1. Introduction
The ESG landscape includes an array of disruptions, activities, and commitments around the environment, social capital, business and innovation, leadership and governance, and human capital.
Recent developments by standard-setters and regulators are changing the disclosure landscape regarding ESG. In 2021, the International Organization of Securities Commissions (IOSCO) Technical Expert Group appointed the SEC as co-chair to accelerate global sustainability reporting standards focused on enterprise value and drive international consistency of related disclosures that will stand up to the new International Sustainability Standards Board (ISSB).[1] The move toward ESG disclosure in regulated filings spotlights the necessary role of assurance and governance for ESG activities in order to meet new standards and communicate the financial relevance of ESG performance. This ongoing transformation, along with the anticipated developments on the horizon, points to the critical role Controllership can play in the regulatory environment and ESG framework for organizations.
2. ESG Landscape in India
Every business enterprise is deeply intertwined with Environmental, Social, and Governance (ESG) matters. There is a more significant push to commit to ESG efforts. ESG has attracted attention from all stakeholders – investors, consumers and governments. ESG is important as it creates high value, drives long-term returns, and global stakeholders are paying attention to the topic. ESG can be viewed as a non-financial performance of an enterprise and build insight into long-term value.
ESG is primarily defined as a triple-bottom-line approach that combines financial gains adhering to social and environmental norms. Moreover, ESG aspects have also become global standards of reporting and disclosures.
Investopedia defines Environmental, Social, and Governance as a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social measures examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Environmental is all about an enterprise focus and action leadership around energy usage, waste management, and natural resources conservation. It also encompasses carbon emissions, climate change and going green. Social deals with an enterprise relationship and reputation with its employees, customers, stakeholders, institutions and the larger community. It is also about employee retention, labour relations, diversity, and inclusion. Governance is all about how an enterprise manages with the proper management structure, executive compensation and ensuring stakeholder rights, especially employees, shareholders and customers. It also includes systems and networks in giving back to the community where it is operational.
With the push for the Sustainable Development Goals and the climate action movement gaining momentum, the sustainability reporting landscape is changing rapidly around the globe. It is essential to understand the concept of business responsibility and the evolution of ESG reporting in India. ESG reporting in India started in 2009 with the Ministry of Corporate Affairs, Government of India, issuing the National Voluntary Guidelines on Corporate Social Responsibility (NVGs).
In 2012, the Securities and Exchange Board of India (SEBI) mandated that the top 100 listed companies by market capitalization file the Business Responsibility Report (BRR) based on NVGs along with annual reports.[2]
CSR activities have been made mandatory under The Companies Act, 2013 for companies falling under the prescribed category. In 2015, BRR was extended to the top 500 listed companies by market capitalisation.
Integrated Reporting (IR) was introduced by SEBI in 2017 voluntarily for the top 500 companies required to prepare BRR. National Guidelines on Responsible Business Conduct (NGRBC) came in 2019. The same year, SEBI has extended the BRR to the top 1,000 listed companies by market capitalization.
Business Responsibility and Sustainability Report (BRSR) was introduced in 2021. The reporting landscape in India has come a long way from the introduction of the Business Responsibility Report (BRR) in 2012 to the addition of the Business Responsibility and Sustainability Report (BRSR) in 2021. BRSR is a standardized reporting format that will give a baseline to compare environmental, social and governance goals across companies and sectors. It is essential to understand the value of the introduction of BRSR as it embraces and incorporates metrics of international frameworks on par with global ESG reporting trends.[3]
The alignment of BRSR’s with ESG pillars can be the environmental aspect that covers energy and Green House Gas/ scope emissions; solid waste management; water consumption and withdrawal; 3R practices; sustainable sourcing; Extended Producer Responsibility (EPR); Life Cycle Assessments (LCAs). Also the social aspect includes employee well-being; workers’ health and safety; training; human rights; social impact assessment; gender equality, representation of women at the top levels; CSR activities and details of beneficiaries. Governance indicators include anti-corruption and anti-bribery policies, conflict management process; retention policies; remuneration policies; stakeholder engagement. It should be noted that BRSR should emerge as a single source for sustainability disclosures related information in India. It would serve as a base document for stakeholders to compare enterprises in making wise investment decisions. According to Bloomberg, it is estimated that by 2025, investments with high-performing ESG metrics will reach USD 53 trillion, which is more than a third of the USD 140.5 trillion in projected total assets under management.
