Corporate reporting is evolving: The boardroom approach to ESG is driving change from the top

If it seems at times like ESG (Environmental, Social and Governance) reporting is a topic that’s only gained traction over recent years, it’s worth pointing out that the European Union has been taking a strong stance on environmental protections for the last three decades.

The wheels of regulation grind slowly, but successive treaties from 1987 onwards brought legal personality to the bloc to enable it to make international agreements. However, within the last decade, climate regulation has begun to show those teeth it’s taken so long to grow.

The 2015 Paris agreement, initially ratified by all EU member states as a way of bringing it into force, marked a watershed moment. It was the first time that nations had agreed to introduce legal accountability for climate change and has since been signed by over 190 countries. In 2021, Shell was the first company to become subject to a legal ruling that it must reduce its emissions by 45% by 2030 under the terms of the agreement. The firm is appealing the decision, but the case could prove to be an important precedent, and it seems likely that other NGOs will follow suit.

A second key development that’s put sustainability firmly on the boardroom agenda is the fact that global financial institutions are now accountable for the carbon footprints of the companies they invest in. Regulation is one factor in this – the EU’s Sustainable Financial Disclosure came into force in 2021, obliging financial firms to provide transparency into the carbon footprint of their investment products. However, heightened awareness and public pressure have also undoubtedly played a part, as financial firms strive to make their products as appealing as possible to conscious investors.

This shift is playing out in two key ways. Firstly, sustainability has become a matter of access to capital. High-carbon businesses are finding it increasingly tough to fund business-as-usual investment. On the flip side, there’s a tidal wave of funding flowing into the energy transition and the growth of green businesses. In the first half of 2021 alone, green tech startups raised €7 billion, compared to €4.7 billion in all of 2020. Similarly, investment in ESG-related assets continued to set new records in 2021, on a trajectory to hit $50 trillion by 2025.

The rapid pace of the shift is now beginning to become evident in the way the ESG agenda is evolving in the boardroom.

Currently, there’s a huge push to hire executive leaders and board members for these new green businesses and sustainable financial products. This shift indicates that in the new wave of green businesses, sustainability is baked into the culture, mindset, and even the mission of the organization rather than being seen as an extra function added to business-as-usual.

Furthermore, this change isn’t only visible at the senior level. Within functional roles such as manufacturing, procurement, supply chain, investor relations, and more, sustainability is increasingly becoming an integral part of the job description.

Even in traditional organizations that have hired a Chief Sustainability Officer, there’s a visible shift in the way the ESG agenda is shaping up. When we talk to CSOs, they’re increasingly reporting that boards are highly engaged with ESG topics, moving beyond the “what” and the “why” of sustainability initiatives to the question of how they can deliver on their ESG commitments. This seems to be particularly true when they’ve signed up to a net-zero pathway or when firms need to pivot to greener initiatives as a means of accessing capital.

So far, the climate has consumed a substantial share of the ESG conversation, but we can expect a broader focus moving forward. The accelerated net zero pathway, Europe’s new mission to eliminate dependence on Russian oil and gas, and a looming food crisis mean there will be pushes for more disclosures. Biodiversity, water consumption, and plastics could all become areas of focus.

The Intergovernmental Panel on Climate Change (IPCC), have released their sixth annual assessment report on the mitigation of climate change where they concluded that greenhouse gas emissions must peak by 2025, and can be nearly halved this decade to give the world a chance of limiting future heating to 1.5 degrees above pre-industrial levels. As they clearly state, there is a need for a “now or never” dash to a low-carbon economy and society. Leaders must rise up and make concrete commitments with measurable outcomes to achieve this objective.

Furthermore, the combined effect of COVID-19 and now the outbreak of war on the edge of the EU means we can expect to see an increasing focus on social and governance topics. Both incidents have created humanitarian crises unprecedented in modern times, increasing expectations that governments and firms will take action to stand up to human rights abuses. This means that supply chains must also be aligned with a company’s ESG values across the board. There’s little ESG value in being the best producer of solar panels or electronic vehicle batteries if the supply chain is fraught with calamities like child labor or modern slavery.

Back in 2020, it was already evident that the pandemic was creating a shift in mindset, generating a global sense of solidarity around issues like climate change. At that point, it wasn’t clear if the momentum around the conversation would translate into concrete action. However, at this point, it’s evident that, if anything, the ESG movement is picking up pace. We cannot risk complacency while there’s still an overwhelming amount of work to be done, but currently, there are plenty of signs that firms are willing and able to rise to the challenge.