TELESTO STRATEGY

What Should Boards Consider as Voluntary versus Non-Voluntary Disclosures for ESG?

OCTOBER 2024 | SPECIAL REPORT

In today’s dynamic global corporate regulatory landscape, ESG (Environmental, Social, and Governance) reporting for CPG (Consumer Packaged Goods) companies goes beyond regulatory compliance—it plays a pivotal role in building trust, driving consumer and investor decisions, and securing long-term business viability. Boards must strategically navigate voluntary versus non-voluntary disclosures, not only to meet current regulatory demands but also to anticipate and shape future standards, turning ESG efforts into a competitive advantage.

Key takeaways:  

  • The global tapestry of ESG and Sustainability reporting is expanding and layering, which requires additional attention by board members to ensure they mitigate downside non-compliance risk and capture upside risk for revenue-generating opportunities  
  • Boards should consider ESG reporting not just as box checking, but also as a strategic governance tool that influences reputation and long-term business success 
  • ESG reporting, both voluntary and non-voluntary, presents opportunities for competitive differentiation and investor confidence, especially in a market increasingly driven by consumer and stakeholder activism 
  • Balancing voluntary disclosures with regulatory compliance helps companies manage risks, meet evolving expectations, and avoid potential backlash or accusations of greenwashing 

For CPG companies, ESG reporting is not just about compliance, it is a critical aspect of strategic governance that influences stakeholder trust, brand value, and long-term business viability. But over time, ESG, Climate, and Sustainability disclosures have also provided competitive differentiation in the market for those who take the lead. For the board of directors, ESG disclosures impact the company’s reputation, compliance, and long-term license to operate and succeed.  

The practice of reporting on ESG performance first took shape in the early 1908s through corporate social responsibility. With the formation of the Global Reporting Initiative (GRI) was founded in 1997 and since then has been a roller coaster ride for most companies. Incidentally, the first few companies to start taking ESG reports to the market were CPG companies like Ben and Jerry’s, Unilever, and Procter and Gamble (P&G). The practice of reporting has evolved over several decades and is projected to intensify with the roll-out of CSRD, EUDR, as well as ESG and climate legislation from California, UK, Canada, Australia, New Zealand, Singapore, and more.  

While CPG companies have been under scrutiny for product safety and consumer health standards for their whole existence, concepts like the World Health Organization’s Good Manufacturing Practices (GMP), Sustainable manufacturing practices, truthful labeling, market standards, cross-border consistency, REACH and K-REACH compliance (along with ISO), ethical practices for fair labor, and responsible sourcing have also grown over the years.  

While many of these aspects of good business models are part of any established CPG company, today the boards of directors of these companies are most concerned about organizational reputation and retention of the consumer trust placed or earned. In today’s world, those are incredibly fragile and difficult to rebuild once lost.  

Studies continue to show a significant shift towards socially responsible and sustainable products. 73% of millennials are willing to pay more for such products. 65% of consumers say they only want to purchase from purpose driven brands and 78% of consumers say environmental practices of the company influence their purchase decisions. Paying focus to the gray areas between what is non-voluntary and voluntary disclosure also helps get access to the now $649bn ESG-focused funds flowing in 2023. 88% of institutional investors consider ESG-focused investment strategies, and data suggests that a higher Trust index gives a 13% reputational premium to any company. 

For a CPG company, disclosure requirements are already complex and steadily increasing. As previously mentioned, starting from SEC (including Climate) to EU NonFinancial Reporting Directive and CSRD, EU Taxonomy regulations and the Task force on Climate-Related Financial Disclosures (TCFD), companies also face asks from OSHA, TNFD, Modern Slavery Act, GDPR, ISO, GRI, and certain stock exchange requirements and U.S. State laws (California Climate Bill). But usually, boards have to consider all the voluntary requirements and the gray zone between asked versus not asked to ensure that companies are not subjected to consumer, NGO, environmentalist, and shareholder activism.  

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 CPG boards to ask management about are disclosures around:  

  • Raw materials and cocoa sourcing: This has been an area of challenge for issues like child labor, poor working conditions, and deforestation. Cocoa is increasingly sensitive for many CPG companies, especially as cocoa prices are hitting record highs, signaling a challenging time ahead for businesses that rely on this commodity. 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 
  • 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 as recently been flagged for food companies, which adds another layer of reporting complexity in addition to the roll-out of EUDR 
  • Plastic packaging pollution: Use of plastic has been a source of backlash for many CPG 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 
  • 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 
  • 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  
  • 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 
  • 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 
  • 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 
  • 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 audit 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 practice are not inherently divergent. However, ESG disclosure and reporting are where companies may be limiting themselves by taking an overly retrained approach. For instance, survey data suggests that 62% of consumers choose brands that are transparent about their environmental impact, and companies with high ESG rating 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 who 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 over-stated clean energy portfolio, ExxonMobil’s Deepwater Horizon oil spill, and Nestlés lack of clarity in packaging recyclability, companies have learned that being too aggressive with voluntary measure 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:  

  • Unilever pioneering the use of carbon labeling on products in 2020 in response to growing customer demand and competitive pressures  
  • Nestlé investing in responsible sourcing for cocoa and coffee 
  • 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 is built in, enhancing reputation and potential to shape the future ESG reporting standards. In essence, ESG reporting, mandatory or voluntary, presents significant strategic opportunity for CPG 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, 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: 

Telesto Strategy supports Corporate Directors in CPG to mitigate ESG and climate risks, stay ahead of changing regulatory regimes, and enhance disclosures and reporting in the face of increasingly complex environments. See additional resources to equip Corporate Directors: 

 

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