By: Noelle Fuchs

We are constantly reminded that individual contributions matter greatly in the fight against climate change. Reduce waste. Reuse bags. Recycle. While all of this is undoubtedly important and does make a difference, it is equally, if not more, vital for corporations to be a part of the solution towards establishing a sustainable future for our planet. As pivotal players impacting the economy, environment and society, companies are slowly starting to experience the pressure to act responsibly. The notion of Corporate Social Responsibility (CSR) and Environmental, Social, Governance (ESG) reporting is gaining traction in the business world to not only appeal to investors but to hold the corporate world more responsible for their actions. But to what extent is this nonfinancial reporting wave benefiting the environment? What are the pitfalls to this approach and how can US environmental policy play a role? 

The term “corporate social responsibility” (CSR) was coined by Howard Bowen in 1953. It became much more relevant in 1997 with the founding of the Global Reporting Initiative (GRI).^[1] Following numerous incidents of corporate indifference, the CSR movement, now commonly now referred to as ESG, was created in an attempt to hold corporations responsible for stakeholder engagement and their overall contributions to society. This includes, but is not limited to, reporting their greenhouse gas emissions, company organizational structures and diversity, equity, and inclusion initiatives. Companies are beginning to report everything from scope 1, 2 and 3 emissions to the percentage of women in senior leadership positions. One of the primary reasons for supporting these types of nonfinancial reports rests on the notion that large corporations have an immense impact on society and therefore holding them responsible for their actions, through the mechanism of mandated reporting, might generate a healthier, safer, and more productive society.  As the effects of climate change become more potent, the ‘E’ in ESG (environmental) has proven to have important implications for how a business discloses its impact on the natural world.^[2] Enlightened companies are recognizing a sustainable environment is more than just about goodwill, but that it creates values. 

As with many matters of sustainable development, Europe is currently leading the charge over the United States when it comes to nonfinancial or ‘sustainability’ reporting policy and regulations. Most notable is the EU’s most recent adoption of the Corporate Sustainability Reporting Directive (CSRD) in January of 2023.^[3]The directive will impact over 50,000 companies by extending the current scope of the EU taxonomy that mandates reporting on various environmental, social and governance (ESG) indicators.^[4]  More specifically, the EU taxonomy is embedded within the EU’s sustainable finance framework as a way to increase the level of transparency between companies and investors. It provides common, standardized criteria for companies to better understand what economic activity is considered as environmentally sustainable.^[5]

While at first glance CSRD will seemingly have more impact on a company’s reporting strategy rather than their sustainability practices, the goal of the directive is to guide investment towards sustainable enterprises. Some of the goals set forth in the CSRD, like reaching climate neutrality by 2050 and targeting net zero emissions in the EU, can only occur if asset managers and banks are able to access a company’s sustainability performance to determine where to invest.^[6] In terms of effectiveness, a study conducted by Aluchna et al., solidifies the impact that mandatory nonfinancial reporting can have on large companies. When subjected to legislation regarding mandatory reporting, larger companies generally witnessed increased ESG performance particularly in the social and environmental areas.^[7]  

So… why doesn’t the United States have similar policies if they’re proven to have benefits for the environment and society in Europe? It is a compelling question. In 2019, proposals on ESG disclosure were introduced into the House of Representatives to urge the US Securities and Exchange Commission (SEC) to expand disclosure on human capital.^[8]  Yet, despite rising demand for ESG disclosures from US investors, several roadblocks entrenched in the US political system created an arduous path forward for nonfinancial reporting reform and legislation. On March 6, 2024, the SEC approved new rules for corporate disclosure that only incorporated some aspects of the original proposal. For example, large companies are no longer required to disclose their value chain emissions.^[9] This increases the likelihood that pollution from operations directly outside of the company’s purview can be easily concealed from investors and the public.

