Published 10 October 2023 in Sustainability • 8 min read • 
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At the end of July, the European Commission took an essential step by adopting the European Sustainability Reporting Standards (ESRS) in pursuit of a sustainable economy. These new ESRS standards, which are strategically aligned with the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI), aim to ensure a high degree of coherence in global sustainability reporting. However, it should be noted that there are still some differences between the different regimes, such as the ESRS definition of materiality including the concept of “double materiality”, i.e., not just the impact of the company on the climate but the impact of the climate on the company.
With this gradual move towards greater alignment, companies can avoid having to report to multiple reporting regimes, reducing the reporting burden. In addition, the new ESRS standards are facilitating global comparability, leading to comprehensive reporting on ESG issues. This not only reinforces the EU’s commitment to sustainability but also paves the way for a unified global framework for meaningful corporate disclosure. This helps companies escape the “reporting trap” (i.e., spending much of their available ESG resources on reporting instead of performance enhancement). For instance, companies face fewer requirements to report differently in different jurisdictions. The alignment also makes life easier for investors as they seek to compare peer companies reporting under different ESG regimes.
The fast-paced developments in global ESG regulations and frameworks are quickly transforming the position of the board of directors from one based on engagement to one requiring true commitment because, under the new rules, directors are becoming full stakeholders in a company´s ESG performance. Clearly, the changing regulatory landscape requires reinforcement on an organizational level. So, what changes are needed within the realm of ESG to future-proof companies on their climate-related disclosures?
Let’s look at two positive examples in practice: one from the semiconductor industry and another from the experience of the Singapore stock exchange in the adoption of disclosure standards.
ASML is an innovation leader in the semiconductor industry with total net sales of €21.2bn ($23bn) in 2022. Netherlands-based ASML, one of the biggest firms in its sector, provides chipmakers around the world with hardware, software, and services. As a matter of fact, it is one of the most important players in the semiconductor supply chain, with an almost exclusive position on the machines that chipmakers need to produce computer chips – all major chipmakers use ASML’s technology.
Regarded as a sustainability role model in its sector, ASML has a very low ESG risk score from Morningstar/Sustainalytics of 9.6 (indicating “negligible risk”), placing the company in first place out of 328 peers in the semiconductor industry. The company also features in the S&P Global Sustainability Yearbook 2023, scoring 83 out of a possible 100.
ASML´s approach hinges on a solid ESG governance structure, well-equipped board members, and the inclusion of supply chain and innovation in pursuit of its “net zero” targets.
As part of its sustainability program, ASML developed a clear climate action strategy that has a stratified approach to achieving net zero greenhouse gas emissions (see chart).
More than 98% of ASML´s CO2 emissions are sourced from its supply chain and product use (what are referred to as “scope 3” emissions). Consequently, for its climate action strategy to deliver on its promise, ASML is working to embed its net zero commitments in its product development and supply chain activities, for instance, by aiming to increase the energy efficiency of its lithography solutions. For each of the emission categories, key driver trees have been identified that ASML should work on to achieve its objectives.
To reinforce its ESG governance, in April 2023, ASML´s supervisory board decided to establish an ESG committee that focuses on ESG and sustainability in recognition of their importance both to the company and its business. The responsibilities of this committee include assisting the supervisory board in carrying out its governance and oversight responsibilities with regard to ESG matters. Some important agenda topics for the board include the company’s ESG strategy, the integration of ESG in the company, as well as ESG sustainability performance and progress against its objectives. The prominent position of this committee underpins ASML’s climate ambitions at the highest level, not just in its operations – increasing its chances of a successful transformation.
The Taskforce on Climate-related Financial Disclosures (TCFD) was founded in 2015 to develop a global standard for consistent climate-related financial risk disclosure to enable companies to report on their potential climate impact. The standard requires companies to analyze risks and opportunities through the lens of different global warming scenarios, alongside embedding good corporate climate governance practices.
Regarding governance, the TCFD standard recommends the disclosure of two elements that require commitment from senior management:
a.) A description of the board’s oversight of climate-related risks and opportunities.
b.) A description of the management’s role in assessing and managing those risks and opportunities.
Even though the number of companies signing up to the TCFD standards has quickly risen over the past five years, the actual disclosures from those companies illustrate that the category of governance is lagging compared to that of metrics and targets (see graph below). From that data, it could be concluded that some companies are still setting climate-related targets without a matching level of disclosure for governance.
Given the urgency of climate change, it may come as no surprise that regulatory bodies worldwide are seeking to strengthen the commitment and accountability of companies in their ESG reporting. The list of countries that have implemented TCFD-aligned disclosure requirements – or are working on it – includes the UK, Brazil, Switzerland, and the EU. Indeed, the new ISSB S1 General Requirements for Disclosure of Sustainability-related Financial Information and S2 Climate-related Disclosure, which are designed to represent an international benchmark, are aligned with the TCFD.
In late 2021, the Singaporean Stock Exchange (SGX) published a directive for listed companies regarding sustainability disclosures, as recommended by the TCFD. According to the SGX, all Singapore-listed companies are required to provide climate reports as a part of their sustainability reporting on a “comply or explain” basis. Under that premise, companies can comply with the regulation or explain why they have decided not to do so. This directive has resulted in industry-specific mandatory climate reporting for SGX-listed companies in the financial, energy, agriculture, food, and forest sectors starting in the 2023 financial year. The transportation, materials, and buildings industries are set to follow in 2024.
Following the increased focus of the SGX on the disclosure of climate reports, all directors of Singapore-listed companies must attend one of eight pre-selected ESG sustainability training courses. The companies involved were required to provide confirmation that their directors have attended this training in their first sustainability report for the 2022 financial year.
From our experiences over the past five years, it has become evident that merely following recent recommendations and standards should not be top of the ESG checklist for companies. Successful ESG programs can only deliver value to stakeholders if they have a strong and diverse commitment from both the C-suite and the board of directors. With many more companies yet to realize the full potential of the TCFD disclosure standards, the experiences from first movers are worth learning from. Based on these examples, we suggest the following three practical steps for companies looking to successfully navigate the new landscape:
A formal sustainability governance process creates clarity for roles and responsibilities and helps to embed the notion that the company’s ESG performance is not just the responsibility of the sustainability department. At board level, topics (and responsibilities) should be broadly shared and not limited to a dedicated ESG committee of members with an “affinity” for the subject. As seen in the example of ASML, its ESG committee actively assists the supervisory board in carrying out its governance and oversight responsibilities regarding ESG matters.
To obtain a commitment from boards on ESG objectives, involve and engage them early on in ESG risk assessments such as double materiality and TCFD processes. This can be done through workshops or interviews to ensure the impact of climate scenarios and materiality on the company’s strategy are taken into account. In case regulatory bodies do not provide appropriate education – as offered by the SGX, companies should ensure that the C-suite and board directors are suitably trained in ESG ratings, metrics, and performance. This is a must to establish a broader base of ownership.
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To reach the targets set out in most net zero plans, fundamental innovation is required on a product level and in collaboration within the value chain. In the case of ASML, this covers more than 98% of ASML´s CO2 emissions. To bring these emissions down to zero, value chain partnerships are a must – initially, to disclose scope 3 emissions but, more importantly, to jointly reduce emissions to zero before 2040.
With sustainability factors rapidly becoming an integral part of corporate reporting and strategy, companies that want to achieve ESG leadership must realize that their board members need to be fully committed, not just involved. When struggling with the difference between the two, just remember the chicken and the pig.
6 November 2023 • by Sudhanshu Sarronwala in ESG
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