Environmental, Social, and Governance (ESG) factors are now a critical component of how companies are assessed and valued by investors and other stakeholders, who increasingly demand transparency and accountability.
Reflecting this shift, there is now a number of requirements that companies must meet in order to satisfy the regulators and government.
However, this has led to debate over whether mandatory ESG disclosures are the right approach, or whether voluntary sustainable business practices are more effective.
A key question is whether mandatory reporting will simply lead to a “tick the box” approach to ESG rather than encouraging a true commitment to sustainability by businesses.
For those that support mandatory ESG reporting, one key benefit is that it establishes a consistent and comparable framework, with companies required to report on a standardised set of metrics. This makes it easier for investors and stakeholders to compare performance and outcomes in sustainability.
It also provides a level of transparency for investors, customers and the broader community, who can more easily see how companies are addressing areas such as corporate governance, environmental impact or labour practices.
Another benefit is that mandatory reporting means companies are required to regularly review and manage their ESG-related risks. This allows companies to better anticipate and manage potential risks which could affect their financial performance and reputation.
Voluntary approaches, on the other hand, encourage greater innovation and flexibility in sustainability approaches. This can result in a better outcome as strategies are tailored to specific circumstances, and may exceed the minimum requirements of mandatory disclosures.
In addition, companies that voluntarily adopt environmental practices are more likely to have a genuine commitment to sustainability, which will lead to more meaningful changes compared to compliance-driven approaches. It can also create a competitive advantage in the market, allowing companies to differentiate themselves.
So what is the best approach for companies?
Companies should aim to combine the benefits of both approaches rather than choosing one over the other.
The introduction of ESG reporting frameworks in Australia and overseas means companies must comply with certain requirements. However, balancing this with the adoption of voluntary practices will lead to better outcomes for both the company, its shareholders, and the broader community.
Disclosing both required and voluntary information allows for a more holistic view of companies’ ESG performance and provides greater transparency for investors. This can improve access to capital as well as driving innovation, operational efficiency, and brand loyalty.
Mandatory disclosures provide the necessary transparency and accountability, while voluntary practices allow for innovation and genuine commitment to sustainability. Combined, they create a robust framework for companies to manage the complexities of ESG.
This article was first published in the 2025 IPO Watch Australia Report.