ESG reporting and corporate accountability: Last month, the scientific community unveiled two pivotal discoveries that carry significant implications:
Seven of the eight safe and just Earth System Boundaries (ESB) have been breached, critically risking the planet’s health and the survival of its species. – Earth Commission
Global warming is likely to hit the 1.5°C threshold set by the Paris Agreement by 2027. – World Meteorological Organization
Earlier this year, Intergovernmental Panel on Climate Change (IPCC) reports summarised the following:
- Anthropogenic climate change has led to widespread adverse impacts and related losses and damages to nature and people globally.
- Around 3.3-3.6 billion people are highly vulnerable to the effects of climate change. Vulnerable communities, who have historically contributed the least to current climate change, are disproportionately affected.
- Increasing weather and climate extreme events have exposed millions of people to acute food insecurity and reduced water security.
Consensus on converging global risks
According to the Global Risk Report released by the World Economic Forum, economic risks were among the top five concerns for humanity till 2015. Since then, there has been a shift towards social and environmental aspects as primary concerns. This convergence has become even more pronounced since 2020, aligning purely with social and environmental issues. The established risks of humanity are:
- Failure to mitigate climate change
- Failure of climate adaptation
- Natural disasters and extreme weather events
- Biodiversity loss and ecosystem collapse
- Large-scale involuntary migration
- Erosion of social cohesion
- Livelihood crisis
Climate denial: Inevitable calls for a response
Climate denial has become increasingly difficult due to the persistent dissemination of information, rigorous quantification efforts, and mounting scientific evidence. However, it is crucial to emphasize that the current state of climate action falls significantly short of the critical pace and unwavering determination required to address this pressing global issue.
Governments, investors, and global organisations consistently engage in a cyclical pattern of understanding, initially underestimating, subsequently acknowledging, or facing pressure, and eventually responding to the challenges of climate change at their own pace. This response may not be in the best interests of humanity. While the absence of globally coordinated action and binding commitments exacts a significant toll, there are noteworthy endeavours that act as catalysts for change. These endeavours assume the role of change leaders, even as they operate within the context of diverse approaches and priorities.
Several examples highlight this dynamic:
- The G7 nations reached an agreement to accelerate the phasing-out of unabated fossil fuel usage, albeit without finalizing a consensus on a specific timeline for phasing out coal.
- Despite the European Union (EU) demonstrating exceptional leadership in climate action through proactive policy development, instances of climate denial persist among global leadership.
- France implemented a ban on short-haul flights, but global sales of private jets reached an all-time high this year.
In the face of global textile waste reaching 92 million tons annually, the EU has taken a praiseworthy step by prohibiting the destruction of unsold textiles, thereby preventing approximately 6 million tonnes of waste from being discarded. - A lawsuit filed by 25 states against the Biden administration regarding “socially conscious” investing prompted President Biden’s first veto to protect the ESG rule related to pension funds.
- India, home to more than 17% of the global population, is the third-largest emitter of greenhouse gases and has made a commitment to achieve Net Zero by 2070. Although this target deviates significantly from the commitments of other major emitters, India maintains the lowest per capita emission among G20 countries. India’s endeavors in decarbonisation place it among the top 5 nations exhibiting commendable climate action, as indicated by a study.
READ I Beyond renewables: Innovative climate change strategies for a sustainable world
ESG reporting: A catalyst for change
Despite its current challenges, ESG reporting has emerged as a catalyst for change, driving corporate sustainability and accountability. It is seen as a starting point by companies to measure their environmental, social, and governance performance and identify areas for improvement. The increased focus on sustainability reporting is attributed to several factors that have contributed to a shift in mindset and subsequent response:
Streamlined policies and reporting frameworks: Regulators and non-profit standard-setters worldwide have taken significant steps to streamline policies and unify sustainability reporting frameworks. Many companies adhere to domestic stock exchange guidelines or follow globally recognized standards such as the Global Reporting Initiative (GRI). This has resulted in a high percentage of companies recognizing climate change as a risk to their business operations and undertaking sustainability reporting.
International Sustainability Standards Board (ISSB): The establishment of the ISSB in 2021 received support from the G20, the International Organization of Securities Commissions (IOSCO), and Finance Ministers and Central Bank Governors from over 40 jurisdictions. The ISSB’s primary objective is to develop universal sustainability disclosure standards and provide essential sustainability information to global capital markets. By integrating key frameworks such as TCFD, SASB, CDSB, WEF IBC, and the Integrated Reporting Framework, the ISSB aims to harmonize reporting practices. Its inaugural reporting standards are anticipated to come into effect in January 2024.
