Environmental, social, and corporate governance (ESG) is a rapidly evolving framework designed to hold companies accountable for their actions and increase understanding of how an organization or company manages its risks around these issues. In a perfect world, ESG knowledge would increase investor knowledge, maximizing stakeholder well-being.
Still, with so many confounding factors surrounding sustainability, human rights, labor conditions, and diversity in the workplace, standardizing ESG reporting is difficult, to say the least, in a corporate world filled with different industries with different objectives. Several countries and regions worldwide have worked and continue to work to standardize ESG reporting methods and requirements to give investors the best opportunity to get a clear picture of where they are putting their money and provide more robust frameworks for companies’ futures.
The U.S., the U.K., and the EU are huge markets that ESG significantly impact. In the ever-evolving landscape, though, the three areas hold different ESG requirements and are developing new, better ways for companies to report ESG considerations.
The EU’s Determined ESG Reporting Objectives
In 2017, the European Commission published the non-financial reporting directive (NFRD), which requires companies with over 500 employees to report standardized ESG information. The European Commission also released a set of non-binding guidelines to go along with the NFRD, highlighting key reporting areas for companies.
The non-binding guidelines encourage companies in the EU to disclose information about environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters.
Because industries vary throughout the EU, companies must include key performance indicators (KPIs) specific to their industry or sector. These KPIs include data collection methods that might be particular to a certain area and explaining why reporting on certain data points is relevant.
In addition to the 2017 NFRD, the European Commission published a proposal for a Corporate Sustainability Reporting Directive (CSRD) in 2021, which would amend the reporting requirements outlined in the NFRD.
The CSRD would extend reporting requirements to all companies listed on regulated markets and require audits on reported information. It would also introduce more detailed reporting requirements, and companies would have to digitally ‘tag’ reported information so that it is machine-readable and entered into a central European access point.
ESG reporting requirements are some of the most stringent in the world right now. The extra work for the companies comes at a cost, but in theory, it will build a more robust economy for the future with more transparency regarding ESG considerations.
The U.K.’s Goal to Keep Pace with Sustainability Targets
With the ambitious goal of targeting net zero greenhouse gas emissions by 2050, the U.K. strives to be a leader in ESG reporting for some of the largest companies in the world economy. Like EU companies, U.K. companies with over 500 employees must disclose certain non-financial information, including environmental, social, anti-bribery, and corruption factors.
The reporting requirements are based on recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD). The TCFD is an organization that heavily emphasizes climate change’s increasingly prevalent role in world financial markets.
As such, the U.K.’s reporting requirements place sustainability disclosures high on the list of priorities. The U.K. government even issued a roadmap to sustainable investment to keep the U.K. economy on track to meet its environmentally-minded goals.
Companies with more than 250 employees must participate in Streamlined Energy and Carbon Reporting (SECR) as part of some ESG regulations implemented in 2018.
The U.K. also plans to integrate its ‘Green Taxonomy’ framework into the economy in the coming years. The Green Taxonomy will set the standard for categorizing climate-friendly investments to minimize ‘greenwashing’ in ESG reporting.
To stay up with its lofty ambitions, the U.K. has set high standards for companies’ ESG reporting requirements. Like the EU, reporting requirements are evolving at breakneck speed in hopes of building a more solid economy for the country’s future.
The U.S.’s Ambition to Catch Up with Other ESG-Focused Markets
Later to the game than most other major markets, the U.S. has few ESG reporting requirements, but like other markets, the situation is rapidly changing to mandate non-financial reporting for large companies. The most substantial upcoming change is the Securities and Exchange Commission’s (SEC) proposed climate-risk disclosure requirements.
In May 2022, the SEC released a proposal to the public to get the ball rolling for one of the world’s biggest economies to get on board with more standardized ESG reporting requirements.
SEC Chair, Gary Gensler, said, “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”
The proposed SEC requirements also expect companies to disclose emissions according to the Greenhouse Gas Protocol standards. Implementing these requirements will take time, but the SEC hopes to open the door to the new regulations in 2024.
ESG regulations play a bigger role in economies worldwide as each year passes with no signs of slowing down. The U.S., the U.K., and the EU represent some of the world’s largest markets, and it is clear that all three are vying for the top position to set the standard for ESG regulations in high-performing economies. Each region has different expectations for companies in the area. Still, ESG requirements across the board are getting more stringent to provide investors with a more transparent view of a company’s goals, actions, and impacts on its environment.
