The Shift From Choice to Requirement
For decades, corporations viewed ESG as a voluntary exercise, a way to appear environmentally friendly without binding obligations. That landscape has changed dramatically.
Rules and regulations from the Securities and Exchange Commission now mandate what was once optional. The transition from "nice to do" to "must do" reflects growing investor demand for transparency in corporate environmental and social practices.
Transparency Becomes the Standard
ESG reporting increases transparency by requiring companies to voluntarily report to shareholders and stakeholders about firm-specific risk factors that could impact mandatory SEC filings.
The British Petroleum oil spill in the Gulf of Mexico marked a turning point. As the last straw in a series of disasters, it demonstrated that ESG reporting provided vital information to asset classes for shareholders and stakeholders, according to a 2016 study by Euroif. The voiced concern from investors led 95 percent of the world's 250 largest corporations to report on ESG issues by 2011, according to KPMG, Mantiora and Eccles and Krzus research.
Why Companies Embrace ESG Reporting
The accounting firm KPMG identified this global trend in 2016, noting that companies increased ESG reports because of corporate scandals like Merckskemper and Streit. The purpose extends beyond scandal prevention.
ESG reports improve the reliability and integrity of firm-specific risk factors, according to research by IIRC, Eccles and Krzus. The goal: help stakeholders and firms understand comprehensive corporate performance.
The CSR Foundation
ESG reporting builds on Corporate Social Responsibility principles that emerged in the 1950s. Early proponents like Bowen, Carroll and Zeimers argued that CSR focused reports on the triple bottom line of economic, social and environmental performance in organizations. John Elkington, Howard Buehtigieg and others championed this integrated approach.
Both ESG and CSR serve Socially Responsible Investing strategies. They function as tools to screen investments, according to research by Capelle-Blancard, Monjon and Dawkins. ESG reports help investors align personal values with portfolio choices, allowing them to exclude stocks in sectors like alcohol, tobacco, firearms, gambling and pornography while prioritizing environmental, social and governance characteristics.
These corporate reports give investors direct access to quality and trustworthiness of quarterly and annual SEC filings, according to studies by Zabihollah, Ling, Dimson, Karakas and Li. Today, institutional investors simply demand this level of disclosure.
The Challenges Ahead
The Socially Responsible Investing and ESG trend faces problems for both shareholders and stakeholders, according to 2017 research by Chiu and Freeman. Understanding these challenges helps investors make informed decisions about how to evaluate corporate ESG commitments.
Next Steps for Investors
Review ESG reports alongside traditional financial statements when evaluating investment opportunities. Look for specific metrics and transparent disclosure rather than broad sustainability claims. Consider how mandatory reporting requirements may affect your portfolio holdings.
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“Action Required: Sustainability and ESG – Related Regulations are on the Rise Globally,” Christopher Tower, Marisol Berrios-Silletti, BDO, 2/23/2023
https://www.bdo.com/insights/assurance/action-required-sustainability-and-esg-related-regulations-are-on-the-rise-globally
Ibid.
“Impacts of Climate-Related Risk and Reporting Requirements,” Mallory Thomas, Brianna Hardy, Baker Tilly, 4/1/24
https://www.bakertilly.com/insights/impacts-of-climate-related-risk-and-reporting-requirements
“Environment Social and Governance Law 2024,” David Silk, Carmen X. W. Lu, ICLG.com
https://iclg.com/practice-areas/environmental-social-and-governance-law/usa
“Action Required: Sustainability and ESG Regulations are on the Rise Globally,” Chistopher Tower, Marisol Berrios-Silletti, BDO USA, 2/23/23
https://www.bdo.com/insights/assurance/action-required-sustainability-and-esg-related-regulations-are-on-the-rise-globally