Businesses are shifting toward higher-quality sustainability reporting.
Key takeaways
Sustainability disclosures offer strategic value.
Regulators are pulling back from complex frameworks.
The sustainability reporting landscape is undergoing a significant transition. We are deep within the third wave of sustainability disclosures, with an unmistakable shift as companies and regulators retreat from complex frameworks in favor of streamlined, higher-quality reporting. This movement emphasizes valuable insights over exhaustive compliance, and effective outcomes over expensive exercises. Importantly, this shift toward quality also recognizes sustainability as more integral to strategic growth than well-intentioned initiatives or compliance-driven reporting.
New horizons
Over the past decade, regulatory enthusiasm has propelled environmental, social and governance (ESG) disclosures into uncharted territories of reporting on non-financial information. Regulations such as the European Union's Corporate Sustainability Reporting Directive (CSRD) and the U.S. Securities and Exchange Commission’s ESG disclosure requirements promised heightened transparency and accountability. California's Senate Bills 253 and 261 require eligible companies to report emissions and disclose climate risks with limited and eventually reasonable assurance. Additionally, other states are advocating for corporate accountability.
However, these more expansive regulatory ambitions have recently encountered a stark reality check. The SEC has ended its legal defense of the proposed rules. The European Union has created the EU Omnibus Directive to reduce the CSRD’s regulatory burden. These developments indicate a critical reassessment: Sustainability reporting, to drive real impact, must strike a balance between the comprehensive and the practical.
The third wave
The first wave of sustainability reporting was largely voluntary and aspirational, characterized by narrative-driven disclosures. The second wave moved toward increased standardization, driven by investor demands and nascent regulatory frameworks. Today, we navigate the third wave, where quality, comparability and a genuine return on sustainability investment have become paramount.
Quality disclosures should not merely tick regulatory boxes but deliver strategic value, enabling businesses to improve decision making, mitigate risk and unlock growth opportunities. A recent Harvard Law School article implied that companies with effective sustainability programs consistently outperform peers in operational efficiency, market valuation and long-term profitability. This "sustainability dividend" is compelling evidence that genuine sustainability integration, rooted in material, high-quality, focused disclosures, translates directly into shareholder and stakeholder value.
However, sustainability reporting often suffers from issues of comparability, credibility and relevance. Companies frequently grapple with reporting in sufficient detail to satisfy regulatory scrutiny without becoming bogged down by overly granular, costly data exercises that offer little actionable insight.
This challenge underscores why the current retreat from regulatory encumbrance isn't surprising. Complicated frameworks can become counterproductive, inadvertently promoting box-checking exercises rather than genuine sustainability.
What organizations can do
Boards of directors play an increasingly critical role in this evolving landscape. Recent research published by the National Association of Corporate Directors stresses the importance of boards moving beyond compliance oversight toward active strategic guidance.
High-quality disclosures enable directors to better assess risk, understand sustainability-driven value creation opportunities, and communicate effectively with investors and other stakeholders. The most successful boards embed sustainability metrics into their broader business strategies, ensuring alignment with long-term organizational goals rather than siloed ESG initiatives.
Businesses must recalibrate their sustainability reporting strategies. Rather than merely reacting to changing regulations, proactive leaders should focus on meaningful, strategic sustainability disclosures that drive business value. Companies should prioritize metrics that clearly link sustainability initiatives with operational performance, financial outcomes and reputational enhancement.
Companies should consider these actions:
1. Use technology to facilitate efficient auditability and lower the cost of compliance.
With audits of non-financial data now written into law, activate ESG technology that is already embedded in or connected to most enterprise resource planning or reporting platforms. These include systems such as Microsoft Sustainability Manager, ServiceNow, Workiva and AuditBoard, among many others. Connect your non-financial data (e.g., energy bills, supplier invoices, human resources data) to ESG data repository and greenhouse gas (GHG) calculator tools that enable data approvals and workflows to automate or optimize regulatory reporting, with the added benefit of auditability.
2. Add efficiency metrics to data you already track.
With GHG calculations already measuring energy, water and waste, consider tracking energy per unit produced or fees for waste haul per site. These metrics have a material impact on the financials of your business, and their improvement translates into dollar savings and margin lift. If it is important, measure it.
3. Add a one-click red flag to supplier onboarding or evaluation.
In your procurement process, consider implementing procurement policies and supplier red flags. Add a simple yes/no field or decision point that pulls from your supplier risk platform and searches the second and third tier of your supply chain for child or forced labour. You can also search freely accessible databases (e.g., U.S. Customs forced labor lists, public deforestation watchlists) before onboarding a Tier 1 supplier or buying specific goods.
4. Make sustainability-related data a tiebreaker in capital allocation.
When multiple capital expenditure proposals show the same internal rate of return (IRR), fund the one with lower emissions, water usage or reputational risk. This can be as straightforward as including an addendum in your investment decision-making process: “If IRRs are equal, choose the lower-risk ESG profile.”
The third wave of sustainability reporting is a flight to both quality and value, rooted in realism and pragmatism. Organizations that recognize and act on this shift will be positioned to meet regulatory expectations while also leveraging their sustainability efforts as competitive differentiators. The retrenchment is an essential pivot toward clarity, efficiency and value.
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