Global ESG Disclosure Regulations: From awareness to practice towards sustainability

In Australia, environmental, social, and governance (ESG) reporting is currently voluntary, although some entities have mandatory reporting obligations under various ESG-related laws. Listed companies are required to comply with continuous disclosure and have a duty to avoid misleading and deceptive conduct. This provides an added incentive for companies to meet their ESG targets. Companies and their directors face the risk of being found liable for misleading conduct if they do not have reasonable grounds to support their net zero commitments. In relation to climate-related disclosure, ASIC recommends that listed companies follow the TCFD recommendations, while other voluntary guides such as APRA's Prudential Practice Guide on Climate Change Financial Risks and the Governance Institute of Australia's Climate Change Risk Disclosure Guide provide an indication of how regulators may expect companies to consider and manage climate-related risks in the future. However ESG strategy is much broader than climate change and spans across sustainability.

The quality of a company's sustainability report can be evaluated based on several factors, including balance, comparability, accuracy, timeliness, and clarity. Balance refers to the comprehensive coverage of the company's environmental, social, and governance (ESG) performance and impacts. Comparability refers to the consistency and comparability of the report across different reporting periods, companies, and ESG topics. Accuracy refers to the reliability and correctness of the information reported, while timeliness refers to the timely release of the report. Clarity refers to the report's ability to effectively communicate the company's ESG performance and impacts to stakeholders. Regulations and compliance are important for ESG as they provide a framework for companies to report on their ESG performance and impacts, ensuring that stakeholders have access to reliable and consistent information. By adhering to regulations and compliance, companies demonstrate their commitment to transparency and accountability in their ESG practices, and contribute to the development of a more sustainable and responsible corporate sector.

The ESG framework is often associated with climate action, but it is much more comprehensive than that. It is the broad umbrella that encompasses the United Nations Sustainable Development Goals (SDGs), which are 17 interconnected and interdependent objectives aimed at creating a sustainable future. ESG factors include issues such as environmental sustainability, social responsibility, human rights, and corporate governance, which are all crucial for the long-term health and stability of organizations, communities, and society as a whole. This breadth of coverage creates a complex data analysis problem, as it requires gathering and assessing data from a variety of sources and making connections between seemingly disparate factors. The ESG framework is a comprehensive approach to sustainability and requires a nuanced understanding of the interconnections between environmental, social, and governance issues.

The challenges of ESG reporting can be significant and multi-faceted. One major challenge is the collection of data related to environmental, social, and governance issues. Companies often struggle to gather data from various departments, business units, and supply chains, which can lead to incomplete or inconsistent information. The involvement of data managers is also critical, as they play a crucial role in ensuring the accuracy and reliability of the data used in ESG reporting. However, the lack of standardization in ESG reporting can make it difficult for data managers to accurately compare and benchmark their company's performance against industry peers. Additionally, choosing the right software to support ESG reporting can be challenging, as companies must navigate a complex and rapidly evolving landscape of ESG reporting tools and platforms. Effective ESG reporting requires a combination of robust data management processes, appropriate software and tools, and an understanding of industry standards and best practices.

There are several voluntary ESG frameworks that are widely used by companies and investors to assess and report on ESG performance. Some of the most well-known ESG frameworks include:

1. The Task Force on Climate-related Financial Disclosures (TCFD) - a widely accepted global framework for companies to disclose information on their climate risks and opportunities, in quality and consistent manner on climate-related information in financial reporting, and to facilitate the integration of climate considerations into financial decision-making.
2. The Global Reporting Initiative (GRI) - a leading international organization that provides sustainability reporting guidelines and standards,
3. The Sustainability Accounting Standards Board (SASB) - a non-profit organization that provides industry-specific ESG reporting standards,
4. The Carbon Disclosure Project (CDP) - a global non-profit organization that provides a platform for companies to disclose and manage their environmental impact,
5. The United Nations Principles for Responsible Investment (UN PRI) - a global network of investors committed to integrating ESG issues into investment decision-making and ownership practices,
6. The Dow Jones Sustainability Indices (DJSI) - a family of indices that track the performance of the world's leading sustainability-driven companies,
7. The MSCI ESG Indices - a set of indices that track the performance of companies with strong ESG practices.

These ESG frameworks provide a common language and set of standards for companies and investors to assess and report on ESG performance, helping to promote greater transparency and accountability in the area of ESG.

Mandatory ESG regulations have become increasingly widespread globally, both in the United States and other countries, as the need for sustainable and responsible business practices has become more pressing. These regulations vary in scope and intensity by region, but they all aim to promote transparency and accountability in corporate ESG practices, and to ensure that companies consider the broader impact of their operations on society and the environment.

ESG regulations are required beyond frameworks because they provide a legally binding framework for companies to report on their ESG performance and impacts. Frameworks, such as the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB), provide guidelines and standards for sustainability reporting, but they are voluntary and may not be consistently adopted by companies. ESG regulations, on the other hand, mandate reporting on ESG issues, ensuring that all companies within a jurisdiction are required to report on their ESG performance and impacts, creating a level of consistency and comparability in reporting. This consistency in reporting allows for better informed decision making by stakeholders, such as investors, customers, and employees, who rely on ESG information to assess a company's sustainability practices and to understand their potential risks and opportunities. Furthermore, ESG regulations can drive companies to prioritize ESG issues and to take concrete actions towards sustainability and responsibility. Overall, ESG regulations play a crucial role in promoting greater transparency and accountability in the area of ESG issues, supporting the growth of a more sustainable and responsible corporate sector, and contributing to the creation of a more sustainable global economy.

