CORPORATE GOVERNANCE AND SUSTAINABILITY REPORTING REQUIREMENTS

ABSTRACT

Sustainability reporting has gained much importance in the current world of business and is very sensitive to how corporate governance is designed. While sustainability reporting is transitioning from a mere assurance reporting system to a relatively more bureaucratic system, the aspect of corporate governance has come to the forefront in the ability of businesses to address sustainability objectives. Good corporate governance provides reasonable assurance that besides meeting the legal and regulatory requirements, corporate entities implement practices that create value that is sustainable, and beneficial for shareholders, customers, employees, creditors, and the environment. Another dimension in which corporate governance affects sustainability reporting is its capability to determine the credibility of the reports. To reduce the risks of greenwashing, properly constituted independent directors, audit committees and good internal controls will improve the sustainable reporting of the firm’s claims. Thus, the research hypothesis that friendly corporate boards interested in sustainability principles are more likely to oversee the preparation of detailed, accurate, and reliable sustainability reports can be formulated. These reports also help key consumers of the information make informed decisions on a firm’s ESG activities. The relative level of adherence to the international and domestic rule systems is at the core of analyzing regulatory effects on sustainability reporting. For example, bodies like the Global Reporting Initiative (GRI) or the Sustainability Accounting Standards Board (SASB) have their guidelines which corporations striving for increased ESG transparency ratings and measures use as a reference point. However, the domestic regulations also differ in the sense that they may imply different legal requirements to companies. Therefore, the synergy of these standards and regulations may result in similar reporting formats, making it easy for the companies to overcome the differences in legal requirements.

Another external influence whereby legal risks are a distinct factor that influences organizational behavior. Legal consequences that result from non-compliance with sustainability reporting regulations include; fines, loss of reputation, and loss of stakeholder confidence. Hence, the governance structures require to be legally compliant, and ethical in controlling these risks. To make the corporations adhere to the ESG principles, the following policy changes should be recommended Transparency Accountability, Long term Res value creation. Governments should enhance the legislation on sustainability reporting, support the ESG performance disclosure voluntarily, and advance good practices in corporate governance. The enhancement of good corporate governance practices in the business sector will be promoted by companies’ efforts to adopt sustainable business practices thus creating positive change in the business environment for the benefit of the society and the environment.

Keywords

Corporate governance, sustainability reporting, ESG compliance, greenwashing, capacity building, blockchain technology, international trade agreements

INTRODUCTION

According to WCED of 1987, or the Brundtland Commission, sustainable development can be described as a development that occurred in the present to fulfil the needs of the present without compromising future generations fulfilling similar needs.[1] This definition captures a realization of the constraints of resources and the increasing pressure for organizations to attain sustainable development, they are responsible for the impacts they bring to the environment and society as they pursue wealth. The reason why the involvement of businesses in shaping future societies and the environment has become widely discussed in academic and regulatory debates. The corporate world especially in the recent past has felt the need to embrace and show procedures of sustainability. There is also a growing appreciation of the fact that corporate sustainability is central to both social and business sustainability at a long-term level of analysis.

Arguably, the central part of such a shift is corporate governance, which in its broadest sense refers to the systems, structures, rules, and relationships by which companies are directed, monitored, and regulated. Corporate governance has usually been defined as the configuration according to which and in which manner companies are managed and overseen with a view to making sure that they function properly and fairly. The board of directors, the management, as well as the shareholders of the organization, make the decisions that will ensure the strategic goals the business has set in the generation of value in the long-run while observing the legal and ethical standards. Sustainability issues have been increasingly embraced within the strategy and processes of business management and it forms a vital stage in the corporatization of enterprise. Modern theoretical and best practice models of corporate governance have also shifted from a single-minded focus on the financial objectives, suggesting that companies are part of a complex social, ecological system wherein it is their responsibility to function.