3. ESG Landscape in UK
Refining and strengthening ESG regulations will be a crucial component of the UK Government’s approach to what it terms a ‘green industrial revolution’ designed to drive the nation’s long-term response to COVID-19. As the UK’s Presidency of COP2026 unfolds, ministers have signaled intent to establish leadership in sustainability by the first major economy to legislate for net-zero.[4]
Added to the mix is the introduction of post-Brexit legislation designed to align with or exceed the sustainability and human rights standards enshrined in both EU law and among broader global trading partners. Effectively, the UK Government is aiming to develop an ESG policy and regulatory landscape that works for the UK market, tailoring many areas of law to UK priorities and, by doing so, putting the economy in a strong position to generate post-COVID growth.
As investor and consumer scrutiny also focuses on environmental, social and governance performance indicators, UK firms need to be alert to the impacts of more intensive ESG regulations.
3.1 What Are the ESG Regulations in the UK?
The three elements of environmental, social and governance (ESG) are highly interdependent. In many instances, good performance in one area is fundamental to meeting the requirements of another, but they cover an incredibly diverse range of topics. These have grown and changed in importance and focus over time, and, as is typically the case with fast-moving areas, ESG regulation has struggled to keep pace.
Consequently, there is not currently one overarching piece of UK legislation covering all ESG factors. However, there are various regulations covering aspects of ESG that companies must comply with in different ways, depending on their size, sector and scope. These derive from a range of legislative sources and official guidance, including the: UK Corporate Governance Code 2018 (UKCGC), Companies Act 2006, Climate Change Act 2008 (CCA), UK Stewardship Code 2020 (UKSC), Disclosure Guidance and Transparency Rules (DTRs), Bribery Act 2010, Modern Slavery Act 2015. The UKCGC, Companies Act, and DTRs set the primary guidelines for ESG disclosures. These guidelines are generally flexible, allowing them to fit different businesses and industries. While this flexibility is good, it can also lead to confusion about which aspects of a company’s operations should be monitored and reported, and who needs to be informed.
3.2 Is ESG Reporting Mandatory in the UK?
The majority of ESG reporting is not currently mandatory in the UK. However, some specific metrics that come under the ESG regulation reporting umbrella are mandatory, including:
Greenhouse gas reporting: Mandatory for quoted companies since 2013 under the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013
Energy use: Quoted companies must report on their global energy use, and large businesses must disclose their UK annual energy use and greenhouse gas emissions. This is required by the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.
Gender pay gap: Any employer with a headcount of 250 or more must comply with gender pay gap reporting regulations.
Modern Slavery: UK organisations with an annual turnover of £36 million or more must publish an annual statement setting out the steps to prevent modern slavery.
3.3 What Are the Non-Mandatory Guidelines and Frameworks?
There are numerous guidelines and frameworks available to help organizations report on and comply with ESG regulations. Some of the most widely used include the Task Force on Climate-Related Financial Disclosure (TCFD), Sustainability Accounting Standards Board (SASB), Carbon Disclosure Project (CDP), International Integrated Reporting Framework (IIRC), Global Reporting Initiative (GRI), and UN Principles for Responsible Investment (PRI). These frameworks provide guidance on various aspects of ESG reporting, including climate-related disclosures, sustainability accounting standards, carbon emissions data, integrated reporting, and responsible investment principles. An organization may adopt more than one of these non-mandatory frameworks. They have different focus areas, from financial impact in the accounting standards to direct climate and social impact in the other frameworks. The choice may depend on the company’s sector. For example, Lloyd’s Banking Group’s ESG report aligns with the UN Environment Programme Finance Initiative’s Principles for Responsible Banking, but also with the Global Reporting Initiative Standards, the SASB disclosure framework, and the TCFD.
In a bid to resolve the complexity of this “alphabet soup” of frameworks, the World Economic Forum’s International Business Committee proposed a set of ESG metrics in September 2020. These build on, rather than replace, components of existing frameworks to create an overarching reporting framework that covers all the relevant areas. To align with current and future ESG regulations, UK businesses should prioritize ESG on the board agenda, ensuring the board has access to expertise and comprehensive information. A materiality assessment should be conducted to identify and prioritize applicable ESG areas. Existing regulatory reporting requirements related to ESG should be identified, along with the necessary infrastructure, technology, and resource investment for material issue identification, regulatory compliance, and ESG performance monitoring. Understanding the frameworks used for current ESG reporting and their suitability for the business is crucial. Additionally, businesses should regularly monitor the framework landscape for new developments, such as the adoption of WEF ESG metrics.
