Board Series: How can Industrials reassess their voluntary vs non-voluntary ESG Disclosures strategies under Trump 2.0?

To leverage ESG reporting as a differentiator, boards of directors have to oversee reporting beyond compliance and embrace it as a strategic imperative. Some of the areas for consideration for Industrial boards to ask management about, are disclosures around:

1. Climate risk: Formerly TCFD and now integrated into the ISSB reporting framework, industrial companies are disclosing due to investor pressure the financial impact related to physical and transition risks
2. Raw materials sourcing: This has been an area of challenge for issues like child labor, poor working conditions, and deforestation. This surge is driven by a multitude of factors, from supply constraints to adverse weather conditions, which presents a complex landscape for industry players to navigate
3. Environmental Product Declarations (EPDs): EPDs allow manufacturers to take comprehensive, third-party verified life cycle analyses (LCAs) and turn them into standardized declaration labels (disclosures) for their products. EPDs are maintained by country-specific program operators and coordinate with ISO
4. Packaging pollution: The use of plastic has been a source of backlash for many industrial companies. Some companies have stated the use of recycled plastic while others have touted the strategy of recyclable plastics. Either way, the word plastics has a strong reaction from customers and investors. And now, the market reacts to it equally strongly. Moreover, the United Nations is moving aggressively with its development of a Plastics Treaty. 175 nations have agreed to develop a legally binding agreement on plastic pollution by 2024, prompting a major step towards reducing greenhouse gas emissions from plastic production, use, and disposal
5. Circular economy: The need for recycled content in production and EPR (extended producer responsibility) is becoming a jurisdictional requirement in Europe and the U.S. This trend will only continue, but companies can take a leading role in this area to stay ahead
6. Water stewardship: Water usage, quality, and management is another area where companies can showcase their work and leadership to win market share and investor sentiment
7. Scope III GHG emissions: With increasing requirements from SBTi, GHGP, TCFD, ISSB, etc., more and more regulators are requiring companies to report on their indirect emissions generated from their value chains
8. Supply chain visibility: Supply chain visibility ensures transparency from the sourcing of raw materials to the delivery of finished products, crucial for managing extended and outsourced supply chains effectively
9. Human rights: The scope of human rights covered by the ‘S’ of ESG is quite broad. For example, it includes the 30 human rights listed in the 1948 Universal Declaration of Human Rights (such as the right to life, freedom and security, the right to equality before the law, the prohibition of torture and slavery, the prohibition of forced labor, the prohibition of discrimination, etc.). Nine UN treaties are also relevant, which, for example, deal with the rights of the child, the prohibition of discrimination against women, or the rights of migrant workers
10. Palm oil: Companies have faced questions regarding deforestation and loss of biodiversity due to the production of palm oil. NGOs have also raised questions about social conflicts and community impact due to the ask by big brands for palm oil production. Embedded palm oil has recently been flagged for food companies, which adds another layer of reporting complexity in addition to the roll-out of EUDR
11. DEI: Although the reporting on Diversity, Equity, and Inclusion (DEI) has been somewhat diminished due to U.S. Supreme Court rulings, there are still a number of drivers to increased reporting on board diversity. For instance, NASDAQ requires companies with more than five board members to have at least two diverse directors – one woman and one person from an underrepresented group. This rule continues to face legal pressures and will continue to evolve

Other examples include areas of traceability of raw materials, labor practices, product reformulation for healthy living, and standardizing third-party audits and assurance of reported data and company performance.

Although there has been a recent boom in reporting requirements, many companies have long been aggressively working on these disclosure topics. ESG and common-sense good business practices are not inherently divergent. However, ESG disclosure and reporting are where companies may be limiting themselves by taking an overly restrained approach. For instance, survey data suggests that 62% of consumers choose brands that are transparent about their environmental impact, and companies with high ESG ratings outperformed their peers by 2.8% annually over the past five years. Bank of America states that ESG leaders experienced 28% less stock price volatility during market downturns. Given the strong performance of companies that more proactively disclose, a fair question becomes why don’t corporate directors and investors ask for more disclosure versus less?

One of the principal concerns of disclosing more than what is required is the thorny potential of being called out for greenwashing—the practice of making misleading public claims about Sustainability or ESG performance. With public greenwashing scandals like Volkswagen admitting to cheating on emissions testing, BP’s over-stated clean energy portfolio, ExxonMobil’s Deepwater Horizon oil spill, and Nestlé’s lack of clarity in packaging recyclability, companies have learned that being too aggressive with voluntary measures can result in great fees, loss of customer trust, and degradation of brand value.

