Regulating ESG Disclosure: towards enforced and enhanced self-regulation

ESG disclosure has been developed as an important mechanism to monitor businesses’ contribution towards SDG goals. Various jurisdictions have developed regulations on ESG disclosure, in which voluntary versus compulsory disclosure has been the centre of the debate and regulatory design. Voluntary ESG disclosure has been known for its weaknesses, and the current international regulatory landscape of many jurisdictions shows a clear tendency toward compulsory ESG disclosure. However, compulsory disclosure may well fall into the trap of regulatory ritualism and impose a considerable regulatory burden on the regulatees. This article, based on the existing regulatory theories and empirical evidence, argues that rather than viewing ESG disclosure regulation as either voluntary or compulsory, there are a richer variety of regulations that the next stage of ESG disclosure regulation could consider. Among these, this article focuses on the possible design of self-regulation, with a combination of enforced self-regulation and enhanced self-regulation. Applying enforced self-regulation (Braithwaite, 1982), enforcement pyramid of responsive regulation (Ayres & Braithwaite, 1995), and possibly networked responsive regulation (Braithwaite, 2017) to ESG disclosure, enforced self-regulation can be designed as follows. (1) A competent regulator will issue a relevant requirement for ESG disclosure, including the required entities, the baseline disclosure requirement, principles of disclosure, timeframe, and format of disclosure. Many jurisdictions have already taken this step. (2) Companies that are required to disclose their ESG-related information will propose to relevant regulators what they will disclose, including the required baseline information taking into account context-specific ESG issues. (3) A competent regulator will review the proposal and decide whether to approve or reject it for revision. (4) The company will disclose the relevant information, and the regulator can either supervise the process by itself or delegate it to a third party (e.g. a certification organisation) to determine whether the company meet its tailored ESG disclosure requirement. (5) Sanctions will be imposed on those who do not meet the basic requirement, and awards will be given to those who excel in their performance. Enforced self-regulation would benefit ESG disclosure to take care of context-specific ESG issues, disclose information that may have a negative impact on the image of the company, and resist the tyranny of the matrix. Enhanced self-regulation is another important development of the recent literature on self-regulation (Medzini, 2021; Medzini & Levi-Faur, 2023), focusing on the role of regulatory intermediaries. In ESG regulation, international standardisation organisations such as the Task Force on Climate-related Financial Disclosures and various rating agencies have played a crucial role as regulatory intermediaries in developing and defusing the regulatory principles, defining materiality, developing technical screening criteria, and harmonising different standards at the national level. Nonetheless, how the enforced and enhanced self-regulation could work together in a new regulatory model of ESG disclosure remains a challenging and underexplored issue. This article draws implications from the broader regulatory literature to shed light on future research, in particular, how they can complement each other and encourage genuine intention to disclose useful ESG information.