Backlash and threatened lawsuits from all sides has enhanced dissonance between the companies and environmental organizations who support more stringent rules and those who are against them, like Republican lawmakers, fossil fuel producers and farmers.^[10]

Outside of the US, regulatory requirements for non-financial reporting and sustainability-oriented policies valued stakeholder input and increased reliance on more flexible principles. This is a stark contrast to the US perspective. One example of this is the broader skepticism that many Americans have in respect towards government intervention. Our approach places a heavier emphasis and trust in market forces to manifest social benefit.^[11] Many Republican lawmakers have deemed ESG as “woke capitalism”, with the intent of disproportionately prioritizing liberal goals over investment returns.^[12] The strong dominance of the US fossil fuel industry is another source of opposition for strengthening disclosure requirements.^[13] Additional barriers include an increased risk associated with mandatory disclosures and the preference for a corporation’s autonomy to make decisions that are best for its shareholders.  

Although many large US corporations are taking the initiative to engage in nonfinancial disclosures and reporting, more must be done to standardize and institutionalize corporate nonfinancial reporting. To best standardize the many ESG rating and reporting strategies, the SEC and Congress must introduce new rules. A report written by Virginia Harper Ho, a Professor of Law at CityU of Hong Kong, suggests a tiered approach embedded in reform that involves different levels of reporting.^[14] As Congress considers policies regarding non-financial reporting, it is important to consider the progress that has already been made in the EU as well as how these lessons can inspire us to leverage a sustainable finance and a market-based strategy to shift the US perspective.

Despite the controversy surrounding ESG within the United States, the merits of nonfinancial reporting are hard to ignore. Enforcing climate disclosures for companies, especially large corporations, doesn’t just eradicate the potential for economic development within a society. On the contrary, it drives investment towards sustainable development by enabling more investor security, protecting investors from greenwashing, and supporting companies as they become more climate friendly. The EU’s groundbreaking Corporate Sustainability Reporting Directive demonstrates the vital role that mandatory ESG disclosure laws can play in driving sustainable investment and corporate responsibility to address climate change. The US should listen. We should take up the challenge to do the same – harness the power of ESG reporting to build a more sustainable future. Doing so would be a game changer in the fight against climate change. Our country must have the political courage to act before it is too late. 

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^[1] Allen, K. (2020, May 14). From CSR to ESG: A brief history. LinkedIn. https://www.linkedin.com/pulse/from-csr-esg-brief-history-kaitlyn-allen/

^[2] Ibid.

^[3] ClimateAction. (2023, June 13). What implications does the CSRD have for non-financial disclosures? climateaction.org. https://www.climateaction.org/news/what-implications-does-the-csrd-have-for-non-financial-disclosures

^[4] EU taxonomy for Sustainable Activities. finance.ec.europa.eu. (n.d.). https://finance.ec.europa.eu/sustainable-finance/tools-and-standards/eu-taxonomy-sustainable-activities_en

^[5] Ibid.

^[6] Ibid.

^[7] Aluchna, Maria (12/2023). “From talk to action: the effects of the non-financial reporting directive on ESG performance”. Meditari Accountancy Research(2049-372X), 31 (7), p. 1.

^[8] Harper Ho, V. (2020). Non-Financial Reporting & Corporate Governance: Explaining American Divergence & Its Implications for Disclosure Reform Accounting, Economics, and Law: A Convivium, 10(2), 20180043. https://doi.org/10.1515/ael-2018-0043

^[9] Tabuchi, H., Livni, E., & Gelles, D. (2024, March 6). S.E.C. approves new climate rules far weaker than originally proposed. The New York Times. https://www.nytimes.com/2024/03/06/climate/sec-climate-disclosure-regulations.html?unlocked_article_code=1.bE0.dXfq.4vjXFYcfTCBt&smid=url-share

^[10] Ibid.

^[11] Harper (2020)

^[12] Meredith, S. (2024, February 27). Bank CEO shrugs off U.S. War on “woke” capital, says ESG investing is good for business. CNBC. https://www.cnbc.com/2024/02/27/war-on-woke-capitalism-stanchart-ceo-says-esg-is-good-for-business.html?__source=iosappshare%7Ccom.apple.UIKit.activity.Mail

^[13] Tabuchi et al. (2024)

^[14] Harper (2020)