Relationship between voluntary and mandatory disclosures

When businesses consider their corporate sustainability and ESG disclosure, many will focus solely on mandatory ESG reporting requirements. It’s important to remain aware of how voluntary disclosures can aid in establishing a successful system for mandatory ESG reporting and staying ahead of changing regulations. In this article, we explore three examples of how voluntary and mandatory disclosures work in conjunction to improve your sustainability and financial reporting.

1. Mandatory requirements expand on voluntary requirements

Firstly, mandatory legislation can often be built on voluntary principles or guidelines, creating a dependent relationship where both disclosures act concurrently to record impactful ESG data and metrics. 

For example, the Corporate Sustainability Due Diligence Directive (CSDDD) aims to foster appropriate sustainable and corporate behavior by requiring companies to carry out environmental and human rights due diligence and disclose any steps they take to address impacts — including in their value chains in and out of Europe. The CSDDD is based on the voluntary OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. 

Further, the Corporate Sustainability Reporting Directive’s (CSRD) adoption of mandatory standards from January 2023 expands on the ESG data all types of companies must report to meet new sustainability reporting expectations. Companies who were already adhering to those foundational voluntary principles are now ahead of emerging regulations on disclosing information.  

2. Mandatory disclosure circle round to voluntary ones

Secondly, a mandate may ask companies to disclose any voluntary reporting initiatives they commit to, spotlighting any existing ESG metrics, ESG standards, or ESG frameworks. Mandating corporate sustainability disclosure responds to the need for comparable information for different stakeholders. 

In July 2023, the European Commission adopted the European Sustainability Reporting Standards (ESRS), subject to the CSRD. These impose mandatory requirements dictating how companies must disclose certain environmental, social, and corporate governance sustainability information. These standards are combined with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) to enhance the operability between EU companies.  

The effort to streamline and align reporting frameworks serves to emphasize voluntary reporting. The ESRS even asks companies to disclose if they’re following any other voluntary initiatives to advance a specific topic in their sustainability journey. A highlight of the ESRS standards concerns environmental legislation. Companies need to know which regulations apply to them, how they apply, and how existing policies will keep up with emerging regulatory developments.  

The first step to sustainability reporting has always been the ability to track compliance. 

3. Voluntary standards point back to mandatory requirements

When a voluntary framework refers to legislation, companies must build their voluntary ESG disclosure by considering regulations and the potential risks they pose.  

One such 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 disclosure. The TCFD advises that companies identify how to adapt to emerging legislation that could be issued in the transition to a lower carbon economy.  

Voluntary reporting was once thought to be an advantage for companies — and now it’s proven to be so. There will always be voluntary frameworks to enhance your business, and more and more often these strategies are pointing back to mandatory requirements, ensuring continuous compliance across the board.  

Linking EHS compliance and ESG disclosure

Whether it’s voluntary frameworks highlighting mandatory standards, or the other way around, it all translates into the importance of corporate sustainability disclosures. Most sustainability disclosures begin on the bedrock of EHS compliance to measure ESG performance. 

To begin, companies must establish a solid baseline for their compliance, and therefore sustainability reporting — knowing what legislation applies to the business, jurisdiction, and involved sectors. Embed compliance throughout the sustainability journey and the right ESG disclosures will follow.