ADVANCING SUSTAINABILITY REPORTING

ESSAY: ADVANCING SUSTAINABILITY REPORTING: BRIDGING MANDATES WITH RIGOROUS STANDARDS

INTRODUCTION

Sustainability has become central to modern corporate accountability, with businesses facing growing pressure to minimize their environmental impacts and contribute positively to society. Sustainability reporting is a key tool for this, yet its effectiveness in driving meaningful progress remains debated.

Mandatory sustainability reporting frameworks, such as the European Union’s Non-Financial Reporting Directive (NFRD) and the U.S. Securities and Exchange Commission’s proposed climate disclosure rules, aim to institutionalize corporate responsibility. By mandating transparency, these policies seek to address information asymmetries, empowering stakeholders to make informed decisions and hold corporations accountable for their impacts. Yet, despite these intentions, a substantial gap exists between the promise and the practice of sustainability reporting. Many disclosures are incomplete, inconsistent, or strategically manipulated, raising concerns about the authenticity and utility of the information provided.

This tension underscores a critical question: can mandatory sustainability reporting, in its current form, fulfil its potential to drive systemic change, or does it require fundamental reform? Addressing this question demands a nuanced understanding of both the strengths and limitations of existing frameworks. On the one hand, as Christensen et al. (2021) highlight, mandatory reporting frameworks lay the groundwork for corporate accountability by fostering transparency and reducing information asymmetry. On the other hand, as Kaplan and Ramanna (2021) argue, the absence of rigor and standardization in ESG reporting undermines its reliability, leaving it vulnerable to greenwashing and superficial compliance.

This essay explores these issues by critically examining the evolution and implications of mandatory sustainability reporting and the conceptual flaws in current ESG practices. Drawing on Christensen et al. (2021) and Kaplan & Ramanna (2021), it argues that while mandatory reporting is a necessary foundation, it is insufficient without the integration of rigorous, auditable standards. By combining broad regulatory mandates with innovative methodologies such as the E-liability system proposed by Kaplan and Ramanna, a transformative framework can emerge—one that ensures sustainability reporting and drives actionable change.

The following sections will delve into the historical and economic underpinnings of mandatory reporting, analyze the shortcomings of existing ESG practices, and present a synthesis of proposed solutions. Ultimately, this essay posits that the future of sustainability reporting hinges on bridging the gap between accessibility and precision, fostering a system that aligns corporate transparency with measurable progress.

THE EVOLUTION OF MANDATORY SUSTAINABILITY REPORTING

The journey toward mandatory sustainability reporting underscores a profound shift in how corporations engage with their societal and environmental responsibilities. This evolution reflects an increasing acknowledgment of the interconnectedness between corporate activities and broader societal well-being. As the global challenges of climate change, resource scarcity, and social inequities have grown more pronounced, governments, investors, and civil society have demanded greater transparency and accountability from businesses. Mandatory sustainability reporting frameworks have emerged as a pivotal response to these demands, creating formal mechanisms for corporations to disclose their environmental, social, and governance (ESG) impacts.

According to Christensen et al. (2021), frameworks such as the European Union’s Non-Financial Reporting Directive (NFRD) and the U.S. Securities and Exchange Commission’s (SEC) climate disclosure proposals are designed to address the information asymmetry between corporations and their stakeholders. By mandating the disclosure of standardized ESG metrics, these frameworks aim to create a level playing field where stakeholders can evaluate corporate sustainability performance objectively and consistently. The NFRD, for instance, requires large companies to report on their environmental, social, and employee-related matters, as well as respect for human rights, anti-corruption, and board diversity. Such measures seek to integrate sustainability considerations into the core strategic and operational decisions of businesses.

Mandatory reporting is more than a symbolic gesture of corporate accountability; it carries tangible economic implications. Christensen et al. (2021) argue that these disclosures reduce information asymmetry between firms and investors, enabling capital markets to function more efficiently. Investors, equipped with reliable and comparable data, can make informed decisions that reward sustainable practices, thereby lowering the cost of capital for companies committed to ESG goals. Furthermore, mandated transparency incentivizes firms to align their operations with societal expectations, fostering trust and legitimacy. For example, studies show that companies subject to mandatory greenhouse gas (GHG) reporting are more likely to implement emission reduction strategies, contributing to global efforts to combat climate change.