Sustainability reporting as an off-shoot of corporate governance is therefore a crucial instrument in this regard. It refers to the act of releasing information pertaining to the effects of a firm on the environment, society and the economy respectively. Such reports aim to help stakeholder to include investors, regulatory bodies, consumers, society in getting an overall view of a firms initiatives in delivering sustainability. Sustainability reporting is different from conventional financial reporting, which is done only based on the economic perspective; sustainability reporting measures a lot of aspects that cause the sustainability and the efficiency of the business ventures and their impacts on the society. Sustainability reporting involves declaring organizational impacts on environment; social and operational management policies and practices of the organization; the measures in place towards managing risks that emanate from climate change, labor issues, and other corporate governance issues.

The increasing expectations about sustainability reporting has made the subject more important than before. Over the last few years there have been observable changes regarding the consumerist loyalty and investor attention towards ESG-business models. It was found in research that 69 % of investors are positive to invest in organizations that have good sustainable measures, and 67% of investors are willing to invest in organizations that are socially responsible and have significant impacts to the natural environment.[2]This means that investors who only care about their own revenue are no longer the only ones, there are those who will also be concerned with the kind of business the company engages in. This has resulted in a considerable change in funding direction with more money channelled to companies that embrace corporate sustainable and ESG factors. The same applies to consumers who are slowly starting to make their choices more based on the sustainable activities done by the brands they support.

At the same time, unprecedented changes are taking place in the world’s regulatory authorities, who strengthen the requirements for preparing and providing sustainability reports. The Corporate Sustainability Reporting Directive (CSRD) has been developed to impose the obligations for corporate sustainability reporting on businesses in the European Union as a way of standardising their reporting mechanisms. Likewise, in the United States of America, the United States Security and Exchange Commission has put forward new rules designed to increase the clarity of ESG related disclosures. These regulatory changes are not isolated in nature but represent a worldwide change whereby governments and regulatory agencies realize the desirability of common reporting structures that will make corporations answerable for sustainability management.

The need for transparency and accountability is also being demanded by the public, which is increasingly informed and active. As consumers and activists gain greater exposure to information through new technologies and social media, they are able to subject firms and organizations to higher ethical standards and press for more disclosure on sustainable concerns. This pressure to be accountable has translated the compliance sustainability reporting into the strategic sustainability reporting since it is now part of reputation and image of a company. These findings argue that CSE is more than lip service because companies disclose ESG practices to reassure stakeholders that they are committed to sustainability despite being regulated to do so.

THE ROLE OF SUSTAINABILITY REPORTING IN ENHANCING CORPORATE GOVERNANCE

Given the current state of global economic shocks such as climate change and the economic meltdown, there is an increasing demand for companies to become more transparent. With contemporary changes, typical company financial reporting is no longer adequate.[3] Corporate governance structures have a direct impact on the reliability of sustainability reports since they offer a framework and enable scrutiny of business practices and professional comportment. Independent oversight is a way to ensure that the measures of sustainability are taken correctly and that there are no manipulations. ESG representatives should be incorporated on the board since they provide miscellaneous points of view pertaining to sustainability issues which can improve decision-making. If standards and protocols are clearly defined, then ethical principles remain a fundamental component of ensuring that reporting processes are accurate and credible. Further, empirical evidences gathered from the case studies of MNCs demonstrate that firms with sound governance provide a better standard of sustainable reporting than other firms, as well as improved investor satisfaction, stakeholder’s satisfaction, and better financial performances in the long run. As such, this highlights the importance of corporate governance in ensuring corporate vision and mission are achieved in line with the sustainable development goals.

a) BOARD COMPOSITION

Boards, including ESG counterparts, will consist of various specialists and their approach towards problems is diverse. This interconnected model is essential as the sustainability risk and opportunity can be hidden from managers who have a specialization in less connected fields. This gives confidence to firms when formulating business strategies that ESG factors are not only observed but also prioritized; thus, increasing the value when oriented in the long term without risking on possible harms.

