By Dr. Liad Ortar

The approach of Corporate Social Responsibility emerged in the early years of the twentieth century with the rise of multi-national (global) corporations. As these business entities gained momentum and expanded their activities around the globe, so did the proliferation of numerous tools, procedures, and standards that sought to produce soft guidance on aspects of human rights, ethics, and the environment. This era of voluntary actions embraced (partially) by corporations, especially with regard to reporting obligations, is about to end very soon. There are some very significant harbingers of change for this. The first harbinger of change is the #europeanunion, which recently approved (as part of a European Parliament decision) the Corporate Sustainability Reporting Directive (#csrd ).

This binding directive (part of the Accounting Directive) is going to be approved by all the institutions of the Union during the coming weeks and will come into effect in 2024 (for 2023 reports). This is the beginning of a real regulatory revolution because this directive (a pan-European law) is going to apply to about 50,000 corporations that will be required to publish a sustainability report. Just for the sake of comparison, today around 15,000 reports are published annually all over the world. This means the expectation is that within three years, five times as many reports will be published, and only in Europe!

These reports are the basis for decision-making processes in the capital markets, especially for institutions that must base their decisions on information that is publicly available. Of course, this motivates, as is happening today in Israel, the creation of professional rating tools that assist institutional investment managers in the decision-making processes and integration of ESG considerations (as required of them by the Israel Capital Market, Savings, and Insurance Authority).

Harbinger of another, much bigger change… is the IFRS Foundation, the largest accounting standard institution in the world. About a year ago, a professional team was established in IFRS for the preparation of regular ESG reporting guidelines (International Sustainability Standards Board (ISSB) On this front as well, the preparatory work is progressing rapidly and it is expected that at the beginning of next year a complete set of accounting reporting guidelines covering the environmental, company and proper management aspects will be put in place. The approach of these two organizations is slightly different, especially with regard to the examination of materiality, i.e. what are the criteria by which it will be decided what is included in the report and what is not.

In both of these standards, one of the most important aspects of reporting is the way ESG aspects are managed throughout the organizational management chain (and by the way, this also includes supply chains) and this is where the board members come into the picture. There are specific reporting guidelines that ask who is the most senior management member responsible for auditing and controlling (and also awarding positive compensation for achievements) ESG processes. Communication about how to manage ESG is a core component in the world of reporting and board members are expected to be educated in the field and also to integrate members that it is their professional field, just as there is an obligation to integrate directors with a deep understanding of accounting. Of course, this responsibility is not without risks and therefore requires an in-depth study of the field and the establishment of the required safeguards (responsibilities of office bearers).

What is certain is that the tsunami of regulating ESG reports in the world is making its way these days right to the shores of the corporate world and the financial regulators and business corporation managers would do well to foresee the future and prepare for it now. There is nothing to wait for the ninetieth minute!