Think ESG is Not for You: Think Again, Mandatory ESG Disclosures are Here

Mandatory ESG reporting has gained significant momentum worldwide. The Governance & Accountability Institute reports that the number of S&P 500 companies publishing sustainability reports surged from 20% to 92% in 2020. The European Union introduced the EU Sustainable Finance Disclosure Regulation (SFDR) in March 2021, mandating ESG disclosures for financial institutions. The UK, US, Australia, and more, are also moving towards mandatory ESG reporting. Companies must prepare for upcoming requirements and embrace sustainability.

In this article, you will learn everything you need to know about mandatory ESG disclosures at a global level and specifics in the UK, US, EU and Australia.

ESG disclosures revolve around three key components: Environmental, Social, and Governance factors. Environmental factors encompass a company’s impact on the environment (carbon emissions, resource usage, and waste management) . Social factors focus on the company’s relationships with employees, communities, and other stakeholders (including diversity and inclusion efforts, labour practices, and community engagement). Governance factors pertain to the company’s internal structures and processes, (including board composition, executive compensation, and ethical business practices).

ESG reporting frameworks can be either voluntary or mandatory, providing guidelines for companies to disclose ESG information. Popular ESG frameworks include the Global Reporting Initiative (GRI) , the Sustainability Accounting Standards Board (SASB) , and Task Force on Climate-Related Financial Disclosures (TCFD) under listing rules. These frameworks offer flexibility in reporting, allowing companies to prioritize the ESG issues most relevant to their business. 

Yes , for large companies (listed; or >250 employees, or turnover >£36 million; or balance sheet assets >£18 million)

The UK has taken up the charge as a leader in ESG. In 2019, it passed a law targeting net zero greenhouse gas (GHG) emissions by 2050. To reach that target, the government has pushed ESG reporting requirements that are expected to expand over the next five years.

The Companies Act of 2006 and The UK’s Streamlined Energy and Carbon Reporting (SECR) policy , require specific company-level disclosures from large and medium UK entities. Apart from the annual financial reporting, they need to report their energy use, carbon footprint, and greenhouse gas (GHG) emissions.

In addition to listed or quoted companies, companies and LLPs need to comply and report under SECR if they meet two or more of the following criteria:

For financial years starting after 6 April 2022, TCFD -based reporting will be mandated for more than 1,300 of the largest UK-registered companies and financial institutions. The International Sustainability Standards Board (ISSB) also released its exposure drafts on 31 March 2022. The draft standards set out further requirements for disclosures over climate and general ESG reporting and are to be adopted under UK law by 2024 or 2025 .

UK companies need to discuss the strategy, processes, and due diligence regarding matters of:

Specifically for the environment, climate-related disclosures must include:

Yes , for large companies (listed, or >500 employees). However, the European Commission has proposed changes to the directive in order to further strengthen the disclosure requirements and to expand its scope to all large companies and listed SMEs, regardless of their size .

Like the UK, the EU has also committed to carbon neutrality by 2050. Since 2017, large companies (listed with over 500 employees) must comply with the EU Non-Financial Reporting Directive (NFRD) . This requires disclosure of social and environmental issues in annual reports, including:

By 2023, the NFRD will expand with the Corporate Social Responsibility Directive (CSRD) . Reporting requirements are in three key aspects:

Almost . The U.S. Securities and Exchange Commission (SEC) has proposed climate disclosure reporting for listed companies by 2024.

Like the UK and the EU, the US has also announced net zero targets by 2050. The SEC has provided guidance indicating that where ESG issues are material to a company’s financial condition or results of operations, the company should disclose those issues.

In March 2022, the US Securities and Exchange Commission (SEC) proposed climate-risk disclosure requirements, which would expand the annual reporting requirements of publicly traded companies. Companies are required to discuss financially material, climate-related risks guided by the TCFD recommendations, including:

Beyond federal regulations, companies in the US may also have to comply with state regulations. In January 2022, climate leader California passed the Climate Corporate Accountability Act. This act would require companies operating in California that generate over $1 billion in annual revenue to disclose their GHG emissions also in line with the GHG Protocol . This rule is expected to affect 5,200 public and private companies.

In addition, many US companies voluntarily provide ESG reports, often following guidelines set by global standard-setting organizations such as the Sustainability Accounting Standards Board (SASB) or the Global Reporting Initiative (GRI) .

Yes. Australia is set to introduce mandatory Climate-Related reporting for companies starting 2024.

The government of Australia is planning to implement mandatory climate-related financial disclosure requirements for ALL companies and financial institutions . Reporting requirements would apply as soon as 2024 for large businesses , with smaller entities phased in by 2027 .

Australia’s proposed climate-related disclosure requirements focus on core elements: governance, strategy, details of risks and opportunities and metrics & targets. Some specific proposals include a requirement for companies to disclose transition plans, including information on offsets, target-setting and mitigation strategies, processes used to monitor and manage climate-related risks and opportunities, and the use of scenario analysis. The rules would also require companies to report Scope 1 , Scope 2 and material Scope 3 emissions , in addition to industry-specific metrics.

It will use a phased-in approach to the new climate-related reporting requirements, both by company size, as well as some disclosure requirements that require time to build capabilities and expertise. Larger entities, such as those with over 500 employees, revenues over $500 million and assets over $1 billion, would be covered by the new rules beginning in 2024-2025; with medium-sized companies (250+ employees, $200 million+ revenue, $500 million assets) the following year 2026; and smaller entities (100+ employees, $50 million+ revenue, $25 million+ assets) in 2027-2028.

The proposal also gives companies an extra year to implement Scope 3 reporting. This allows time for scenario analysis to transition from qualitative to quantitative, and introduces a 3-year transitional period for enforcement for areas including scenario analysis, transition planning and Scope 3 emissions .

The global state of mandatory ESG disclosures is evolving rapidly, with an increasing number of countries implementing regulations and reporting requirements. Major asset managers, such as BlackRock, Vanguard, and State Street, have already made it clear that they expect companies to publish ESG disclosures. Therefore, companies should proactively adopt ESG reporting best practices and ensure they are well-prepared to meet the growing demand for transparency and accountability.

Although several countries have incorporated measures requiring mandatory ESG disclosures, it has not yet reached a global forum. Efforts are underway to establish a global framework for ESG reporting standards, in response to the growing demands for standardisation of the ESG reporting process. This comes as a result of inconsistencies from participating entities and a bid for transparency and accountability.

Mandatory ESG reporting is here to stay. Companies must familiarise themselves with the latest ESG criteria and obligations sooner rather than later. However, this can be a complicated, costly, and error-ridden process especially for UK SMEs.

A more effective approach is to use ESG consulting agencies such as Version28   to ensure compliance and avoid costly mistakes. At Version 28 , we understand the challenges and complexities of ESG reporting.

Ready to find out more and start your ESG reporting journey? Get in touch with us and learn more about the advanced features of our ESG package— primed to elevate your ESG reporting.

The post Think ESG is Not for You: Think Again, Mandatory ESG Disclosures are Here first appeared on Version28.