Outside directors, who are appointed without being members of the company’s staff, do not have an ability to bring their self-interest motives into play and therefore ensure that conflicts of interest and over-optimistic biases are avoided. By being independent, they add checks and balances on the governance structure making sure that decisions being taken are for the benefit of all stakeholders and not just management or shareholders. Consequently, independent directors act as watchdogs over the corporate business leadership and spend more time seeking to ensure that corporate behavior is accurately portrayed in relation to its sustainability performance. ESG factors are integrated into corporate strategies by independent directors to monitor the activities of the company and check abuses.[4]

It also guarantees sustainable development goals are aligned to the overreaching corporate strategy of the company, thus providing surety of the company’s adherence to sustainable development. It enhances stakeholders’ confidence because it indicates that the company is also concerned with not only ripping good returns but also with enduring worldwide sustainability issues. Finally, this leads to credibility that helps to ensure more responsible attitude from companies, their improved image, and ultimate sustainability.

b) AUDIT COMMITTEES

Most audit committees ‘sustain’ an essential responsibility of supervising both financial and non-financial disclosure, including sustainability reporting and compliance with legal and ethical requirements. They are part of the process of confirming the correctness of sustainability reports since they track the processes and information behind the reports. These audit committees hold a vital task of providing leadership in the area of sustainability reporting and ensuring that reporting meets the needed standards in terms of accuracy and compliance to the law and ethical learning.[5]Audit committees ensure that such disclosures meet statutory conditions as well as satisfying the items and information to be disclosed. The governance responsibility entails assessing whether the information that is processed and reported in sustainability reports is not only reliable but also relevant to the company’s responsible ESG impact.

Besides, audit committees determine the likelihood of sustainability reports containing material misinformation or inaccurate representation of the facts. They are expected to develop recommendation strategies and changes to manage any such risks. As gatekeepers of organizational information, audit committees guarantee the investors and shareholders that only accurate information has been released to the public.

Additionally, audit committees help to ensure the communication between some members and organizational structure and external members, such as internal and external auditors, as well as on making decisions regarding ESG issues. This coordination is integral to guaranteeing that decisions made are for the benefits of the stakeholders, and through accurate and reliable reporting, stakeholders gain more trust with the company’s sustainable development.

LEGAL AND REGULATORY FRAMEWORKS

a) International Standards

Global Reporting Initiative (GRI): Contains the principle framework for sustainability reporting that will require all companies to follow ESG reporting standard. Through benchmarking, the GRI framework promotes transparency of how organisations affect the environment, people, and society. Such guidelines are accepted by organizations to promote the presentation of sustainability reports which, meets the expectations of the stakeholders as well as conform to different rules and regulations of the governments as well as faces the challenges like climate change and inequality in society. Sectors standards of the GRI: The GRI is designed to assist organizations to report their ESG performance credibly and enhance stakeholder engagement, helping the firms to align their reports with SDG targets and requirements. [6]
Sustainability Accounting Standards Board (SABS): in the global economy, the IFRS offers industry-specific disclosure standards for various industries due to their instinct features. Correcting for these potential issues, SABS’s approach to sustainability metrics directly relates sustainability to the operations of a company, thereby providing for more meaningful comparisons between firms in the same industry. These standards help organisational to announce the financially relevant sustainability information which appeals its significance to investors and other parties. By addressing both the contend and standards of subsystem ESG factors, SABS helps integrate sustainability reporting and disclosures into the system of core financial reporting to satisfy investor expectations of corporate governance and improve organizational accountability.[7]
Task Force on Climate-Related Financial Disclosures (TCFD): Presents detailed guidance for climate-risk disclosures in categories of governance, strategy, risk management, and metrics and targets. The TCFD framework is intended to allow companies to evaluate the risks and opportunities of climate change in their financial statements to allow investors and lenders amongst others to make better decisions. With the adoption of forward-looking information and scenario analysis, the TCFD has also improved the quality of climate change risk disclosures by making them standardized, comparable and accurate across different industries and geographical locations. Due to its prevalence and prominence, it has become a standard tool used in climate transparency and accountability initiatives across the world due to its wide use. The Task Force on Climate-Related Financial Disclosures (TCFD) provides a framework for companies to disclose climate-related risks and opportunities across four core areas: governance, strategy, risks and measures, and targets.[8]