Companies across industries have learned from these mistakes and recognize that ESG reporting requires a focused investment of resources and a versatile portfolio of regulatory, data management, Sustainability, and multi-jurisdictional expertise. But if this area is not managed consistently properly, it will expose vulnerabilities and lack of standardization. Companies use Materiality Assessments to address this concern on what is truly voluntary and beneficial versus involuntary and a license to sell. Other aspects of concern are the evolving regulatory landscape leading to emerging requirements, data management, and lack of transparency from the whole supply chain.

Instead, for boards to use ESG reporting as a differentiator, companies must go beyond compliance and view ESG strategy and reporting as a strategic pillar. A few good examples of such work include but is not limited to:

1. Unilever pioneered the use of carbon labeling on products in 2020 in response to growing customer demand and competitive pressures
2. Financial firms such as American Express and MasterCard have introduced emissions trackers that allow customers to view their carbon footprint based on purchases
3. Similarly, travel providers such as Google Flights and Uber have rolled out tools that show emissions data to customers
4. Both Disney and Netflix have started using battery-powered generators on filming sites, which both reduces emissions and increases filming time (due to less noise pollution) and responds to increasing consumer demand
5. For leisure and hospitality, Hilton was one of the first to expand its carbon-labeled menus and lower-impact menus
6. In high tech, a coalition of Google, AWS, Meta, and Digital Realty contends that Environmental Product Declarations (EPDs) will help the data center industry improve its collective sustainability profile
7. Mondelez launched the Cocoa Life program in 2012 as a holistic approach to address cocoa-growing communities social, economic, health, and environmental needs

In an age where information is readily accessible, consumers are quick to support brands that reflect their values. But it is also an age of consumer activism alongside investor interests. The board’s line of responsibility also opens accountability to these stakeholders and their direct views. While non-voluntary reporting keeps the company compliant, voluntary reporting allows boards to stay ahead of evolving stakeholder expectations and potential future regulations. By disclosing information that may become mandatory in the future, foresight, and preparedness are built in, enhancing reputation and potential to shape the future ESG reporting standards. In essence, ESG reporting, mandatory or voluntary, presents significant strategic opportunities for industrial companies and a good toolkit for governance for boards.

Actions boards can take:

• Treat ESG reporting not only as a compliance requirement but as a governance tool that can drive long-term business success and reputation
• Ensure the company balances both regulatory requirements and voluntary disclosures, particularly in areas such as climate, human rights, and supply chain transparency, to avoid greenwashing and enhance trust
• Stay ahead of evolving regulatory requirements by proactively adopting best practices in ESG reporting, potentially influencing future reporting standards and gaining a competitive edge
• Enhance visibility across the entire supply chain, from raw material sourcing to final product delivery to ensure all practices conform to ESG principles and regulatory standards
• Use high-quality, transparent ESG disclosures to build investor confidence, particularly in ESG-focused funds, and to mitigate the risk of stock volatility

Questions for the boardroom:

• Are we strategically leveraging both voluntary and non-voluntary ESG disclosures to enhance our market differentiation and stakeholder trust?
• How are we preparing for potential regulatory changes and evolving consumer expectations related to ESG reporting?
• What resources and processes do we have in-place to ensure our ESG disclosures are transparent, consistent, and aligned with our long-term business strategy?
• What are future intersecting trends in ESG and Sustainability reporting – Cyber and ESG? Traceability and Supply Chain Management? Sanctions compliance and Human Rights?
• How can we build a data infrastructure that automates ESG reporting so more of our people’s time can go to identifying opportunities, and developing strategies as opposed to data management?
• Where are the strongest regulatory drivers now and in the next 1-3 years?
• What are the top growth opportunities identified in TCFD/ISSB reporting? How can we best pursue those opportunities?

Additional Telesto resources:

• Board Series: Preparing for China’s retaliation to Trump 2.0 tariffs
• Board Series: Trump 2.0 tariffs and preparedness for Industrial companies
• Preparing for climate litigation: What board members need to know
• Navigating corporate climate action under a second Trump administration – 7 focal points for business leaders
• Faros, our climate risk assessment tool, helps your organization identify emerging climate threats as they become more common and disruptive and position your assets to protect operational continuity, hedge against rising insurance costs, meet regulatory disclosure requirements, and incorporate climate risk into asset acquisition and disposal.
• Prism, our ESG benchmarking tool, helps your organization to rapidly strengthen its sustainability, climate, and ESG performance and disclosures through in-depth benchmarking of industry peers and identification of gaps and areas of distinction