Introduction
ESG reporting is simply the disclosure of information about operations that relate to environmental, social and governance areas of a business. The aim is to provide stakeholders with valuable insights that can inform decision-making, highlight potential opportunities as well as risks that may affect the valuation of a business. ESG reporting has become important for organizations for several reasons, ranging from the need for transparency, investor demand, compliance, risk management, innovation, and goal tracking. However, many organisations see it as a box-ticking exercise rather than a means to address material risks and meet stakeholder expectations. This approach undermines the importance of the incorporation of ESG principles in corporate strategy, operations and culture and may pose a threat to business sustainability.
Compliance Approach
Regulatory Framework Focused on Compliance and Reporting
Publicly listed companies are expected to incorporate sustainability reporting in their annual reports in compliance with the Nigeria Exchange Sustainability Disclosure Guidelines. Accordingly, the Securities and Exchange Commission Guidelines on Sustainable Financial Principles for the Nigerian Capital Market provide a set of principles which regulated entities are expected to apply in their operations, as part of the drive towards a sustainable global economy and to ensure proper reporting, detailing progress and performance regarding commitment to the Principles. Principle 26 of the Nigerian Code of Corporate Governance 2018 mandates organisations to pay adequate attention to sustainability issues, including environment, social, occupational, and community health & safety as responsible corporate citizens contributing to economic development. The Board is also enjoined to establish policies and practices regarding sustainability issues, monitor implementation and report on the extent of compliance with same. For banks in Nigeria, the Nigerian Sustainable Banking Principles provide that banks should produce a report on compliance with the sustainable banking principles on an annual basis.
Risks of the Compliance-Only Approach
Narrowing compliance with ESG standards to the requirement for reporting defeats the essence of ESG integration in organizational practices and invariably exposes organizations to several risks and missed opportunities. Some of the risks include:
- Superficial ESG Engagement: In a bid to report on meeting the minimum compliance requirements, organizations are likely to claim that ESG considerations have been integrated into their business operations when they have not. Through deceptive reporting, marketing and false claims, stakeholders are misled and this in turn erodes trust, leads to reputational damage (for organisations reporting false claims), and undermines credible efforts to address sustainability issues.
- Missed Strategic Opportunities: Compliance-driven ESG initiatives often lack innovation and do not align with the broader business goals. Companies may miss cost savings and innovation in sustainable products.
- Vulnerability to Evolving Standards: ESG regulations and stakeholder expectations are continually evolving and organizations that are focused on compliance may be unable to keep up with evolving trends and be unprepared for future requirements. In future, this can lead to non-compliance, necessitating costly and reactive adjustments.
- Neglect of Material ESG Issues: A compliance-only approach focuses on generic ESG factors rather than material issues specific to the organisation's industry and context. This can lead to a waste of resources and opportunities to address the more significant matters.
- Absence of Competitive Advantage: Companies that view ESG integration and reporting as a box-ticking exercise may fail to differentiate themselves from their competitors that embrace sustainability as a value driver. This in turn offers limited opportunities for brand differentiation and leadership in sustainability.
Going Beyond Compliance
Organisations must start to view ESG integration as more than just a regulatory requirement but as a strategic opportunity to create value, manage risks and build resilience. Taking a passive approach to ESG matters is no longer an option as stakeholders' interest in ESG strategies, practices and performance continues to heighten. Thus, going beyond compliance with reporting requirements would necessarily involve a more pragmatic approach to embedding sustainability and responsible business practices into the core strategy, operations, and culture. Organisations must:
- Develop a proactive ESG strategy which aligns with global standards.
- Integrate ESG into core business operations.
- Foster a culture of sustainability.
- Engage stakeholders actively and communicate authentically.
- Innovate for sustainability and build resilience against future ESG challenges.
- Track ESG outcomes and measure impact.
- Explore ESG related financial opportunities.
Overcoming Challenges
There must be a mindset shift from "obligation" to "opportunity" in order to address the challenges of the compliance-only approach. In addition, the right strategy to embrace ESG as a value driver rather than a regulatory obligation must be developed in line with global standards and adopted by organizations. Focus must also be placed on material ESG factors, whilst stakeholders are actively engaged, and an ESG-driven culture is fostered through the organisation. Improvement mechanisms including benchmarking ESG performance against industry leaders; conducting third-party audits and implementing feedback should be emplaced.
Conclusion
Going beyond compliance requirements on ESG reporting supersedes the need to meet today's expectations, given the imperative of remaining relevant, responsible, successful and sustainable. Organisations must understand and accept that adopting a more proactive approach to integrating ESG in their business processes would create long-term value, address material risks, and help businesses thrive in the evolving economic landscape while meeting stakeholder expectations.
Originally published June 11, 2025.
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