Why ESG integrity is at a crossroad between aspiration and regulation

The EY Global Integrity Report 2024 highlights that ESG-related regulatory reporting and data integrity are top risks for organizations.

In brief

• Thirty-seven percent of organizations see complying with new and changing ESG regulations as the greatest challenge in meeting compliance obligations.
• Executives say they’ve undertaken a number of initiatives to address these challenges and they’re being transparent about it.
• Taking an integrity-first approach to ESG can help organizations to tackle immediate risks and achieve aspirational objectives.

As climate-related goals become obligations, and voluntary environmental, social and governance (ESG) efforts become mandatory, a quick scan of the market landscape reveals that the conversation around net-zero emission targets and broader ESG issues has shifted in tone over the last two years from boldly aspirational to compliant box-ticking.

In the past, many organizations set lofty goals, issued audited Global Reporting Initiative (GRI) reports and reported their climate impacts according to Task Force on Climate-related Financial Disclosures (TCFD) recommendations. By contrast, today’s conversations focus on ESG’s significant challenges and risks, particularly around changing regulation, a lack of harmonization across sustainability reporting standards, and data integrity.

Rather than a race to the top, many organizations appear to be in a race to the bottom. Confronted with the need to publicly disclose progress toward their sustainability goals at a time when corporate disclosures are becoming more technical, complex and confusing, organizations are considering scaling back their targets either to what they know to be achievable and easy to measure, or to what is needed to meet current regulatory and compliance obligations. This may become even more prevalent, depending on the outcome of upcoming political elections in more than 60 countries in 2024. While the intentions behind developing stronger mandatory reporting requirements for companies are laudable, it may prove counterproductive as organizations divert efforts from meeting ambitious but hard-to-measure ESG goals to focus on compliance.

Yet, as ESG regulations rapidly evolve around the world, the practical approach of doing only what is required may quickly prove woefully impractical. According to the EY Global Integrity Report 2024, 37% of respondents cite keeping up with and complying with new and changing ESG regulations in various jurisdictions as one of the greatest challenges in their organization in meeting their ESG compliance obligations. 

This is hardly surprising given the proliferation of ESG-related legislation around the world and the lack of harmonization of sustainability reporting standards. From 2011 to 2023, more than 1,255 ESG regulations were introduced globally¹. Notable examples of ESG-related legislation proposed or enacted in the last two years alone are detailed below.

Seven areas where organizations struggle most

Based on the results of the EY Global Integrity Report 2024, as well as EY experience working with clients, there are seven areas where CFOs, chief sustainability officers (CSOs) and other senior executives struggle most to address ESG challenges:

1. Mapping and measuring the sustainability journey. One-third (34%) of report respondents admit that they have limited reliable data to measure progress against performance targets. Measuring and reporting against ESG ambitions and targets drives the need for better, auditable data at the group level, often across multiple markets, business units and brands.
2. Ensuring CSOs are more involved in key decision-making. But, for 29% of report respondents, there is a concern that, without the appropriate level of influence or power, they may not be getting sufficient dedicated resources and budget for ESG initiatives.
3. Adding sustainability solutions to deal with regulatory requirements rather than building them in. This is an approach that gives the impression within and outside the organization that ESG is an afterthought rather than an integral part of the organization’s strategy, value creation and culture.
4. Implementing the right processes, systems and internal controls to strengthen transparency and reporting. Organizations may also have to take additional actions to push ESG data to the level of financial reporting and ensure that it can withstand the rigor of an audit — a requirement by some of the new ESG regulations, including CSRD. In the research, organizations say they’re increasing their focus on ESG and have already undertaken several initiatives to comply with ESG external reporting requirements. Furthermore, nearly two-thirds believe their organization is transparent about its progress. However, as legislation and regulations evolve, more will need to be done.
5. Building a robust risk management program. While there’s increased focus on what to report and how to report, organizations are sometimes missing the critical need to build a robust risk management program around ESG activities. Having the structures in place to report is important. However, a risk management framework over business conduct — of both employees and third parties — in executing ESG initiatives has lagged. Organizations should be putting as much effort into risk management around nonfinancial reporting as they have around their financial reporting. Further, even when organizations do think about it, they focus on investor relations and marketing. However, the increase in regulations and disclosure requirements means that other parts of the business and processes now need to be included. Organizations will require a multidisciplinary approach — which can be challenging for those who operate under a more decentralized and siloed structure.
6. Avoiding the hidden perils of greenwashing. Employees who haven’t traditionally been involved in ESG reporting are being inundated with new requests for information, new acronyms and new standards. Most of these people are already carrying a full load with their regular roles and responsibilities. The more they are asked to take on additional roles, the more pressure they feel to get things done, even if some might not yet have the skills or knowledge to deliver what’s being asked of them.
7. Bearing the weight of market and regulatory scrutiny, as well as the pressure to make meaningful advances in the organization’s sustainability transformation.

These challenges raise the stakes significantly around the types and levels of risk organizations face, which can include regulatory risk, litigation risk, reputational risk and commercial risk — all of which can lead to accusations of greenwashing, greenhushing (underreporting or hiding ESG credentials from public scrutiny) or even fraud, if improperly managed.

Putting integrity first, from strategy to execution to reporting

While the challenges and risks stemming from the evolving ESG regulatory landscape may seem daunting, it’s allowing companies to take a more mature approach to how they’re focusing on their sustainability transformation efforts. It’s also important to recognize that organizations that reach beyond simply meeting regulatory or compliance requirements do so because they see the business benefit in deeply embedding sustainability into their core strategy.

A more mature approach to ESG requires organizations to have clarity of purpose, knowledge (often in the form of reliable data) and an actionable path forward — something many organizations still struggle with.

Organizations need to be comfortable speaking about the importance of ESG integrity as part of their corporate ESG strategy. Organizations also require policies and programs to make certain that ESG measures and reporting address both regulatory requirements in all applicable jurisdictions and fulfill the organization’s stated ESG ambitions.