Beyond the economic realm, mandatory sustainability reporting has significant implications for corporate governance. By institutionalizing transparency, these frameworks compel firms to consider their ESG impacts systematically. This often leads to the development of internal mechanisms for data collection, monitoring, and evaluation, which in turn foster a culture of accountability within organizations. For example, the requirement to disclose gender diversity metrics under the NFRD has prompted many companies to revisit their hiring practices, improving representation and inclusivity within their workforce.

However, while the adoption of mandatory sustainability reporting frameworks represents substantial progress, their implementation has revealed persistent gaps and shortcomings. One of the most critical issues is the inconsistency and incompleteness of reported data. Many companies cherry-pick favourable metrics to present an inflated image of their sustainability efforts, a practice commonly referred to as “greenwashing.” For instance, firms might highlight reductions in direct emissions (Scope 1) while neglecting to account for the more significant emissions associated with their supply chains (Scope 3). This selective reporting undermines the credibility of disclosures, leaving stakeholders with an incomplete picture of a company’s true environmental impact.

Moreover, the lack of standardized criteria exacerbates these challenges. Christensen et al. (2021) note that without uniform reporting standards, the comparability of ESG data across firms and industries remains limited. For example, two companies might define “carbon neutrality” differently, with one including offsets and the other relying solely on reductions in direct emissions. Such discrepancies create confusion among stakeholders and dilute the impact of mandatory reporting.

Another critical challenge is the enforcement of these mandates. While frameworks like the NFRD and SEC proposals provide guidelines for disclosure, the mechanisms for verifying and auditing the accuracy of reported data are often inadequate. This lack of enforcement allows companies to engage in superficial compliance without meaningfully addressing the underlying ESG issues. For instance, reports of firms overstating their sustainability achievements in voluntary and mandatory disclosures have raised questions about the reliability of the entire reporting system.

In summary, the evolution of mandatory sustainability reporting reflects a growing recognition of the need for corporate accountability in addressing global challenges. These frameworks have made significant strides in promoting transparency and reducing information asymmetry, enabling stakeholders to hold corporations accountable. However, the persistent issues of incomplete data, inconsistent standards, and inadequate enforcement highlight the limitations of current reporting practices. To unlock the full potential of mandatory sustainability reporting, these gaps must be addressed through more rigorous standards, comprehensive methodologies, and robust enforcement mechanisms. Only then can sustainability reporting evolve from a compliance exercise to a transformative tool for driving systemic change.

THE SHORTCOMINGS OF CURRENT ESG PRACTICES

While mandatory sustainability reporting frameworks establish a foundation for corporate accountability, the current ESG reporting landscape is fraught with significant conceptual and practical deficiencies. Kaplan & Ramanna (2021) argue that these shortcomings undermine the credibility, accuracy, and overall utility of ESG disclosures, hindering their ability to drive meaningful change. One of the most prominent examples is the reliance on the Greenhouse Gas (GHG) Protocol as the prevailing standard for emissions reporting. Although widely adopted, the GHG Protocol suffers from critical limitations, exposing systemic vulnerabilities in how companies measure and disclose their environmental impacts.

The GHG Protocol categorizes emissions into three scopes to standardize reporting: Scope 1 (direct emissions from a company’s operations), Scope 2 (indirect emissions from purchased energy), and Scope 3 (emissions from the broader value chain, including suppliers and customers). While Scopes 1 and 2 are relatively straightforward to calculate, Scope 3 emissions—often the largest contributor to a company’s carbon footprint—present significant challenges. Tracking Scope 3 emissions requires extensive data collection across complex supply chains, which many firms lack the capacity or willingness to undertake. Consequently, companies often exclude Scope 3 emissions from their disclosures, resulting in an incomplete and misleading picture of their overall environmental impact. For instance, a manufacturing firm might report significant reductions in Scope 1 and Scope 2 emissions while neglecting to disclose the emissions generated by its suppliers or the end-use of its products. This selective omission allows firms to present themselves as more sustainable than they truly are, perpetuating greenwashing.

Beyond omissions, the GHG Protocol’s methodology itself has inherent flaws that exacerbate these issues. Kaplan & Ramanna (2021) highlight the problem of double-counting emissions, which occurs when multiple firms within a value chain report the same emissions. For example, a supplier’s emissions may be recorded as Scope 1 emissions by the supplier and as Scope 3 emissions by the purchasing firm. This duplication inflates aggregate emissions figures, distorting the overall data and complicating efforts to assess progress toward global climate targets. Such inconsistencies diminish the reliability of ESG metrics and undermine trust in the reporting process.

