At the final event of our Sustainability Networking Forum series for 2022, we focused on the different regulatory and market expectations for environmental, social and governance (ESG) reporting across the globe. Catherine Bell, Sustainability Principal at BDO in Australia, was joined by a panel of speakers from around the world - Karen Baum (Sustainability & ESG Advisory Lead, BDO in the USA), Karien Erasmus (Associate Director and Sustainability Lead, BDO in South Africa) and Viola Möllner (Partner in Sustainability Services, BDO in Germany) for a conversation about how local drivers influence new business behaviours, business models and global value chains.
Germany: Leading the way with regulation
Germany, and the European Union in general, has been leading the way with the increase in regulation and reporting through the Non-Financial Reporting Directive (NFRD), laying down a directive of disclosure for companies with more than 500 employees when reporting on their social and environmental metrics. The proposal for a Corporate Sustainability Reporting Directive (CSRD) would also amend the NFRD, extending the scope and adding audit requirements. The expectation is that by 2025, 15,000 companies in Germany alone, and a further 35,000 across Europe, will be affected by this legislation. The expectation to report on these metrics will also flow through to suppliers for these large companies as they investigate their supply chains.
While regulation may be the trigger for sustainability reporting, it has moved beyond just meeting regulatory requirements. Together the NFRD and the CSRD have over 2,000 pages, and this is where the confusion begins. Large companies may have the resources to ensure compliance with this legislation, but the middle market and smaller organisations are concerned about incorrect reporting and the potential for punishment. This is where organisations like BDO play a role in supporting companies in becoming familiar with the language of sustainability.
America: State vs federal
In contrast to Germany and the European Union where we see a consistent approach to sustainability reporting, America has struggled to reconcile the approach of individual states with a federal mandate. The U.S. Securities and Exchange Commission earlier this year announced proposed rules that would require certain companies to report on their greenhouse gas (GHG) emissions and the corresponding risk, essentially requiring companies to align with the Task Force on Climate-Related Financial Disclosures (TCFD).
While encouraging, this lags behind states such as California that implemented GHG reporting and a cap-and-trade system as early as 2006, resulting in reduced GHG emissions back to 1990 levels by 2016. That said, California is in stark contrast to states like Texas where legislation that prevents government authorities from engaging with banks that have adopted ESG policies has recently passed, effectively creating a government boycott of banks that engage in sustainability.
This has led, to some extent, to a box checking attitude where companies that do not have enough resources do the bare minimum to meet the regulations of their jurisdiction. While this has worked previously, larger companies are now extending their sustainability expectations to their suppliers, which has put pressure on smaller companies that don’t have the same resources to dedicate in this space.
South Africa: Balancing sustainable and economic upliftment
In reflection of its history, South Africa has been driving a social sustainability movement for quite some time, with a strong stakeholder focus on new projects, resulting in robust environmental legislation. South Africa has seen a focus on net zero transition planning, working through the difficulties in trying to find a balance between social and economic upliftment, and the decoupling of carbon emissions from the economy.
The Climate Bill is in the final stages of being signed into law and aims to provide management of climate impacts, response to climate change, ensure a transition to a low carbon economy and protect the planet. This is in addition to the existing Carbon Tax Act that puts a price on carbon, initially of R120 (AUD10.22) per tonne of CO2 equivalent, increasing by inflation plus two per cent until 2022 and then inflation thereafter.
The uncertainty surrounding sustainability reporting, with the changing standards, terminology and the potential risks of not reporting properly, has left companies asking how they simplify, implement and monitor their sustainability impact, from an operational perspective.
Global: A time of flux and progress
Globally, the common thread we see with sustainability reporting is that we are in a time of flux. Both private industry and governments are wrestling with the changing expectations surrounding sustainability reporting. We expect to see the language of sustainability change, moving away from the narrative to a more concise metric focus in line with what we see from financial disclosure. While the average sustainability report has improved drastically in the past few years, we foresee the next step will involve going beyond reporting and regulatory requirements, to making a positive impact.
Get in touch
Our Sustainability Networking Forum series will continue in 2023. If you are interested in attending our future events, please send your details to perth.events@bdo.com.au. If you would like to learn more about how BDO can help your organisation on its sustainability journey, please contact one of our sustainability experts.