In recent times, environmental, social and governance (ESG) performance is increasingly being incorporated into management and investment decision-making thanks to its positive impact on cost reduction, higher productivity, and optimal investment.
In simple terms, ESG is an evaluation of a firm's seriousness in engaging itself with environmental, social and governance factors. Using ESG principles, investors can assess an entity's performance across a wide range of parameters, such as efficiency, labour relations and corporate governance.
Therefore, ESG disclosures are beneficial in terms of attracting an emerging brand of investors who are not only interested in the financial performance of a company but also its engagement with ethical issues.
Consequently, there has been significant growth in ESG reporting practices, especially among top-performing companies in the world. Following the United Nations Climate Change Conference (commonly known as COP 21) target to achieve net-zero carbon emissions by 2021, the issue of ESG reporting, especially for financial institutions, had gained further momentum.
Financial institutions have a major role to play in achieving the net-zero target, due to their ability to restrict the financing of projects that lead to environmental pollution. Subsequently, regulators and governments in different parts of the world have taken a more proactive approach to regulate ESG reporting.
Such initiatives have not been confined to the developed world only. Rather, many emerging economies, such as South Africa, China and India have introduced mandatory ESG reporting for listed companies.
In India, for example, the Securities and Exchange Board of India (SEBI) introduced mandatory ESG reporting for the top 1000 companies in the form of a Business Responsibility and Sustainability Report (BSRS).
The BSRS builds on SEBI's pre-existing requirement to produce a Business Sustainability Report and incorporates disclosures regarding wider social and governance issues, such as gender diversity, health and safety, anti-corruption and bribery.
The BSRS reporting format provides the companies with the opportunity to quantify their ESG performance across several different parameters. Very recently, in February 2022, SEBI has issued a consultation document regarding the standardisation of the ESG rating and quantification process, indicating the regulator's seriousness in this issue.
In Bangladesh, there have been several regulatory interventions by different regulatory bodies to address the issue of ESG reporting. At the forefront of such initiatives has been the Bangladesh Bank, which, through its 2008 circular titled 'Mainstreaming corporate social responsibility in banks and financial institutions in Bangladesh', introduced the notion of taking ESG reporting seriously in Bangladesh.
In 2011, the central bank also issued a green financing initiative to support the financing of environmentally friendly projects and introduced the notion of green banking in Bangladesh. In recent times, the Bangladesh Bank has issued a 'Sustainable Finance Policy' (Bangladesh Bank, 2020) to incorporate 'to accommodate Environmental, Social and Governance (ESG) issues' (preamble) in the portfolio of banks and financial institutions in Bangladesh.
The other notable ESG regulatory initiative has come from the Bangladesh Securities and Exchange Commission (BSEC), who through their Corporate Governance Guidelines (2006, 2012 and 2018), has introduced mandatory disclosures of various corporate governance issues for listed companies in Bangladesh. The BSEC guideline, however, does not incorporate broader ESG issues, such as environmental pollution, social inclusion, discrimination, bribery etc.
Despite all these regulatory interventions by the regulatory bodies, the level of ESG reporting in Bangladesh has remained disappointing. Research evidence suggests that CSR reporting in Bangladesh is largely unreliable, poor, and sometimes politically motivated.
The corporate sector in Bangladesh is characterised by the presence of highly concentrated family ownership, where powerful families prefer to override various mechanisms of governance.
Consequently, there are limited incentives for the family owners of these large (and listed) corporations to engage with ESG issues, as these would force them to be more accountable and transparent.
As exposed by the infamous Rana Plaza collapse in 2013, workers in Bangladesh are often subject to various forms of exploitation and are forced to work in deplorable working conditions.
The success of the post-Rana plaza regulatory regime, which required mandatory inspection reports regarding building and fire safety conditions, is a testament to the potential power of ESG reporting in allaying concerns regarding labour governance issues, and consequently, attracting further foreign investment.
Also, the fact that despite the initiatives of the Bangladesh Bank, very few banks and financial institutions follow the sustainability reporting guidelines, provides a business case for a mandatory introduction of ESG reporting in Bangladesh. This initiative would put Bangladesh on the map of countries leading ESG issues, and the attainment of COP 2021 goals.
The mandatory introduction of ESG reporting, however, will not be without its challenges. One of the biggest obstacles in implementing ESG reporting is the availability of data.
Corporations have been historically familiar with the collation of data for financial reporting purposes. However, when it comes to ESG data, there are limited attempts (and related investment) to develop and conserve such information.
This, coupled with the fact that there is no defined format for ESG reporting - unlike financial reporting, which is guided by the International Financial Reporting Standards - makes it somewhat challenging for the management to understand what is required to be reported.
It is important to note that companies need to have ownership of the ESG data it produces. Over-reliance on external providers (such as rating agencies), may lead to a situation where the ESG 'story' of a company is being told by an outside third party with limited knowledge of the company's affairs.
The reliability of ESG reporting is another major issue. In the absence of an independent assurer, the authenticity of the ESG reporting process could be questioned, making such reporting process largely ritualistic.
As demonstrated by the success of the post-Rana plaza certification regime in the Readymade Garments Sector (RMG) in Bangladesh, independent inspections (and reports) can go a long way in allaying concerns regarding the corporate social and environmental performance of a company.
This is where Chartered Accountancy firms can be at the forefront of the ESG reporting initiative. As auditors of a company, the chartered accountancy firms are best placed to gain sufficient knowledge of its business, and ESG activities that are compatible with it.
They can, in turn, use this knowledge to provide ESG assurance services for investors and regulators. The Institute of Chartered Accountants of Bangladesh (ICAB), should proactively engage with its members and regulators so that the issue of independent assurance of ESG reports is seriously considered.
With the focus on net-zero emissions in high profile events such as the COP 2021, ESG reporting is likely to be a major trend in companies across the world. Therefore, it is perhaps time for Bangladesh to step up and join the regulatory bandwagon.
Professor Javed Siddiqui is a Professor of Financial Reporting at the Alliance Manchester Business School, the University of Manchester, UK. He can be reached at [email protected]
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.