Investor awareness and action: Major investors like Blackrock have vocally advocated for ESG investing. However, there have been concerns about potential greenwashing and the complexities of navigating the political landscape. Despite these challenges, there is a clear indication of increased investor awareness and action in the ESG sphere. Investors and companies rely on rating agencies to assess and streamline ESG performance, although the absence of standardized scoring frameworks across different agencies results in minimal correlations among these systems.
Trust and transparency: Currently, there is minimal assurance and tools to validate the disclosures made by businesses in the ESG reporting ecosystem. However, efforts will be made over a period to establish the trustworthiness of data and enhance transparency in reporting. Just like traditional financial accounting, which took a century to evolve, ESG accounting is also expected to face similar challenges before establishing a strong foundation of trust and credibility.
ESG reporting: Towards global sustainability
While ESG reporting, in its current form, may not directly contribute to achieving specific global targets such as the Sustainable Development Goals (SDGs) or Net Zero by 2050, it serves as a crucial stepping stone for broader sustainability efforts. To propel global sustainability, it is essential to address the deeper transformations required:
Economic system reform: The primary objective of larger corporations must shift from generating wealth for a select few to positively influencing the lives of millions. Economic systems need to be restructured to prioritize equitable global consumption governance and optimize resource utilization. The principle that “limited resources cannot deliver unlimited growth” should be embraced, and measures should be implemented to align economic activities with planetary boundaries.
Equitable geopolitical governance: Achieving global sustainability requires equitable geopolitical governance, where developed economies embrace the concept of Degrowth and prioritize well-being over profit. Developing economies should grow sustainably and establish Universal Basic Income and Services for all citizens. Collaboration and coordination among nations are crucial in climate action.
Linking Earth System Indicators to economic activities: Establishing accurate linkages between economic activities and their effects on planetary boundaries is vital. This will enable informed decision-making at different levels, from communities to global organizations. It requires the maturity of social, economic, and scientific systems to understand the impact of each economic activity on the environment and society.
Decoupling economic growth from environmental impact: To achieve sustainability, there is a need to decouple economic growth from environmental degradation. This involves implementing circular economy principles, promoting resource efficiency, and embracing clean technologies. Governments can incentivise businesses to adopt sustainable practices and invest in R&D for eco-friendly alternatives. By decoupling growth from resource consumption and pollution, we can strive for a more sustainable and resilient economy.
Enhancing education and awareness: Education plays a vital role in fostering sustainable practices and raising awareness about the importance of ESG factors. Integrating sustainability education into school curricula and promoting lifelong learning on environmental stewardship can shape future generations to be more conscious of their actions. Increasing public awareness through media, campaigns, and initiatives can also drive behavioural change and encourage individuals to support sustainable businesses.
Collaboration between public and private sectors: Global sustainability cannot be achieved without collaboration between the public and private actors. Governments need to provide clear regulations and policies that incentivize sustainable practices while offering support to businesses in their transition. Public-private partnerships can drive innovation, investment, and knowledge sharing to accelerate the adoption of sustainable practices.
Integration of ESG into corporate strategy: ESG reporting should not be viewed as a mere compliance exercise but as an integral part of a company’s strategy. Businesses need to integrate ESG considerations into their decision-making processes, from boardroom discussions to operational practices. This holistic approach ensures that sustainability becomes embedded in the company’s DNA, leading to long-term value creation and resilience.
Embracing stakeholder engagement: Engaging employees, customers, suppliers, and communities is essential for sustainable business practices. By actively seeking input and feedback from stakeholders, companies can identify and address their concerns and expectations. This approach fosters trust, strengthens relationships, and enables businesses to make informed decisions that align with their stakeholders’ values and needs.
Conclusions
ESG reporting has come a long way and has become an essential tool for driving sustainability and corporate accountability. While there are challenges to overcome, the increasing global focus on ESG factors signals a positive shift toward a more sustainable future.
By streamlining reporting frameworks, enhancing trust and transparency, and integrating ESG considerations into decision-making processes, businesses can play a crucial role in achieving global sustainability goals. However, true sustainability requires deeper transformations, including economic system reform, equitable geopolitical governance, and decoupling economic growth from environmental impact. Collaboration, education, and stakeholder engagement can help humanity build a sustainable and resilient world for future generations.
Thara TK is a renowned expert in sustainability and technology. She is the founder of ESG Minds.