b) Indian Legal Frameworks

India has adopted the Companies Act, Section 135 on Corporate Social Responsibility (CSR) in 2013 which made it compulsory for companies having prescribed turnover, net worth and net profit to spend money on social and environmental causes. Further, SEBI has come up with BRSR for listed entities defined in Regulation 7 of the SEBI (IT) Regulation, 2018 otherwise known as Business Responsibility and Sustainability Reporting. This initiative focuses on ESG factors by requiring companies to provide specific reports on the policies, practices, and KPIs adopted and implemented by the company regarding sustainability aspects. With the introduction of ESG disclosures, SEBI seeks to improve the standard of corporate governance in India by promoting ethical business practices within the country and preparing the Indian economy for compliance with the growing global trend of sustainability practices. The BRSR also aids in shifting from a less tangible to a more quantified and structured process of reporting ESG performance in the Indian context.

EFFECT OF THE INTERNATIONAL TRADE AGREEMENTS ON THE ESG STANDARD

TRADE POLICIES

Corporate sustainability reporting and ESG compliance have seen global trade agreements embracing or requiring sustainable reporting provisions in the agreements. These provisions are indicative of a higher trend towards sustainable trade that enhances environmental standards, social subjects, and governance issues.[9] For instance, Free Trade Agreements contain chapters on trade and sustainable development: the European Union FTAs specify commitments to accountable and sustainable development and decent treatment of labor standards together with the environmental conditions of the partner country. Likewise, there are environmental commitments in regional trade pacts such as the United States-Mexico-Canada Agreement (USMCA). When sustainability goals are incorporated into trade policies, then such agreements not only encourage adherence but also bring about parity to the extent that ESG criteria are part and parcel of world trade. To qualify for these preferences, firms are motivated to improve ESG disclosures with the aim of meeting the criteria required to access preferential trade benefits.

GLOBAL COMPETITIVENESS

Compliance regarding ESG factors is central to the optimization of the global competitiveness of a firm. Especially as international markets are becoming conscious of sustainable solutions, those business entities that showcase strong ESG capabilities are more likely to have an advantage. Foreign market access is regularly invested in compliance with more rigorous ESG requirements; for instance, the EU’s proposed CBAM would impose carbon levies on imports from countries with lenient rules regarding environmentalism. Furthermore, procurement teams in multinational firms expect their vendors and other counterparts to uphold ESG standards in global supply chains amid many risks. Failure to meet the set standards can lead to fallout from high-value and high-visibility trade relationships, limited market access, and tarnishing of the organization’s image. On the other hand, organisations that are recognized globally for their good ESG standards get investment from other countries, get good trade terms and improve the worth of their brand reputation in the international markets. Essentials of Environmental, Social, and Governance (ESG) are rapidly rising as best practices for effecting the management of corporate strategies and choices, including corporate value, growth, and investment.[10] The foregoing is a clear pointer to the fact that corporate governance must adapt to International ESG benchmarks in order to succeed in a competitive environment.

CHALLENGES IN GOVERNANCE REPORTING

a) Regulatory Ambiguities

Variations in sustainability reporting standards across countries present major compliance issues to multinational companies due to the diverse requirements, structures, and expectations in different countries. Sustainability reports are not uniform and preparing them is a complicated process; the more so as it leads to greater administrative load and higher chances of failing to meet the standards. Moreover, ESG factors differ from one stakeholder to another and vary from culture to culture, thereby compounding these issues and the pressure that shoots up for international organizations to come up with similar guidelines and work together.

b) Resource Constraint

Small and medium companies especially are not in a position to afford proper structural measures of good governance or elaborate organisational sustainability reports. While doing their sustainability reports, issuers seem to face some challenges such as a lack of financial capital to invest in the production of high-quality sustainability reports, lack of access to technical assistance in performing sustainability reports and most do not employ ESG professionals. Also, when it comes to compliance, there is another issue; SMEs may not be fully aware of the intricacies of certain regulations and laws. Such constraints put a question mark over their transparency and efficiency, at a time when more and more market players start focusing on social and environmental responsibility.

c) Greenwashing Risk

When there is no strict regulation, some firms can portray themselves as more environmentally sustainable than they are in what is commonly known as greenwashing. This is unhelpful and damaging because it weakens the credibility of sustainability programs, damages stakeholder confidence, and distracts from beneficial steps toward environmental and social responsibility. It has legal implications, fines and litigation risks and can cause harm to the company’s image.[11]The implication is that, in addition to lawsuits, greenwashing may lead to other legal consequences and reputational costs and underscores the importance of sound governance and regulation to address this problem.