In addition to these conceptual flaws, the way ESG data is presented in reports further complicates their utility. Companies often inundate stakeholders with voluminous, fragmented, and incoherent data, failing to balance comprehensiveness with clarity. ESG reports frequently prioritize breadth over depth, providing extensive lists of metrics without offering context or actionable insights. For instance, a firm might disclose its water usage, energy efficiency, and employee diversity statistics in isolation, without connecting these metrics to its overall sustainability strategy or long-term goals. This lack of coherence creates an accountability gap, leaving stakeholders unable to verify or contextualize the data presented.

Kaplan & Ramanna (2021) argue that this “data dump” approach not only hinders decision-making but also creates opportunities for firms to obfuscate their shortcomings. By overwhelming readers with excessive information, companies can mask areas of poor performance while drawing attention to favourable metrics. For example, a firm might prominently showcase its renewable energy investments while burying details about its waste management practices in dense technical appendices. This selective emphasis undermines the transparency that ESG reporting is meant to achieve, allowing firms to evade scrutiny and perpetuate the status quo.

The deficiencies in ESG reporting are further compounded by the lack of standardized and auditable methodologies. Unlike financial reporting, which relies on established accounting principles and rigorous auditing processes, ESG disclosures are often self-reported and unaudited, making them susceptible to manipulation. Kaplan & Ramanna (2021) emphasize that without robust verification mechanisms, stakeholders have no assurance that the data disclosed is accurate, complete, or comparable across firms. For example, two companies in the same industry might use different definitions of “carbon neutrality,” with one including offsets and the other relying solely on emission reductions. Such discrepancies not only confuse stakeholders but also impede efforts to hold firms accountable for their environmental and social commitments.

The absence of clear, enforceable standards also limits the comparability of ESG data across firms and industries. Companies often adopt bespoke metrics tailored to their specific operations, making it difficult for stakeholders to benchmark performance or identify industry-wide trends. For instance, while one company might report emissions per unit of production, another might report total emissions, rendering direct comparisons impossible. This fragmentation dilutes the impact of ESG reporting, preventing it from serving as a reliable tool for driving corporate accountability and systemic change.

While mandatory ESG reporting frameworks have created a platform for transparency, their current execution falls short of realizing their potential. The conceptual flaws of the GHG Protocol, coupled with the fragmented and unverifiable nature of ESG data, undermine the credibility and utility of sustainability reporting. Without addressing these shortcomings, ESG reporting risks perpetuating opacity and greenwashing, failing to deliver the accountability and transformative change it promises. To overcome these challenges, the next generation of sustainability reporting must prioritize rigor, standardization, and auditable methodologies, ensuring that disclosures are not only comprehensive but also accurate, actionable, and trustworthy.

PROPOSED SOLUTIONS: THE E-LIABILITY SYSTEM

To address the gaps in current sustainability reporting, Kaplan & Ramanna (2021) propose the E-liability system—a precise and innovative method for tracking emissions across a company’s value chain. Combining cost accounting principles with blockchain technology, this system offers a transparent, auditable framework that links emissions directly to specific transactions, reducing inaccuracies and inconsistencies in ESG reporting.

How the E-Liability System Works

The E-liability system offers a detailed, transaction-specific approach to tracking emissions, addressing key flaws in existing frameworks like the Greenhouse Gas (GHG) Protocol. Instead of broadly categorizing emissions into Scopes 1, 2, and 3, it assigns precise emissions data to every stage of production. For instance, a car manufacturer would track emissions from mining raw materials, assembling vehicles, and distributing them to retailers. Blockchain technology ensures the data is accurate, traceable, and tamper-proof, enabling stakeholders to evaluate environmental impacts at each stage.

This granular method eliminates ambiguity and provides actionable insights. By directly linking emissions to specific activities, companies can pinpoint inefficiencies, such as energy-intensive processes, and take targeted actions to improve sustainability.

Key Advantages

1. Precision: Assigning emissions to specific transactions helps firms identify inefficiencies and implement precise corrective measures.
2. Transparency: Blockchain ensures data integrity, minimizing greenwashing and fostering trust among stakeholders.
3. Comparability: Standardized metrics allow investors, regulators, and consumers to benchmark performance across industries effectively.
4. Integration: Aligning emissions tracking with financial reporting offers a holistic view of corporate performance.
5. Scalability: The system adapts to complex global supply chains and evolving regulatory needs, ensuring flexibility in implementation.