4. ESG Landscape in USA
For decades, the voluntary nature of corporate environmental, social, and governance (ESG) reporting has been a primary challenge in the ESG data industry. Carbon reporting by companies and the lack thereof is a bellwether for ESG reporting in general. Years of work by sustainable investment organizations have laid the groundwork for clear, standardized requirements and yielded patchy reporting.
The ESG landscape in the United States is characterized by a mix of regulatory developments, voluntary initiatives, and growing investor interest. While it has lagged behind some European countries in terms of unified federal regulations, there has been significant progress in recent years. Carbon reporting offers a window into the larger challenge. It’s been a long-time project of standards organizations: companies to reveal their carbon footprint in comparable numbers.
The leading Greenhouse Gas Protocol for corporations was established in 2001. Since then, the Sustainability Accounting Standards Board (SASB), the Climate Disclosure Project (CDP), the Global Reporting Initiative (GRI), and the Task Force on Climate-Related Financial Disclosures (TCFD) have pushed standards outlining how companies should report on carbon emissions, with most of them using harmonized metrics and methodologies.
Still, while more than 9,500 companies reported emissions to the non-profit CDP in 2020, most companies did not. According to an article by Columbia professor Shivaram Rajgopal writing in Forbes, as of June 2021, “only 20% of publicly listed U.S. companies voluntarily disclose emissions data.” As a result, data providers are forced to either fill in values, penalize non-reporters, or leave certain data points blank if companies don’t provide them. This leads to ESG data products that are inaccurate when it comes to carbon emissions as well as other ESG factors.
This situation mirrors the larger corporate sustainability challenge beyond just carbon. The Conference Board reports that climate-risk disclosures are increasing globally and for the Russell 3000, with a small step backward for S&P 500 firms. However, this logjam of corporate disinterest in reporting carbon emissions (or in standardized sustainability metrics) is threatened by regulators on both sides of the Atlantic.
Regulatory Efforts:
- SEC Rule Proposals: The Securities and Exchange Commission (SEC) has proposed rules requiring public companies to disclose climate-related risks and greenhouse gas emissions. These proposals are still under review and could significantly impact the ESG landscape.
- State-Level Initiatives: Several states have enacted their own ESG-related laws, particularly focusing on climate change and human rights.
European Regulatory Regime
The European Union’s ESG regulatory disclosure regime is comprised of the Taxonomy Regulation, the Non-Financial Reporting Directive (NFRD), and the Sustainable Finance Disclosure Regulation (SFDR).
Under the NFRD, large EU public corporates must disclose their “non-financial” ESG performance alongside their financial performance. An in-process rule will extend those requirements to an even larger group. Not only must individual companies meet these reporting requirements in Europe, but asset managers will soon need to make disclosures of principle adverse impacts (PAIs). The requirements are slowly rolling out, beginning with the largest participants in financial markets.
Challenges and Opportunities:
- Lack of Uniform Standards: The absence of a unified federal ESG framework can create confusion and inconsistencies for companies.
- Data Quality and Reliability:Ensuring the accuracy and reliability of ESG data is a challenge, as it often relies on self-reporting.
- Greenwashing:Concerns about greenwashing, or misleading claims about ESG practices, persist.
- Balancing Economic and ESG Goals: Companies often face the challenge of balancing economic growth with ESG objectives.
Overall, the ESG landscape in the United States is dynamic and evolving. While there are challenges to overcome, the growing investor interest, regulatory developments, and industry initiatives suggest a continued trend toward greater ESG integration in corporate practices.
[1]IFRS Foundation Trustees announce working group on sustainability. (2021, March). IFRS Foundation. Retrieved from https://www.ifrs.org/news-and-events/news/2021/03/trustees-announce-working-group/
[2]https://www.financialexpress.com/lifestyle/science/environmental-social-and-governance-landscape-in-india/2475476/,
[3] Ibid.
[4] https://www.diligent.com/en-gb/blog/esg-regulations/