ESG reporting requires disclosure of data relating to an organization’s ESG performance. Investors use ESG disclosures to make informed decisions about companies’ ESG-related strengths, weaknesses and exposure to risks. When completing ESG reports, retailers focus on the topics and metrics most material to their business, their investors and other stakeholders.
Why do companies complete ESG reports?
Investors are increasingly demanding ESG disclosure from companies in all industries primarily because they consider it financially material to the performance of their investment. While ESG information does not always provide information about a company’s competitive positioning, it can provide insight into risk and resilience, two aspects with which investors are increasingly concerned. ESG data provides a holistic view of a business and allows investors to make informed decisions. ESG reports are also useful for internal communication and transparency with external stakeholders (e.g., customers), and as explained below, disclosing certain material ESG information may become mandatory in the United States.
Greenwashing refers to the promotion of a product, service or entire company as more environmentally friendly than it actually is by making misleading or exaggerated claims in marketing materials or sustainability disclosures. This can be done intentionally or unintentionally by making unsubstantiated claims. It is crucial to differentiate between retailers that are genuinely adopting a culture of ESG and those that are merely masquerading as “green.”
Regulators are increasingly scrutinizing companies’ sustainability claims and investigating allegations of greenwashing. The risk of greenwashing can be avoided through ESG assurance, which refers to the validation of the information to be included in ESG-related disclosures, reports or filings. ESG assurance can be completed internally or through external auditors.
The U.S. Securities and Exchange Commission (SEC) mainly regulates capital markets, but has recently been using its authority to unify existing ESG frameworks and develop reporting requirements for public companies.
Other major ESG standards-setting entities include:
What to Expect
Government regulators are responding to investor and consumer concerns about corporate ESG performance and disclosure by working to establish more consistent reporting frameworks and compliance requirements.
In the United States, ESG reporting is still primarily voluntary, but the SEC is considering guidelines for mandatory reporting for public companies — specifically around climate change, human capital management and political spending — in 2022. These expected regulations would set forth metrics and broadly dictate reporting expectations to help investors make more informed decisions. The mandatory ESG reporting measure passed through the House of Representatives in June of 2021, but it faces some opposition on the grounds that it is too costly for companies and does not focus on the issues most material to each industry and company.
In regions like the UK and the EU, mandatory ESG disclosure regulations have already passed and are in the implementation phase. In the UK, specifically, disclosures must be aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. The EU Sustainable Finance Disclosure Regulation requires the disclosure of an array of sustainability information.
- Financial Management: What’s ahead for ESG strategy and reporting after COP26?
- JD Supra: SEC Intensified Focus on ESG Disclosures and Policies, Practices, and Procedures
- Yahoo! Finance: What Is ESG and Sustainability Reporting and Why Is It Important?
- Business World: Timely and necessary convergence in ESG reporting
- Fortune: The world inches closer to ’alignment’ on global ESG standards
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Last Updated: 4/15/2022