As global environmental, social, and governance (ESG) momentum continues to snowball, business ESG reporting has become no longer a question of “if”, but rather “when” and “how.”
Despite this, many businesses are delaying their efforts to coincide with the introduction of major governmental regulations, and taking a “wait and see” approach. However, as the adage goes, “the ship has sailed” for ESG reporting and waiting for regulatory bodies like the US SEC to mandate ESG reporting may no longer be the wisest strategy.
Regional and state-level pressures, as well as growing demands from consumers, investors, and stakeholders, are driving the need for businesses to conduct ESG reporting. While geographic regions exist where regulatory requirements are less stringent, other major economic regions such as California and the European Union (EU) are pushing ahead with mandatory disclosures for businesses operating above certain employee and revenue thresholds.
In the case of the EU for example, the Corporate Sustainability Reporting Directive (CSRD) requires all large companies and listed SMEs to publish regular reports on their environmental and social impact activities. California, meanwhile, has endorsed two significant climate-related bills, SB 253 and SB 261, which substantially broaden the environmental and climate-related disclosure obligations for both public and private entities engaged in business with the state.
The fact that many thousands of businesses are either headquartered or operate within these regions has a major knock-on effect on supply chain partners who may not even be located within them – if they’re part of the supply chain for a company that needs to comply, then they too will need to comply, regardless of their location.
Suffice to say, the time is now – there is no more hiding from sustainability reporting, and taking a “wait and see” approach can have multiple drawbacks, including:
An obvious drawback of delaying sustainability reporting is an ever-increasing risk of non-compliance with mandatory regulations. The ESG compliance landscape is evolving rapidly and many sustainability-related regulations are in the process of being developed for market use. Consistently delaying ESG reporting shortens the window of opportunity for a business to prepare, and elevates the risk of it being caught short in the event that new mandatory compliance is introduced.
Gradually decreasing investor confidence
Failing to report on ESG and sustainability concerns conveys a lack of transparency, eroding investor confidence, and potentially resulting in reduced investment, higher costs of capital, and difficulties in attracting new investors.
Risk to business reputation
Reputation damage can have big financial implications. A lack of sustainability transparency together with the potential for negative events due to ESG management failures can result in a loss of customer trust and loyalty, and a drastic decline in brand reputation.
Supply chain and business partner problems
Increasing numbers of companies are requiring ESG metrics and sustainability reporting from their business and supply chain partners. Scope 3 emissions for example, are strongly associated with a company’s supply chain and require businesses to engage with their partners in sustainability initiatives. A “wait and see” approach to ESG and sustainability reporting can result in disrupted or deteriorated supplier relationships, and even potential contract terminations.
Missed business opportunities
Going hand in hand with the point above is the potential for a company to miss out on business opportunities. Not only can delaying reporting have an impact on existing business partners, but it may preclude an organization from opportunities where there may be a required level of transparency around sustainability in order to enter into new deals and relationships.
Increased insurance costs
Companies with poor or inadequate ESG and sustainability records may face higher insurance premiums. A company’s environmental and social practices often play a significant part in risk assessments, and a lack of visibility and transparency in this regard is likely to result in increased insurance costs.
Issues with attracting talent
Employees are increasingly valuing factors outside of financial compensation in deciding where to work and employ their talents. This, coupled with the modern availability of information, has led to them being more informed than ever. Businesses that delay being transparent in their sustainability activities and initiatives will consequently be more likely to encounter future challenges in attracting and retaining top talent.
As shown, taking a “wait and see” approach to ESG reporting can result in increased risks, higher costs, and missed opportunities. It is therefore essential for companies to proactively engage with ESG issues to meet their business partner, consumer, employee, and shareholder expectations.
So far we’ve examined only the negatives of this approach, yet there’s a flipside too – a proactive approach to sustainability reporting opens doors to innovation and new opportunities. It encourages companies to explore environmentally friendly technologies, develop sustainable products and access new markets, and forge exciting new partnerships with like-minded organizations.
There seems ample evidence that the costs of inaction and missed opportunities outweigh the benefits of procrastination, imagined or otherwise. To thrive in the contemporary business landscape, companies need to realize that ESG and sustainability reporting are not items on a begrudging to-do list; they’re ways to showcase innovation, progress, and goodwill.