RECOMMENDATIONS

To ensure our planet’s long-term viability, legislators, regulators, and multilateral organisations are implementing substantial reforms that reshape how we work, live, and prosper. Key international initiatives pushing this shift include the European Union’s Green Deal, the United States’ Inflation Reduction Act, and the United Nations’ Sustainable Development Goals.[12] In order to deal with the throw away factors and related issues of governance and sustainability reporting the following are important. First of all, it is vital for international organizations to jointly have an aim at setting common sustainability reporting standards. It would decrease the differences, ease the concordance for the MNCs, and raise the similarity of the disclosures between the jurisdictions. Furthermore, more capacity for SMEs should be established and Governments and Industry associations should offer training to SMEs and provide materials and knowledge by which the SMEs may apply sustainable business practices and enhance the quality of sustainability reports. Successful policies may be included to ensure that more participants are provided additional resources support to facilitate wider ESG integration.

Enhancement of enforcement measures is on equal operational importance. The flow of sustainability reports has to be accompanied by higher sanctions for non-compliance and a better implementation of procedures for guaranteeing the credibility and honesty of disclosures. Moreover, use of innovative technologies like blockchain can greatly add to increased transparency and currently unattainable real-time tracking in sustainability reporting. Being immutable and verifiable, these technologies can also increase stakeholders’ trust and reduce compliance-related issues, thus providing a foundation on which credible ESG disclosures could be established.

CONCLUSION

In conclusion, sustainability reporting and company management are intertwined since sound governance systems are the pillars of sustainability reporting, and good corporate governance systems are prerequisite to ESG reporting. Corporate governance ensures that sustainability principles are integrated into a company’s planning and implementation, that the business behaves ethically and sustainably according to international sustainable development standards. Although the shift towards sustainability integrated into governance has been progressing in pace, the full integration barriers are still present in the different industries and geographical areas. These challenges are largely driven by the legal discrepancy, the absence of consistent policy for carrying out ESG reporting, and easily understandable by policy-makers. The lack of single appropriateness standards on a global dimension poses a significant issue for businesses when issuing such reports since they must work within a patchwork of varying legal frameworks. Also, the inconsistency of ESG data presenting a hindrance to stakeholders who include investors and consumers in evaluating and comparing companies’ sustainability performance. It evidences why the international synchronisation of ESG reporting disclosures is currently so critical.

Thus, it is crucial to drive the initiatives toward making the ESG reporting standards more consistent. Through international synchronisation of these standards, businesses will be in a position to provide coherent and less ambiguous figures and figures that are fully comparable, hence enhancing corporate governance and accountability. The use of global standardization would alleviate the reporting burden in their numerous operations within the home and other countries to conform to domestic and international sustainability standards. Moreover, it would also help simplify decision making for investors, regulators and other participants in the process based on credible ESG reports. In the same regard, specific legal and policy initiatives are required to fill the emerging gaps in sustainability reporting. Therefore, governments and regulators to play an active and effective part for implementing such a framework for defining best practices related to compliance with ESG criteria and disclosure. But they should not be so prescriptive that they only serve the letter of the law; policy measures should also foster innovation and further enhancement of sustainability processes. The policymakers should encourage organisations to report beyond the legal minimums which will encourage more companies to take further measures to advance sustainability.

