Voluntary or mandatory ESG disclosure? Why they both matter
Your sustainability journey isn’t about either voluntary or mandatory ESG disclosure. Instead, it’s how they work together to move you forward.
When EHS and sustainability professionals think of ESG disclosure some make the mistake of focusing only on mandatory disclosure. But businesses need to keep in mind the value of voluntary ESG disclosure as an important piece of establishing a system for ESG reporting and staying ahead of requirements. Here are 3 examples of how the two types of disclosure work together in your sustainability journey (and how EHS compliance is at the heart of every scenario):
1. Mandatory ESG disclosure based on voluntary
My first example is when mandatory legislation is built on voluntary principles or guidelines.
For instance, the Corporate Sustainability Due Diligence Directive (CSDD) proposal stands to change the ESG and sustainability reporting game across for companies operating inside – and outside of – the EU. When it comes into effect, the CSDD will require companies to carry out environmental and human rights due diligence and of course to disclose information about the steps they take to address any impacts. The CSDD is based on the voluntary OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.
On top of that we see more and more ESG reporting requirements in the pipeline. Especially with the recent adoption of the Corporate Sustainability Reporting Directive (CSRD) in the European Union, mandatory disclosures are here to stay – and more regulated than ever.
Therefore, companies that were already adhering to those foundational voluntary principles are now a step ahead compared to companies that now must start disclosing information.
(Getting turned around by all the ESG-related acronyms? Keep them straight with this quick guide to the most important standards, frameworks, advisory groups, initiatives, and more.)
2. Mandatory circles back to voluntary
My second example is when a mandate asks you to disclose any voluntary reporting initiatives that your company commits to. Basically, if you have any systems in place for voluntary ESG disclosures, you should point them out.
In general, the idea of mandating ESG disclosure responds to the need for comparable information for different stakeholders. At the European Commission’s request, the European Financial Reporting Advisory Group (EFRAG) drafted and submitted standards to create consistency with other reporting standards, such as the ISSB or the GRI. This, therefore, would eliminate the need for multiple reports for multiple stakeholder groups. These European Sustainability Reporting Standards (ESRS), if adopted, will impose mandatory requirements dictating how companies must disclose certain sustainability information – if they are indeed subject to the CSRD.
Interestingly, this effort to streamline and align reporting frameworks only puts more emphasis on today’s voluntary reporting. In fact, the proposed ESRS asks companies to disclose if they are following any other voluntary initiatives to advance specific topic in their sustainability journey.
Now if we look closer at the draft ESRS, taking pollution for example, it might not come as much of a surprise that under these standards, your company will need to make sure it’s following up with environmental legislation. Not just what regulations apply to you but how they apply to you, what controls you have in place, how you keep up with relevant developments on environmental obligations, policies, and how these can eventually translate into legislation. So, the first step to sustainability reporting is keeping track of how you comply with your mandatory legislation.
3. Voluntary pointing back to mandatory requirements
My third example is when a voluntary framework refers to legislation. Here, you must build your voluntary ESG disclosure by first considering the regulations, being aware of them and the risks that they impose.
A good example is the Task Force on Climate-Related Financial Disclosures (TCFD). Many jurisdictions have embraced this voluntary framework, which offers recommendations for mandated climate-related disclosures.
But what does the TCFD actually tell you? It tells you to know the regulatory landscape as well as how you keep up with the changes and adapt to stricter legislation that could be issued in the transition to a lower carbon economy. Again, we’re back to EHS at the heart of ESG disclosure.
The point is: voluntary reporting was once thought to be an advantage for companies – and now it’s proven to be. There will always be voluntary frameworks that will enhance your business. (Of course, there are tons out there and choosing one for you comes down to your strategy and what is relevant to your business.) And more and more, they point back to what’s required.
EHS compliance at the heart (and start) of ESG disclosure
Whether it’s voluntary pointing to mandatory or the other way around – any way you look at it all translates into the importance of ESG disclosures. And most ESG disclosure you submit will begin on the bedrock of EHS compliance. As a starting point, I invite you to establish a solid baseline for your compliance and therefore your sustainability – knowing what legislation applies to your business from EHS issues to those of human rights and supply chain. But don’t stop there. Embed compliance as a reference throughout your sustainability journey, leveraging the essential perspective of EHS professionals at every step.