Why Bangladesh Needs Mandatory Environmental, Social and Governance Reporting
In recent times, environmental, social and governance (ESG) performance is increasingly integrated into management and investment decisions thanks to its positive impact on reducing costs, increasing productivity and optimization of investments.
Simply put, ESG is an assessment of how serious a company is about engaging with environmental, social and governance factors. Using ESG principles, investors can assess an entity’s performance across a wide range of metrics, such as effectiveness, labor relations and corporate governance.
Therefore, ESG disclosures are beneficial in terms of attracting a new brand of investors who are not only interested in a company’s financial performance, but also in its commitment to ethical issues.
Consequently, there has been a significant growth in ESG reporting practices, especially among the world’s top performing companies. Following the goal of the United Nations Climate Change Conference (commonly known as COP 21) to achieve net zero carbon emissions by 2021, the issue of ESG reporting, particularly for financial institutions, had taken momentum.
Financial institutions have a major role to play in achieving net zero, due to their ability to restrict funding for projects that lead to environmental pollution. Subsequently, regulators and governments in different parts of the world have taken a more proactive approach to regulating ESG reporting.
Such initiatives have not been limited to the developed world alone. On the contrary, 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) has introduced mandatory ESG reporting for the top 1000 companies in the form of a Corporate Responsibility and Sustainability Report (BSRS).
The BSRS builds on SEBI’s pre-existing requirement to report on corporate sustainability and incorporates information on broader social and governance issues, such as gender diversity, health and safety, the fight against corruption and bribery.
The BSRS reporting format offers companies the ability to quantify their ESG performance across several different metrics. Very recently, in February 2022, SEBI published a consultation document regarding the standardization of the ESG rating and quantification process, indicating the seriousness of the regulator on this issue.
In Bangladesh, there have been several regulatory interventions by different regulators to address the issue of ESG reporting. At the forefront of these initiatives is the Bangladesh Bank, which, through its 2008 circular entitled “Mainstreaming Corporate Social Responsibility in Banks and Financial Institutions in Bangladesh”, introduced the notion of taking reporting seriously. ESG in Bangladesh.
In 2011, the central bank also launched a green finance initiative to support the financing of environmentally friendly projects and introduced the concept of green banking in Bangladesh. Recently, Bangladesh Bank has issued a “Sustainable Finance Policy” (Bangladesh Bank, 2020) to mainstream “to consider Environmental, Social and Governance (ESG) issues” (preamble) in the portfolio of banks and financial institutions in Bangladesh.
The other notable ESG regulatory initiative came from the Bangladesh Securities and Exchange Commission (BSEC), which through its corporate governance guidelines (2006, 2012 and 2018) introduced mandatory disclosure of various corporate governance for listed companies in Bangladesh. The BSEC directive, however, does not incorporate broader ESG issues, such as environmental pollution, social inclusion, discrimination, corruption, etc.
Despite all these regulatory interventions by regulators, 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 characterized by the presence of highly concentrated family ownership, where powerful families prefer to override various governance mechanisms.
As a result, family owners of these large (and listed) companies have little incentive to engage on ESG issues, as it would require them to be more accountable and transparent.
As the infamous Rana Plaza collapse in 2013 revealed, workers in Bangladesh are often subjected 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 construction and fire safety conditions, speaks to the potential power of ESG reporting to allay concerns about labor governance issues and, therefore, , attract new foreign investment.
Furthermore, the fact that despite Bangladesh Bank’s initiatives, very few banks and financial institutions follow 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 leading countries in ESG and meeting the COP 2021 targets.
However, the mandatory introduction of ESG reporting will not be without difficulties. One of the main barriers to implementing ESG reporting is the availability of data.
Businesses have always been familiar with collecting data for financial reporting purposes. However, when it comes to ESG data, attempts (and related investments) to develop and curate this information are limited.
This, coupled with the fact that there is no set format for ESG reporting – unlike financial reporting, which is guided by International Financial Reporting Standards – makes it somewhat difficult for management to understand what should be declared.
It is important to note that companies must own the ESG data they produce. Overreliance on external providers (such as rating agencies) can lead to a situation where a company’s ESG “story” is told by an outside third party with limited knowledge of the company’s business. company.
The reliability of ESG reporting is another major issue. In the absence of an independent insurer, the authenticity of the ESG reporting process could be called into question, making this reporting process largely ritualistic.
As evidenced by the success of the post-Rana plaza certification scheme in the ready-to-wear (RMG) sector in Bangladesh, independent inspections (and reports) can go a long way in allaying concerns about the social and environmental performance of companies. ‘a company.
This is where accounting firms can be at the forefront of the ESG reporting initiative. As a company’s auditors, accounting firms are in the best position to acquire sufficient knowledge of its activity and of the ESG activities that are compatible with it.
They can, in turn, use this knowledge to provide ESG assurance services to investors and regulators. The Institute of Chartered Accountants of Bangladesh (ICAB) should proactively engage with its members and regulators to ensure that the issue of independent assurance of ESG reporting is seriously considered.
With the focus on net-zero emissions at high-level events such as COP 2021, ESG reporting is likely to be a major trend in businesses around the world. Therefore, it may be time for Bangladesh to step up and join the regulatory bandwagon.
Professor Javed Siddiqui is Professor of Financial Reporting at Alliance Manchester Business School, University of Manchester, UK. He can be contacted 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.