Driving Actionable Change

The E-liability system transforms sustainability reporting from a compliance exercise to a tool for impactful decision-making. Firms can redesign supply chains to prioritize low-emission suppliers, while investors can assess portfolio impacts more accurately. Policymakers can integrate the system into regulations, ensuring consistency across industries and regions.

Implementation Challenges

While the E-liability system offers transformative potential, implementing it presents significant challenges. A major concern is the energy consumption of blockchain technology, particularly with energy-intensive protocols like proof-of-work. These protocols could undermine sustainability goals by contributing to high carbon emissions. To address this, adopting more energy-efficient alternatives such as proof-of-stake can significantly reduce the environmental impact while maintaining data security.

Another challenge is the resource burden on small and medium-sized enterprises (SMEs). These businesses often lack the infrastructure, technical expertise, and financial capacity to adopt advanced reporting systems. Upgrading systems, training personnel, and collaborating with suppliers can be costly and complex. To mitigate these barriers, governments and industry bodies should provide targeted support, including subsidies, accessible training programs, and simplified frameworks designed for SMEs.

Despite these hurdles, the long-term benefits of the E-liability system—improved transparency, stakeholder trust, and actionable insights—outweigh the initial implementation costs. Strategic innovation and coordinated support can ensure the system’s alignment with global sustainability objectives, making it a vital tool for transformative change.

TOWARD A COMPREHENSIVE REPORTING FRAMEWORK

The insights of Christensen et al. (2021) and Kaplan & Ramanna (2021) converge to highlight a pressing imperative: sustainability reporting must balance broad accessibility with rigorous precision to fulfill its transformative potential. While Christensen et al. (2021) emphasize the foundational role of mandates in institutionalizing sustainability practices, Kaplan & Ramanna (2021) focus on the necessity of integrating technical rigor to ensure reliability and actionability. These perspectives are complementary rather than contradictory, suggesting that an effective sustainability reporting framework must synthesize the strengths of both approaches. This section proposes a comprehensive framework designed to address the challenges of transparency, accountability, and stakeholder engagement while remaining adaptable to emerging needs.

Key Pillars of a Comprehensive Framework

1. Mandatory Standardization: Standardization is essential to ensure that sustainability reporting achieves consistency and comparability across industries and jurisdictions. Building on Christensen et al. (2021)’s analysis, a comprehensive framework should mandate the adoption of a core set of ESG metrics applicable to all firms. These metrics should be defined in clear, quantifiable terms to avoid discrepancies in interpretation and implementation. For example, carbon emissions metrics must specify whether they include only Scopes 1 and 2 or extend to Scope 3 emissions across the value chain. Standardization serves multiple purposes. For regulators, it facilitates the enforcement of reporting requirements and enables cross-sectoral benchmarking. For investors and other stakeholders, it ensures that ESG data can be compared across firms, industries, and regions. Policymakers can draw on existing standards, such as those developed by the International Sustainability Standards Board (ISSB) and the Task Force on Climate-Related Financial Disclosures (TCFD), to create a unified reporting framework that accommodates diverse economic contexts while maintaining a global perspective.

2. Auditable Precision: One of the most critical shortcomings in current ESG practices is the lack of verifiable data. As Kaplan & Ramanna (2021) emphasize, advanced methodologies like the E-liability system must be integrated into reporting standards to address this issue. By assigning emissions liabilities to specific transactions and leveraging blockchain technology for data security, the E-liability system provides a robust framework for auditing ESG disclosures. Auditable precision goes beyond emissions tracking. It encompasses all ESG dimensions, including biodiversity, water usage, employee diversity, and governance practices. Firms must implement internal systems for data collection and validation, supported by external audits to ensure compliance and credibility. The integration of auditable precision into the framework ensures that sustainability reporting moves from a reliance on self-reported data to verifiable, evidence-based disclosures.

3. Stakeholder Engagement and Accessibility: Sustainability reports must be designed with diverse stakeholders in mind, including investors, regulators, employees, and the broader public. While precision and standardization are critical, they should not come at the expense of accessibility. Reports should present complex data in clear, concise formats, using visuals, summaries, and narrative explanations to enhance readability and comprehension.

Stakeholder engagement also involves aligning reports with the specific interests and concerns of different audiences. For example, investors may prioritize metrics related to financial materiality, such as energy efficiency and regulatory compliance, while community organizations may focus on social equity and local environmental impacts. A comprehensive framework should encourage firms to supplement standardized metrics with context-specific disclosures that address the priorities of their key stakeholders.

