Evolving ESG Reporting Governance, Regime Theory, and Proactive Law: Predictions and Strategies

• Published date: 01 October 2022
• Author: Adam Sulkowski,Ruth Jebe
• Date: 01 October 2022
• DOI: http://doi.org/10.1111/ablj.12210

American Business Law Journal

Volume 59, Issue 3, 449–503, Fall 2022

Evolving ESG Reporting

Governance, Regime Theory, and

Proactive Law: Predictions and

Strategies

Adam Sulkowski*and Ruth Jebe**

Transparency on ESG (environmental, social, and governance) is an important,

if imperfect, step in striving for sustainability. Because a constellation of nonprofit

organizations created voluntary reporting frameworks with little government

involvement, ESG reporting governance is institutionally dense and fragmented.

Reporting companies and information users have both expressed dissatisfaction. In

2020, standard-setting organizations indicated their intent to cooperate to simplify

ESG reporting rules. In a different yet similar context, scholars utilize regime the-

ory to understand institutional density and the potential for international coopera-

tion, primarily among states. This article is the first to apply regime theory to ESG

reporting governance architecture to better understand this unusual arena of

rulemaking. It identifies key obstacles to global consolidation of ESG reporting

governance and predicts that differences between the reporting philosophies in the

European Union and the United States are among the factors that will prevent

global consolidation of ESG reporting governance. This article concludes with

advice for practitioners. It draws on law and strategy and proactive law literature

to propose approaches for reporting companies navigating the complex landscape

of ESG reporting governance.

*Associate Professor of Law & Sustainability, Babson College.

**Associate Professor of Legal Studies in Business, Boise State University College of Busi-

ness & Economics. An earlier version of this article was presented at the Changing Faces of

Business Law and Sustainability symposium hosted by the Business and Human Rights Initia-

tive at the University of Connecticut, the Center for the Business of Sustainability at Penn-

sylvania State University’s Smeal College of Business, the College of Business at Oregon

State University, and the American Business Law Journal. The authors thank David Hess,

David Zaring, Susan Park, David Orozco, and Stephen Kim Park for their thoughtful and

considered feedback and comments.

©2022 Academy of Legal Studies in Business.

449

INTRODUCTION

Environmental, social, and governance (ESG) reporting has long been

used as a tool to promote sustainability.

1

Scholars recognized its potential

to improve businesses’ human rights performance,

2

to further environ-

mental policy goals,

3

and to foster better stakeholder relations.

4

Civil

society organizations also recognized the potential power of ESG disclo-

sure and created a plethora of reporting standards.

5

With organizations

identified by acronyms, the ESG reporting landscape became an “alpha-

bet soup”of standard setters.

6

ESG reporting has increasingly commanded the attention of business.

The Global Reporting Initiative claims to have 10,000 reporting firms

worldwide using its framework and to have reached the milestone of

50,000 reports uploaded to its Sustainability Disclosure Database as of

1

The terms “environmental, social, and governance (ESG),”“sustainability,”“non-financial,”

and “corporate social responsibility”reporting have been used interchangeably in the past

to describe reports with different degrees of emphasis on environmental, social, and/or gov-

ernance issues, and to distinguish these reports from mandated financial disclosure. This

article uses the term “ESG reporting”to refer to this type of reporting.

2

David Hess, The Transparency Trap: Non-financial Disclosure and the Responsibility of Business to

Respect Human Rights,56A

M.BUS. L.J. 5, 15–26 (2019).

3

See generally Daniel C. Esty & Quentin Karpilow, Harnessing Investor Interest in Sustainability:

The Next Frontier in Environmental Information Regulation,36Y

ALE J. REG. 625 (2019).

4

Jerry K. C. Koh & Victoria Leong, The Rise of the Sustainability Reporting Megatrend: A Corpo-

rate Governance Perspective,18B

US.L.INT ’L. 233 (2017).

