Without action, do corporate ESG disclosures withstand scrutiny?

The world of ESG is witnessing an overwhelming overcrowding of ESG disclosures. There’s a vast amount – mandated and voluntary – each having its own set of metrics and KPIs. Companies are becoming increasingly environmentally and socially conscious. Issues concerning climate, just transition, diversity, equity and inclusion (DEI), human rights, labour and the supply chain are progressively being reported against. Even though companies are steadily being transparent on the ESG front, are their actions and implementation plans (or lack of) telling a different story?

Disclosures platform CDP (Carbon Disclosure Project) recently published a report stating that less than 5% of companies in the EU have a credible net-zero transition plan. Such a concerning figure emphasises the importance of businesses demonstrating action beyond disclosure “tick-box” exercises. This is especially relevant as EU and US regulators seek to increase scrutiny and standardise disclosure requirements.

Recent research suggests many companies report on ESG matters, as they believe it could have a lasting effect on how they are perceived by their key stakeholders, especially investors. This may be akin to greenwashing, as some companies reporting on these issues lack action on the ground. CDP views most plans as lacking “ambition and transparency in key areas necessary to show serious action, such as in governance, financial planning, and value chain engagement”. Multinational automotive firm Tesla was notably removed from the S&P 500 ESG Index over claims of racial discrimination and crashes linked to its autopilot vehicles. More recently, Indian conglomerate Adani Enterprises was cut from the same index over allegations of stock manipulation and accounting fraud. This demonstrates that reporting activity alone does not safeguard firms from scrutiny over poor ESG performance.

What does this mean for ESG disclosures? It highlights that even the most transparent ESG disclosures cannot replace the necessary action required to substantiate responsible business. ESG disclosures remain essential, as reflected by growing regulatory inspection and investor expectations.

So how should companies ensure it is not just about reporting metrics and indicators, but making sure they are meeting set goals? Are employees being treated fairly? Is the supply chain sustainable? Are there just transition plans in place that involve serious action? How about diversity and inclusion? Beyond simply answering these kinds of questions, companies need to define their ESG goals, ensure that KPIs are impact-based and in alignment with the ESG strategy of the company.

Companies need to take a step further, not only to ensure that they are focusing on what KPIs and metrics to report, but, to avoid greenwashing accusations, also to ensure that there are tangible action and plans to meet ESG targets.