The EU Corporate Sustainability Reporting Directive (EU-CSRD) requires large companies operating in the European Union (EU) to report on their environmental, social, and governance (ESG) performance and impacts. This information includes policies, strategies, and outcomes in these areas, providing stakeholders such as investors, customers, and employees with a comprehensive understanding of a company's sustainability practices. The directive promotes global ESG by encouraging greater transparency and accountability and driving the development of a more sustainable and responsible corporate sector. Leaders should adopt the EU-CSRD as it is an important tool for promoting sustainability and accountability, and demonstrates a commitment to creating long-term value for stakeholders while addressing global challenges such as climate change, social inequality, and environmental degradation.

California's Climate Corporate Accountability Act (CCAA - Senate Bill 260), requires companies to report on their greenhouse gas emissions and plans for reducing those emissions and mitigating their climate impacts. This reporting will provide stakeholders with a comprehensive understanding of a company's climate performance and efforts to address climate change. By promoting climate reporting and accountability, the act aims to support the growth of a more sustainable and responsible corporate sector and drive progress towards a low-carbon, sustainable economy. Leaders should adopt the act as it aligns with the growing global trend towards ESG disclosure and accountability, and sends a clear signal to companies that they must take their climate responsibilities seriously.

The Japan Stewardship Code sets out the principles and responsibilities of institutional investors with regard to their stewardship and investment practices. The Code aims to promote responsible investment practices by institutional investors and to enhance the corporate governance and long-term sustainability of invested companies. The Code covers key areas such as engagement with invested companies, voting, and disclosure, and it provides a framework for institutional investors to adopt responsible investment practices that promote sustainability. The Japan Stewardship Code has a significant impact on sustainability as it encourages institutional investors to adopt responsible investment practices that promote sustainability, and it supports the development of a more sustainable and responsible corporate sector in Japan.

The 27th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP27) and previous sessions were crucial events in the context of ESG regulations. It provides a platform for international discussions on collective action to address the global climate crisis and its impacts on the environment and society. These discussions can lead to the development of new and more stringent ESG regulations and reporting requirements. Additionally, COP27 serves as a venue for businesses and investors to showcase their ESG efforts and engage in discussions with regulators and policymakers, helping to drive progress and raise the bar for ESG performance. The outcome of COP27 can therefore have a significant impact on the future of ESG regulations and the promotion of sustainable business practices worldwide.

Adopting Artificial Intelligence (AI) in ESG reporting can bring several benefits, such as increasing the speed and accuracy of data collection and analysis, reducing the workload of manual data entry, and allowing for real-time monitoring and tracking of ESG performance. In fact, researchers identified?AI could contribute to achieving 79% of UN SDGs. AI can be applied in several ways, such as:

1. Generative AI: Generative AI can be used to generate comparable reports on ESG performance, sustainability, and risk, by combining and analyzing large amounts of data from various sources. It can provide insights and recommendations based on historical data and industry benchmarks, improving the quality and accuracy of ESG reporting.
2. Data Science: Data science can be applied to collect, analyze, and visualize ESG data, providing valuable insights and predictions. Machine learning algorithms can be used to identify trends and patterns in ESG data, which can be used to make data-driven decisions about sustainability practices and investments.
3. AI-powered ESG tools and software: AI-powered ESG tools and software can automate data collection, management, and analysis, reducing the time and resources required for ESG reporting. It can provide real-time monitoring and tracking of ESG performance, enabling companies to quickly identify areas for improvement and make informed decisions.

However, it is important to note that AI can only be as good as the?human ethics?practiced, and?ethics and governance?play a critical role in the success of AI in ESG reporting, which is part of?Responsible AI. Adopting an?integrative framework?of Responsible AI can orchestrate the relevant strategies, stakeholders and resources towards?sustainability?and make?a social impact. That encompasses both consequentialism and utilitarianism perspectives of human ethics towards ESG.

In such a Responsible AI framework, leaders can focus the key dimensions of

1. AI,
2. Organisation,
3. Society,
4. Sustainability,

to understand the stakeholders, strategy, social justice and sustainable impact. As shown in the figure, KITE abstraction framework analyses the synergy and social impact of AI from organisational, social and sustainability perspectives. The interdependent perspectives enable the evaluation of motivations for AI ethics and good governance, AI for good, AI for sustainability, and social diversity and inclusion in AI strategies and initiatives. In our experience, this framework enables organisations to systematically engage with the community, volunteers and partners to collaborate towards ethical and sustainable AI for social justice. It hides the application-specific complexities in AI and generalizes the key success factors (KSF) of AI initiatives where stakeholders can easily understand their responsibilities for sustainability and social justice. These key success factors include but are not limited to social DEI (Diversity, Equity and Inclusion), SDGs (sustainable development goals), strategy, ethics and governance in AI. Moreover, this framework supports mitigating AI risks related to biases in various aspects, including bias in data, algorithms, and the people involved in AI. For the complete strategy, please refer to my submission?bit.ly/AIESG?in response to the Australian Government AI regulation consultation process.

Conclusion

Even though ESG reporting is voluntary in many countries, there are emerging movements which will lead to mandatory reporting in the near future. It's much broader than climate change and spans across UN SDGs. Companies that fail to meet the expectations for ESG accountability and transparency through proper reporting may face the consequences such as activism from shareholders and employees, divestment by investors, and potential regulatory action. Therefore, having awareness and adaptation of emerging ESG movements and regulations would be a competitive and sustainable business strategy.