5

Reporting frameworks generally provide principles-based guidance on what broad topics

are covered in a report, as well as how the report should be structured. Reporting stan-

dards provide specific, detailed requirements for what should be reported according to

each topic, including metrics. Frameworks and standards are complementary tools. Response

of the Sustainability Accounting Standards Board to the Public Consultation on the Revision of the

Non-financial Reporting Directive,S

USTAINABILITY ACCT.STANDARDS BOARD (June 2020), https://

www.sasb.org/wp-content/uploads/2020/06/SASB.NFRDWhitepaper.FINAL-005.pdf. This

article uses the term “standards”to refer to reporting frameworks and reporting standards

and the terms “standard setting”and “standard setter”to refer to, respectively, the process

of creating standards and reporting frameworks and the organizations that do so.

6

Patrick Temple-West, Companies Struggle to Digest ‘Alphabet Soup’of ESG Arbiters,FIN.TIMES

(Oct. 6, 2019), https://www.ft.com/content/b9bdd50c-f669-3f9c-a5f4-c2cf531a35b5; Ira G.

Pearl, ESG Reporting: Deciphering the Alphabet Soup,C

HIEF EXEC. (Jan. 31, 2022), https://

chiefexecutive.net/esg-reporting-deciphering-the-alphabet-soup/.

450 Vol. 59 / American Business Law Journal

October 2018.

7

The Corporate Register, a nonprofit organization that

focuses on collecting ESG reports, has a directory of more than

150,000 reports prepared by 22,000 different organizations.

8

KPMG

has released an annual examination of corporate ESG reports every

year since 1993.

9

However, with growth has come confusion and disappointment. ESG

reporting developed a complex ecosystem, a constellation of standard

setters, each creating its own reporting standards. There is now a con-

sensus that existing ESG reporting mechanisms are not achieving their

anticipated impacts. Companies that issue reports face pressure from dif-

ferent stakeholder groups to report under multiple frameworks,

depending on the group’s preference, given the plethora of voluntary

reporting frameworks coupled with their voluntary nature.

10

The trans-

action costs associated with reporting across multiple frameworks are a

frequent topic in board discussions of ESG reporting.

11

Reporting com-

panies complain of the “reporting treadmill,”meaning they spend more

time gathering and reporting data than improving their operations.

12

ESG information users face a corresponding set of issues related to the

generally poor quality of available ESG information. Critics argue that

7

GRI Database Reaches 50,000 Reports, ESGN ASIA (Apr. 15, 2019), https://esgn.asia/gri-

database-reaches-50000-reports/.

8

Featured Reports,CORP.REG., https://www.corporateregister.com/ (last visited May 10, 2022).

9

The Time Has Come: The KPMG Survey of Sustainability Reporting 2020, KPMG, https://home.

kpmg/xx/en/home/insights/2020/11/the-time-has-come-survey-of-sustainability-reporting.

html (last visited May 10, 2022).

10

Five Global Organizations, Whose Frameworks,Standards and Platforms Guide the Majority of Sus-

tainability and Integrated Reporting, Announce a Shared Vision of What Is Needed for Progress

Towards Comprehensive Corporate Reporting—and the Intent to Work Together to Achieve It, CDP

(Sept. 11, 2020), https://www.cdp.net/en/articles/media/comprehensive-corporate-reporting

(noting that information users have varied needs).

11

See, e.g., Elad L. Roisman, Comm’r, Sec. & Exch. Commission, Speech at the Corporate

Board Member ESG Board Forum: Putting the Electric Cart Before the Horse: Addressing

Inevitable Costs of a New ESG Disclosure Regime (June 3, 2021), https://www.sec.gov/news/

speech/roisman-esg-2021-06-03.

12

Galit A. Sarfaty, Regulating Through Numbers: A Case Study of Corporate Sustainability

Reporting,33V

A.J.INT’LL. 575, 597 (2013).

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