A plea to embrace voluntary disclosures

The implications for global companies expected to comply

Companies may embrace this development as a signal to embed sustainability into their business models and operations. As double materiality becomes a dominant foundation for sustainability reporting, companies may increase cross-function collaboration to streamline the disclosure process and leverage insights from reporting activities to inform their business strategies. Such responses are among the positive outcomes sought by sustainability regulation.

Companies may also deprioritise voluntary disclosures to meet mandatory reporting. Some practical reasons include reporting costs and resource demands, competing priorities, and the need to execute strategies. This sentiment is also represented by reports of sustainability teams being fatigued by compliance requirements.

Undeniably, mandatory sustainability reporting is a significant milestone in mainstreaming sustainability thinking into business conduct. By mandating assurance and enforcing penalties for non-compliance, reporting requirements provide comparability and credibility for sustainability reporting. Regulation creates accountability in sectors resistant to voluntary actions, and the standardisation benefits systemic issues such as reducing carbon emissions, energy transition, and protecting biodiversity.

(How) is the sustainability agenda impacted by solely depending on regulations to deliver it?

Regulation is often retrospective, an afterthought for a need to regulate certain behaviors and activities. Gaps or loopholes exist inherently from the inability to foresee all future scenarios, compounding consequences, and changes in circumstances. The slow process of changing laws limits the ability of regulatory frameworks to address rapidly emerging sustainability issues.

Conversely, voluntary initiatives keep up with scientific developments and market innovation to allow faster adaptation of emerging risks or opportunities. For example, the current work of the Taskforce on Nature-related Financial Disclosures (TNFD) is advancing the integration of natural capital considerations into financial decision-making.

Voluntary disclosures have and continue to cover non-mandated areas such as biodiversity, water usage, and supply chain impacts. Hence, voluntary disclosures provide temporary solutions to problems or meet needs while regulations are refined and shape future regulations. For example, the recommendations of the TCFD (Task Force on Climate-related Financial Disclosures) have now been adopted into many of the climate disclosures, both mandatory and voluntary.

At times, regulatory requirements fall short in setting the ambition. Lobbying and vested interests may influence the law-making process. Can we rely on the robustness of the results if we don’t trust the process?

Focusing on compliance may discourage efforts that exceed minimum requirements and experimentation driving corporate sustainability innovation. By proactively engaging with emerging issues, voluntary initiatives have encouraged companies to pioneer novel solutions in green finance and within-value chain mitigation with carbon insetting.

Increased regulatory complexity on smaller firms imposes administrative burdens that reduce their ability to focus on creative sustainability efforts. The B-Corp Certification, a voluntary initiative, has made major strides in engaging small and medium businesses to integrate social sustainability practices.

Regulatory-compliant reports contain context richness locally, but regulations diverge based on national sovereignty. Even the EU CSRD will be transposed differently in each EU country. Furthermore, centralising sustainability data under regulators could alienate public engagement if the data is presented in technical jargon or complex formats that are difficult for non-experts, and information may become less accessible to the public.

In this way, voluntary standards as data translators and marketers for the public drive innovation and research at the macro level. The Science Based Targets initiative (SBTi) breaks down knowledge, and CDP synthesises insights from the gathered data, benefiting other research institutions, universities, investors, and buyers. Open data enables international cooperation and global benchmarking.

Voluntary disclosures offer nuanced insights into a company’s enduring sustainability performance. In contrast, regulatory-compliant reports overlook the qualitative aspects that help investors and markets assess long-term risks and opportunities, as they focus on specific metrics (e.g., green house gas emissions and renewable energy consumption).

Hence, regulatory reports may seem insufficient or overly technical for some stakeholders. Other stakeholders value voluntary disclosures as a sign of transparency and commitment to sustainability. A purely regulatory-driven approach could erode trust, engagement, and competitiveness for proactive companies.

How companies respond to compliance requirements will determine the effectiveness of sustainability regulations. Despite the limits of a regulatory-driven approach, sustainability legislation sets the minimum threshold. Desirably, the law raises the bar for the acceptable level of performance. Hence, regulation levels the playing field for businesses to make sustainable practices profitable (at least initially).

The legislation will eventually force companies that treat sustainability reporting as merely a box-ticking exercise in compliance to change. But change might take a long time. Alternatively, companies that proactively leverage sustainable practices and mindset as differentiating factors might shape and set the pace for regulatory change.

Should your organisation ditch the voluntary sustainability disclosures in the face of increasing reporting obligations?

As with any advice we receive — IT DEPENDS on the perspective of sustainability you adopt. Is it the “do no harm” approach OR the futureproofing, forward-looking approach to building resilient ecosystems?

Legal instruments and compliance requirements are raising the baseline threshold for additionality, a vital principle that evaluates the extra benefit of a particular sustainable practice.

Here, we ask, “Does the law mandate this?”. If the law mandates the action, then it is more a matter of meeting minimum compliance than contributing to our social, environmental, and economic well-being.

The ten recommendations of the UN's High Level Expert Group (HLEG) on Net Zero and movements such as net-positive, contribution claim-making, and carbon handprint advocate for going beyond compliance.

The good news

Sustainability reporting requirements continue harmonising interoperability between voluntary and mandatory standards. Some progress is in European Sustainability Reporting Standards (ESRS) (of CSRD) interoperability with the International Sustainability Standards Board (ISSB), Global Reporting Initiative (GRI), Taskforce on Nature-related Financial Disclosures (TNFD), and the Carbon Disclosure Project (CDP).

Increasingly, national governments are incorporating voluntary sustainability standards like ISSB into national regulations. Nigeria, Turkey, Taiwan, the UK, Japan, Singapore, Malaysia, Australia, Canada, Hong Kong, South Korea, Brazil, Costa Rica, Sri Lanka, and China have decided to use or are taking steps to introduce the ISSB standards into their regulatory frameworks.