4. Dynamic Adaptation: Sustainability is an evolving field, shaped by technological advancements, regulatory developments, and shifting societal expectations. A comprehensive reporting framework must be designed to adapt to these changes without compromising its foundational principles. Dynamic adaptation can be achieved by incorporating periodic reviews and updates to the framework, informed by ongoing research, stakeholder feedback, and global best practices. For instance, as new methodologies and technologies emerge, the framework should integrate these innovations to enhance its relevance and effectiveness. Similarly, as global priorities shift—such as the growing emphasis on biodiversity protection and circular economy principles—the framework must expand its scope to address these emerging concerns.

Implementation Challenges and Solutions

Implementing a comprehensive reporting framework is not without challenges. Firms may resist standardization due to concerns about increased compliance costs or competitive disadvantage. Smaller companies, in particular, may lack the resources to implement sophisticated data collection and auditing systems. To address these challenges, the framework should include the following support mechanisms:

• Capacity Building: Governments and industry associations can provide training and technical assistance to help firms, especially small and medium-sized enterprises (SMEs), build the necessary infrastructure for sustainability reporting.
• Incentives for Compliance: Policymakers can offer tax benefits, subsidies, or preferential treatment in public procurement to firms that adopt the framework early and demonstrate strong sustainability performance.
• Phased Implementation: Introducing the framework in stages allows firms to gradually align their practices with its requirements, reducing the risk of non-compliance and facilitating a smoother transition.

Unlocking the Potential of Sustainability Reporting

By institutionalizing these principles—mandatory standardization, auditable precision, stakeholder engagement, and dynamic adaptation—a comprehensive reporting framework can address the dual challenges of transparency and accountability. Such a framework ensures that sustainability reporting evolves from a compliance-driven exercise into a transformative tool for driving corporate responsibility and systemic change. It empowers stakeholders with reliable, actionable data while holding firms accountable for their environmental and social impacts.

In conclusion, the synthesis of Christensen et al. (2021)’s emphasis on institutional mandates and Kaplan & Ramanna (2021)’s focus on methodological rigor provides a clear path forward. A comprehensive framework that combines these perspectives not only enhances the credibility and utility of sustainability reporting but also positions it as a cornerstone of global efforts to build a more equitable and sustainable future.

CONCLUSION

Mandatory sustainability reporting is foundational for corporate accountability, reflecting the global urgency to address environmental and social challenges. However, as this essay has shown, current frameworks suffer from significant limitations, including incomplete data, inconsistent metrics, and insufficient auditing mechanisms. These flaws hinder stakeholders’ ability to assess or act on ESG disclosures effectively.

Drawing on Christensen et al. (2021) and Kaplan & Ramanna (2021), this essay argued that a comprehensive transformation of sustainability reporting is both necessary and feasible. Christensen et al. (2021)’s emphasis on mandates highlights the role of standardized transparency, while Kaplan & Ramanna (2021)’s E-liability system demonstrates the need for rigorous, auditable methodologies. Together, these perspectives offer a roadmap for balancing accessibility with precision, fostering accountability and action.

To achieve this vision, reporting frameworks must integrate key principles: standardized metrics for comparability, rigorous methodologies for precision, stakeholder engagement for relevance, and adaptability to evolving challenges. These measures can empower stakeholders with reliable data, enhance corporate transparency, and incentivize genuine progress. Policymakers can harmonize regulatory standards to ensure fairness, while firms can build trust, efficiency, and resilience by aligning with sustainability goals.

Challenges such as implementation costs, resistance to transparency, and technical barriers remain significant. Addressing these hurdles requires coordinated efforts among policymakers, industry leaders, and civil society. Financial incentives, capacity-building programs, and phased strategies can facilitate this transition.

In conclusion, mandatory sustainability reporting is a critical step but requires integration with innovative systems like the E-liability framework to drive substantive change. By bridging gaps in precision and accessibility, reporting frameworks can evolve into tools that not only reflect corporate impacts but also catalyze systemic progress, fostering a transparent, equitable, and sustainable global economy.

REFERENCES

1. Christensen, H. B., Hail, L., & Leuz, C. (2021). Mandatory CSR and sustainability reporting: A literature review. Journal of Accounting Research, 59(2), 1–37.
2. Kaplan, R. S., & Ramanna, K. (2021). Accounting for climate change. Harvard Business Review, November–December 2021.