Setting climate targets without a consistent way to keep companies accountable will not work. This has been the main conclusion that both the EU and U.S. have drawn in recent years, leading to a slew of changes in corporate reporting. In the EU, policymakers have drawn up a new sustainability reporting framework called the Corporate Sustainability Reporting Directive (CSRD) with corresponding sustainability reporting requirements. In the U.S., the Securities and Exchange Commission (SEC) is expected to imminently strengthen its climate disclosure rule, while the California Assembly has recently passed legislation requiring all large companies to disclose scope 1, 2 and 3 greenhouse gas emissions.

This push for increased sustainability disclosures is putting ESG even higher on the priority list for executives. While in the EU, corporates have engaged with the specific requirements that will apply to their sector, several U.S. companies plan to outright sue the SEC for any changes made. More generally, many EU and U.S. companies have made low or zero-carbon pledges, but many don’t yet necessarily have a fully developed plan for how they will get there, making reporting much more complex. A situation that is exacerbated by the nascent state of ESG data collection.

Regardless of the political reception, companies must be aware of the specific changes underway and how the increased disclosures will open a much larger window into their sustainability communication, risk management, marketing and business strategy.

How companies meet this moment matters. Some may enter only into compliance mode and miss the opportunity to communicate effectively. Others may continue boldly without the right substance and step into a different kind of peril. But these do not harness the long-term value of ESG. What companies need now more than ever is the right ESG strategy, which includes a deliberate and unified trajectory for where the company wants to be and how it will get there. The fragmented and parochial approach at the country, function and even agency level has to evolve to a cohesive and connected outlook.

What does the Corporate Sustainability Reporting Directive mean for businesses?

The new CSRD will require all large and EU-listed companies to disclose detailed sustainability-related information. Corporates will have to report against comprehensive and sector-specific ESG impacts, risks and opportunities. This can include revenue linked to certain sectors (e.g., fossil fuels and chemical production) and remuneration policies linked to sustainability matters for board members.

Companies that have their headquarters outside of the EU, but with operations above a certain size in the EU (see thresholds below), will also be required to disclose against the EU’s standards. This could significantly alter the reporting practices of many U.S. companies, given the expected differences in level of detail required between the EU’s standards and the anticipated SEC rule.

The proposed SEC rule will require additional reporting on the governance and oversight processes of climate-related risks by the company board. It is also expected to require companies to disclose whether they have a climate transition plan, and if so, how they intend to reach the specific goals and targets.

How do the Corporate Sustainability Reporting Directive and U.S. climate disclosure frameworks compare?

While both disclosure frameworks will lead to an increased reporting burden for companies operating across the Atlantic, in comparing, it becomes evident that the global impact of the EU framework is much larger.

Even though the U.S. climate disclosure risk framework does apply to foreign registrants, the number of foreign companies that are registered with the SEC is rather small. In contrast, the new CSRD will apply to all third-country undertakings with a net turnover of €150 million in the EU, and either a “large” subsidiary or a branch that generates €40 million net turnover. This means that parent companies with a sufficiently large branch in the EU will be due to report under the CSRD in 2029, a significant extraterritorial reach of EU legislation.

Additionally, while the EU is actively coordinating with the International Sustainability Standards Board (ISSB) to ensure alignment between the EU’s extensive reporting framework and the International Financial Reporting Standards (IFRS) that are used in many other parts of the world, this seems to be less of a concern for the United States.

How can companies navigate the new sustainability and climate disclosures?

There is no doubt that the new reporting rules, especially those entering into force in the EU, will require many global corporates to significantly increase their data collection and disclose more details on their sustainability journey than ever before. This will open up corporates to significantly more scrutiny and judgment than before.

Yet this is only the beginning. The step change in disclosure requirements is opening a window onto what corporates can expect in the coming years on ESG.

FleishmanHillard’s global ESG advisory approach helps corporates to anticipate the shifting ESG sands in a coherent and connected way across policy, legal, brand, communications and reputation:

Preparation: helping organizations understand what is coming up and how to position themselves

• Global horizon scanner: identifying relevant sustainability policy trends and their legal implications.

• Green authenticity gap: analyzing the alignment between corporate positioning and stakeholder expectations.

Corporate narrative development: advising on globally resonant and locally relevant messages for corporates in any sector to help manage their reputation and positioning.

Execution: helping clients walk the walk

• Bringing ESG reports to life: assisting with the production of sustainability reports from concept to conclusion, underpinned by expert knowledge of different global rules and regulations.

• Strategic partnership building: advising on external profiles (civil society, ESG board representatives) to help boost corporate presence and positioning.

International event participation: identifying impactful speaking opportunities and advising on a corporate narrative that resonates with the latest ESG developments.

Strategic advisory: ongoing advice and support

Across PA, PR, reputation management and crisis communications based on in-depth expertise of global sustainability trends.

