stakeholders such as NGOs, impact investors or employees expect companies to publish sustainability reports to communicate their efforts to go beyond business-as-usual. The EU is leading the way with the new CSRD and developing its own standard.

 

 Is ESG reporting mandatory in the US?

 

In March 2022, SEC proposed to improve baseline climate-risk reporting for all publicly traded companies. Companies will be required to disclose how physical risks such as extreme weather events could impact their bottom line. They will also have to disclose their Scope 1 and 2 GHG emissions to standardize the information on which investors base their investment decisions. Legislators hope this step will incentivize companies to mitigate climate change through their operations by transparently reporting their impacts. These additional disclosures will allow individual and institutional investors better to assess the flow of capital toward sustainable companies. If the proposal is approved, large companies would start reporting in 2024.

 

Companies in the US not only have to comply to SEC regulations but also to state regulations where they operate. In January 2022, California introduced the Californian Climate Corporate Accountability Act (SB260), a bill consistent with its climate-action leadership. It will mandate that “Companies doing business in California and generating over $1 billion in gross annual revenue would be required to disclose annually all their greenhouse gas emissions”. The bill is expected to affect around 5,200 public and private companies. The disclosure will follow the Greenhouse Gas Protocol standards and framework developed by the World Resources Institute and the World Business Council for Sustainable Development.

 

Is ESG reporting mandatory in UK?

 

As of April 2022, the UK became the first G20 country to mandate all large private companies with more than 500 employees and publicly listed companies who already publish non-financial information to include climate disclosures consistent with the TCFD in their annual reports. The requirement scope applies to the group-level and not subsidiaries when the parent company produces consolidated financial statements. The UK government has published official guidelines to help companies understand who is affected by the law and what they need to report on. In fact, the disclosures will cover how physical and transition risks might affect companies’ financial positions covering:  

  • climate change-related risks and opportunities
  • how climate change is addressed in corporate governance;
  • impacts on strategy;
  • how climate-related risks and opportunities are managed;
  • performance measures and targets applied in managing these issues.

 

ESG reporting requirements are being tightened around the world 

Governments around the world, governments are looking to tighten disclosure requirements for their largest companies.

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