April 15, 2020 Mandatory Sustainability Reporting

A sustainability report is the one where a company or an organization discloses its social, environmental and governance performance.

A sustainability report is the one where a company or an organization discloses its social, environmental and governance performance.

Just for the matter of clarity, sustainability reporting can be considered synonymous with other terms united by the idea of reporting non-financial performance metrics such as triple bottom line reporting, ESG reporting, and corporate social responsibility (CSR) reporting, or form part of an integrated reporting that consolidates the analysis of financial and non-financial performance.

Companies of all sizes and sectors are encouraged to produce such reports to become aware of their own impact and let investors and other stakeholders make the decisions that would benefit, not harm a sustainable future.

Note: encouraged, not mandated.

Mandatory sustainability reporting is a matter of heated debates over the last decade and each country seems to have it its own way, which

• undermines the effect of sustainability reporting on the global scale and
• is a great challenge for companies with global operations that should be on top of sustainability reporting requirements imposed in all jurisdictions where they operate.

This post will give insights into the mandatory sustainability reporting in different countries and the surrounding debate.

Countries that Have Mandatory Sustainability Reporting

The prominent 2016 study by Carrots and Sticks revealed that there are around 400 sustainability reporting instruments in 64 countries, 65% of which are mandatory. While these figures are a great growth compared to 180 instruments in 44 countries identified in a 2013 report, the percentage of mandatory instruments declined compared to 72% as of 2013.

It is important to note that mandatory sustainability reporting has been mostly applied only to state-owned companies, large corporations, or so-called listed companies. Also, it targets various, yet not all aspects of sustainability. Some instruments also have a “comply or explain” approach to sustainability reporting.

Let’s have a look at some examples:

The United Kingdom

In the United Kingdom, quoted companies are mandated to provide a report disclosing annual greenhouse gas emissions, diversity and human rights under the Companies Act 2006 (Strategic and Director’s Report) Regulations 2013. Companies with a Premium Listing of equity shares in the UK also need to report on how they apply the main principles of the Corporate Governance Code 2012, which is one of the Code’s provisions.

European Union

The EC Directive on Disclosure of Non-Financial and Diversity Information (2013) is considered a major reporting instrument of the EU. It requires certain large companies and public-interest companies to disclose material environmental, social and employee-related matters, such as anti-bribery, corruption, and human rights performance.

United States

According to the Regulation issued by the US Securities and Exchange Commission (SEC), all listed companies should disclose their environmental compliance expenses. Another sustainability reporting instrument, New York Stock Exchange (NYSE), mandates the listed companies to adopt and disclose a code of business conduct and ethics.

China

Overall, China has seven regulations that act as instruments of mandatory disclosure on sustainability matters. The Environmental Information Disclosure Act, 2008 mandates corporations to disclose environmental information according to the regulatory requirements. Annual resource utilization, pollution levels, waste generation, disposal method, and some other aspects can be disclosed voluntarily to gain more rights to grants and public support. A separate report with an environmental disclosure is also requested from large companies listed on the Shanghai Stock Exchange.

India

India has seven instruments with a mandatory status that can be used for ESG reporting. The Securities and Exchange Board of India requires the top 100 listed companies to produce annual Business Responsibility Reports.

Issues Surrounding Mandatory Sustainability Reporting

The studies show that the adoption of mandatory ESG reporting promotes the social responsibility of business leaders. Since we have one planet and the impact of all countries sums up to produce adverse impacts for all, it is vital that sustainability reporting is promoted, mandated, and regulated on a global scale. Still, there are several barriers to that:

1. The exclusion of small and medium enterprises (SMEs): Most of mandatory reporting instruments target only large or listed companies. Such little attention from governments and regulators to the practice of ESG reporting among SMEs might be one of the factors contributing to its scarcity: while SMEs account for about 90% of businesses, only 10% of reports captured in the GRI Sustainability Disclosure Database come from small and medium enterprises.
2. The lack of industry-specific sustainability standards: To make the available voluntary reporting standards mandatory, they should be perfectly adoptable in any given organization. Creating such standards across all industries is impossible and industry-specific standards are not yet well-developed or widely adopted.
3. Incompatibility of countries’ governance: It is difficult to assess if the countries provide equal attention to checking the validity of the reports. What is more, the corruption levels in the developing countries can undermine the trust in the environmental impact reported nationwide and to the global community.
4. The lack of consensus: There is still much debate on whether sustainability reporting should be mandatory or voluntary. The most popular counter arguments are that voluntary reporting is market-driven and gives a competitive advantage to the reporting companies. Mandatory ESG reporting, on the contrary, limits sustainability efforts to the wish to comply, equals all companies, and puts undue pressure on those companies that have only started their sustainability journey.

Concluding Ideas

There has been a great spurge of both voluntary and mandatory instruments for ESG reporting. The number of produced sustainability reports increases year to year too. Voluntary or mandatory, sustainability reporting is the future. A sustainable future for all of us.

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