Ensuring a 360-degree approach to sustainability across all corporate functions is essential to a successful business strategy. The sustainability window is being cast wide open, and we can help provide organizations with the clearest perspective.  

Read our report, “EU and U.S. Sustainability Disclosure Requirements — a FleishmanHillard Perspective” for more.

Patrick Yu, GM, SVP and Senior Partner, FleishmanHillard Hong Kong

The global landscape for environmental, social and governance (ESG) reporting is in the midst of rapid transformation, driven by new standards and evolving regulations while pressed by broad-based demand for greater transparency and accountability, and all set against a backdrop of a growing number of investment decisions being shaped by ESG considerations.

Investors of all stripes (institutional, pension, private equity etc.) plus other stakeholders want clarity and consistency in the ESG audit process so they can make the correct investment decisions. Many already undergo due diligence on ESG credentials before putting money into funds, M&As or other company financings, but they want to use standardized measures as a foundation.

In our new report, The New World of ESG Compliance and Communications in Asia Pacific, we look at the new standards benchmarks for ESG Reporting from the International Sustainability Standards Board (ISSB). We also take a look at the readiness of companies and different jurisdictions to adopt them.

The stakes are high. Bloomberg Intelligence reports that ESG investable assets surpassed $35 trillion in 2020 and could reach $50 trillion by 2025 – that’s about one-third of projected assets under management globally. For fund managers and investors to be absolutely confident in the integrity of the ESG products they sell or buy is paramount.

In our Future of Asset Management in Asia report released earlier this year, we found that 80% of investors place a high value on strong ESG product offerings, especially those in mainland China (90%) and Hong Kong (80%).

Why effective ESG communication is essential

In June, the ISSB issued its first two standards that set a new global benchmark for such reporting. In parallel, regulators in the U.S., EU and Asia Pacific are moving ESG disclosures from voluntary to mandatory. The moves add up to rapid change and genuine progress in ESG reporting.

Essential to this are effective ESG-related communications – a true business imperative. Besides meeting compliance requirements, companies must craft compelling ESG narratives that satisfy diverse stakeholder expectations.

Many companies are in fact well underway in upgrading their ESG reporting processes. Almost all (99%) of S&P 500 companies voluntarily publish ESG reports in some form, while 85% of Hong Kong-listed companies disclose details of climate-related risks and mitigation measures. That said, disclosure is not uniform across jurisdictions, of which few require independent auditing of claims.

The two new ISSB standards cover general sustainability-related risks and opportunities, and climate-related disclosures. Both are voluntary and apply after Jan. 1, 2024, with implementation by jurisdictions in Asia Pacific and the EU likely by 2025.

In Asia, Hong Kong Exchanges and Clearing (HKEx) became one of the first in the world to announce plans to align with the new ISSB standards, which include new mandatory climate-related disclosures that supersede the current “comply or explain” system. In Singapore, the stock exchange is taking a phased approach to mandatory climate reporting, applying these rules in stages across different industry sectors.

ESG implications and next steps

It’s clear that investors increasingly seek sustainable investments in response to greater awareness of climate change, energy security and ethical finance. Fortuitously for them, higher ESG performance is also seen to correlate with lower risk and better long-term profitability.

So, what are the implications for business leaders in the Asia Pacific?

Regulatory changes and investor demand for new reporting standards mean sustainability information is rising to an equal footing with financial information.

Stricter reporting guidelines and investor scrutiny mean ESG is more integral to corporate communications strategies, so it is vital to develop a strong narrative.

Regulatory trickle-down will hit businesses caught up in the supply chain of companies that need to be ESG compliant, with the key sticking point being Scope 3 emissions.

Regulators worldwide are committed to interoperability and seek an alignment of ESG standards to ease the reporting burden for companies and aide investor decision making.

Companies doing business in Asia Pacific are rightly focused on compliance with ESG reporting standards and regulations as disclosure moves from voluntary to mandatory.

We recommend eight steps to prepare for ESG-driven transformation:

Begin now: ESG reporting is more and more urgent; companies have limited time to comply.

Explore sentiment: perception studies help identify investor sentiment and views on corporate ESG performance.

Build trust: assess your data for alignment with applicable mandatory and voluntary frameworks and identify gaps and actions.

Talk to investors: integrate ESG messaging for more active investor relations.

Tell compelling stories: refresh and update narratives and communications materials around ESG.

Inspire collaboration: use internal communications to improve staff knowledge of relevant ESG standards.

Plan for the worst: prepare for ESG-related risks such as a greenwashing accusation, non-compliance or action by consumer or shareholder activists.

Stay on track: monitor the development of global and local ESG standards.

Asia’s multiple jurisdictions create opportunities and challenges in ESG compliance and communications. Having a trusted advisor will help you navigate the complexity of the ESG landscape in the future.