The array of regulations and standards addressing environmental, social, and governance (ESG) issues across jurisdictions worldwide share one thing in common – the need for corporate transparency. Call it the Age of ESG Transparency, a time when consumers, investors, stakeholders, and regulators are demanding corporate accountability through reporting and disclosures.
In the past decade, a spate of modern slavery regulations across the world introduced the need for a brand of ESG transparency associated with finance transparency decades earlier.
In 1999, the Turnbull Report established best practices for internal controls and risk management for listed companies in the UK. The Sarbanes-Oxley Act of 2002 also required internal controls and recordkeeping requirements for publicly traded U.S. companies. Those requirements stemmed from financial scandals that shook the public’s confidence in corporations.
In the same vein, the persistence of forced labor worldwide brought about modern slavery regulations requiring corporate transparency and accountability in a host of countries, including the UK (2015), France (2017), Australia (2018), the Netherlands (2019), Norway (2022), Germany (2023), and Canada (2023).
Transparency Helps Build Trust
Whether in ESG or finance, trust is at the heart of corporate transparency – specifically the need for corporates to demonstrate their trustworthiness by making their policies and actions more observable.
In the U.S., where no regulation mandates ESG reporting for corporations (public or private), a whopping 96% of S&P 500 companies and 81% of Russell 1000 organizations voluntarily publish ESG reports, according to Ernst & Young.
Corporations understand that transparency makes them more attractive to investors, stakeholders, and consumers. The information they provide helps their stakeholders make informed decisions. The voluntary nature of such disclosures could change under the U.S. Securities and Exchange Commission’s proposed rules that would mandate enhanced climate-related disclosures by public companies.
Apart from the need to build trust, technology also drives corporate transparency. With the advent of the internet, consumers and investors have the means to scrutinize companies. Access to information about business operations and practices is no longer limited to experts or insiders.
Technology has certainly made it easier for information about environmental problems to spread quickly through social media. When a severe red tide that devastated marine life hit Florida in 2021, mainstream media outlets failed to report it. Ordinary citizens took to social media to expose the problem, caused by toxic waste from a phosphate pit, and prompted action by the authorities.
This kind of environmental activism is possible only because technology has given users the capability to share information directly with other users on a massive scale.
What the Age of ESG Transparency Means
While voluntary ESG reporting by companies is commendable, it’s not enough. In the past, a voluntary initiative such as the UN Global Compact encouraged corporates to adhere to responsible business standards in such areas as human rights, labor rights, environment, and anticorruption and antibribery ethics.
A shifting regulatory landscape and continuing problems related to ESG have brought a surge of new regulations and standards. By all accounts, what was once voluntary and optional for corporates will soon be mandatory.
Apart from modern slavery laws in the past decade, new regulations that either recently took effect or were enacted also mandate ESG reporting and disclosures.
- The European Union’s Corporate Sustainability Reporting Directive (CSRD) took effect in January 2023. It requires EU and non-EU companies with activities in the region to file annual sustainability reports alongside their financial statements.
- Also in January 2023, the Lieferkettengesetz (LkSG or German Supply Chain Due Diligence Act) took effect. It required supply chain due diligence and reporting on their activities in two major areas: human rights and the environment.
- Canada passed a groundbreaking modern slavery law in May 2023 to counter forced labor. It imposes significant reporting obligations on Canadian businesses and importers.
- The UK enacted the Economic Crime and Corporate Transparency Act (ECCT Act) in October 2023 to facilitate the prosecution of economic crime offenses, strengthen measures for preventing such crimes, and improve corporate transparency.
In addition to the abovementioned regulations, the ESG reporting standards recently unveiled by the International Sustainability Standards Board (ISSB) are a boon to corporate transparency.
The first two ISSB standards (IFRS S1 and IFRS S2), released in June 2023, will help establish a much-needed global baseline for corporate sustainability disclosures in the face of about 600 standards worldwide.
In terms of building trust, ISSB standards will help boost public confidence in company disclosures by providing clarity and consistency in ESG reporting.
Challenges in the Age of ESG Transparency
The Age of ESG Transparency comes with a set of new challenges for global corporates. Foremost is the sheer number of regulations and standards they must keep up with.
Compliance with numerous requirements can be costly and time-consuming, with most companies devoting their resources to the collection and reporting of ESG data, software solutions, consultants, and other services supporting their ESG programs. Corporate spending on ESG business services is projected to reach about $65 billion in 2027, according to a report by International Data Corporation.
The sooner companies embrace the Age of ESG Transparency, the better off they are. ESG transparency as a core strategy can help them create value in their brands that’s good for the bottom line and future growth.
Proactive corporates understand they must equip themselves with the right capabilities to improve their transparency. A purpose-built third-party risk management platform is essential in navigating an ESG compliance landscape as it evolves from voluntary to mandatory.
Contact us to learn how to streamline and improve your ESG compliance processes. We can help you leverage proportionate risk-based due diligence in identifying, managing, and mitigating third-party risks for your entire value chain.