This paper has however outlined ways in which businesses, especially the smaller ones, can be encouraged to adopt sustainability reporting and this is one of the methods. It found out that many firms are still challenged by the process of ESG reporting since they are SMEs, they do not have sufficient resources, and the right information and tools to use. A few development activities like training, workshops, and use of sustainability reporting tools make the SMEs more capable and ready to report better ESG performances. Such programmes not only aid SME companies to be able to adhere to new developments in reporting requirements but also make the companies to be part of the sustainability agenda. Extending support in the way that is being discussed at present also does not make sustainability a selective tactic for big companies, but for every company all over the world. Technological advances also has a significant part to play in increasing the clarity, credibility and authenticity of sustainability reports. Sustainability data is difficult to fake, alter or manipulate that is why technologies such as the blockchain are capable of offering a global platform where such data can be safeguarded and visible to all parties involved. It is faster to adopt blockchain, an ideal approach for tracking and authenticating ESG data in real-time as stakeholders continue to update their websites. Such disclosures are especially important for creating confidence in stakes holders, consumers, investors and regulators. At the same time, through the use of blockchain, companies will be able to provide more accurate disclosures about their environmental and social footprint and document their journey toward sustainability. Thus, when legal as well as technological and capacity building reforms are successful this will provide a system for corporate direction and disclosure. It will also help them to be economically successful and also create the social and environmental sustainable impact. Corporate strategies can coincide with global sustainable development goals in order to see future organizational success while working on tackling global issues. The synthesis of these streams will expeditiously push organisations to move towards a more systemic view of sustainability, making enduring positive changes for business, society and earth. It will also be helpful for attaining a sustainable development whereby everyone in the society will be able to live a prosperous life in the future.

REFERENCES

OECD Principles of Corporate Governance (2015)
Companies Act, 2013 (India) – Section 135 on Corporate Social Responsibility (CSR)
SEBI’s Business Responsibility and Sustainability Reporting (BRSR) Framework
Global Reporting Initiative (GRI) Standards
Sustainability Accounting Standards Board (SASB)
Task Force on Climate-Related Financial Disclosures (TCFD)
European Union’s Corporate Sustainability Reporting Directive (CSRD)
United States-Mexico-Canada Agreement (USMCA)
Case studies on multinational corporations addressing ESG compliance
Reports on the impact of blockchain technology on sustainability reporting

[1] Santosh Sabharwal, Aishvaraya Bansal, Corporate Governance and Sustainability Reporting- Responsibility towards Stakeholders and Society: A Study of Top 10 Indian Companies, 35, business analyst, 2015

[2] PwC, https://www.pwc.com/gx/en/global-annual-review/2023/pwc-global-annual-review-2023.pdf (last visited Jan 2, 2025)

[3]Alex Thanh-Nhat, Marketing Consultant Shares Insights blog, Marketing eye, (Jan 2, 2025, 4:00 AM)

[4] Directors’ Institute, https://www.directors-institute.com/ (last visited Jan 2, 2025)

[5] Deloitte, https://www2.deloitte.com/us/en/pages/center-for-board-effectiveness/articles/audit-committee-responsibilities.html (last visited Jan 2, 2025)

[6] DRI, https://www.globalreporting.org/standards/ (last visited Jan 2, 2025)

[7] SABS Standards, https://sasb.ifrs.org/standards/ (last visited Jan 2, 2025)

[8] TCFD, https://www.fsb-tcfd.org/recommendations/ (last visited Jan 2, 2025)

[9] European Union, https://policy.trade.ec.europa.eu/development-and-sustainability/sustainable-development/sustainable-development-eu-trade-agreements_en (last visited Jan 2, 2025)

[10] Accenture, https://www.accenture.com/in-en/insights/consulting/esg-reporting-compliance-competitive-advantage (last visited Jan 2, 2025)

[11] Theodora McCormick, The Legal and Reputational Risks Associated with Greenwashing, Epstien Becker Green (Jan 2, 2025, 4:52 AM), https://www.ebglaw.com/insights/publications/the-legal-and-reputational-risks-associated-with-greenwashing

[12] Directors’ Institute, https://www.directors-institute.com/ (last visited Jan 2, 2025)

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