For over two decades, ESG reporting existed primarily in the voluntary realm, with frameworks like GRI, SASB, and CDP providing guidance but no regulatory enforcement. This created inconsistency in reporting practices and made comparing performance across companies challenging for investors and other stakeholders.
In response to these challenges and increasing pressure to address climate change and other sustainability issues, regulators worldwide have begun implementing mandatory ESG disclosure requirements:
This regulatory evolution presents several significant challenges:
Companies now face multiple, sometimes overlapping reporting requirements across different jurisdictions. Even within a single market like the EU, the ESRS contains 12 standards with numerous disclosure requirements. This complexity increases the resource burden for sustainability teams and creates risk of non-compliance.
Mandatory reporting raises the bar for data quality, requiring auditable, consistent, and reliable information. Many companies lack robust systems for collecting and managing ESG data, particularly for complex metrics like Scope 3 emissions or those requiring input from suppliers and other value chain partners.
With mandatory reporting comes increased scrutiny and potential liability for inaccurate or misleading disclosures. Companies must ensure their sustainability claims are substantiated and consistent across different reports, marketing materials, and communications.
The expanded scope and rigorous requirements of mandatory reporting demand specialized expertise that many companies lack internally. This creates a resource challenge, particularly for mid-sized companies newly subject to disclosure requirements.
Forward-thinking companies are adopting the following strategies to navigate this shifting landscape effectively:
Rather than addressing each regulation in isolation, take a comprehensive approach that aligns with the most stringent requirements while allowing for jurisdiction-specific additions. This reduces duplication of effort and ensures consistency across reports.
Implement centralized systems for collecting, validating, and managing ESG data. This may include specialized software solutions that streamline data collection, perform automatic validation checks, and generate reports in various required formats.
Establish clear oversight for ESG reporting at the board and executive levels, ensuring accountability and appropriate risk management. This includes defining roles and responsibilities, implementing control processes, and incorporating ESG into enterprise risk management.
Even with expanded requirements, not all ESG issues are equally important to every business. Conduct rigorous materiality assessments to identify the issues most relevant to your business and stakeholders, then focus resources on these areas first.
Invest in training for existing staff and consider adding specialized expertise in sustainability reporting. This may include hiring dedicated ESG professionals or partnering with external consultants who can provide guidance on complex reporting requirements.
The transition from voluntary to mandatory ESG reporting represents a fundamental shift in how companies approach sustainability disclosure. While this evolution presents significant challenges, it also offers opportunities for companies to demonstrate leadership, build stakeholder trust, and create long-term value through improved sustainability performance.
Companies that proactively adapt to this new landscape will be better positioned to meet regulatory requirements, satisfy investor expectations, and contribute to the broader goal of sustainable development. The key is to start early, invest in the right systems and expertise, and approach ESG reporting as a strategic business function rather than a compliance exercise.
The ESG space is changing day by day, creating more uncertainty for decision makers
