Guardians of Truth: Rethinking How We Police ESG Disclosure Accuracy

As ESG disclosure becomes mandatory worldwide, the crucial question is no longer what companies report, but whether that information can be trusted. Much of the debate has focused on the scope of disclosure, but far less attention has been paid to the enforcement mechanisms that ensure accuracy. My recent paper, Guardians of Truth: How to Ensure the Accuracy of ESG Information, addresses this missing piece.

My central claim is that most jurisdictions are trying to police ESG disclosure with tools designed for financial statements, and that transplanting this mechanism does not work. ESG information is often qualitative, forward-looking, and judgment-laden. Financial reporting mechanisms either fall short – providing too little enforcement to matter – or overshoot, imposing costs and risks that discourage useful disclosure. Through a comparative analysis of Japan, the United States, and the European Union, I show why current approaches misfire and propose a hybrid enforcement framework that allocates each tool where it works best.

Why accuracy assurance is different for ESG

ESG disclosure serves multiple purposes. It helps investors make better decisions, it strengthens corporate accountability, and – particularly under “double materiality” regimes – it enables stakeholders and the public to pressure companies to address environmental and social challenges. Each of these functions has different beneficiaries, which means the costs of accuracy assurance should not always fall in the same place. If disclosure primarily serves investors, then investors and the companies they own should bear most of the burden. But if it also serves broader societal goals, then public enforcement funded by taxpayers must play a larger role. Ignoring this distinction creates mismatches between enforcement tools, beneficiaries, and cost bearers.

A comparative diagnosis

The United States relies mainly on investor litigation, especially Rule 10b-5 actions. This approach can deter outright lies but struggles with ESG’s aspirational claims, which courts often dismiss as immaterial puffery. Plaintiffs face steep hurdles in proving reliance or loss causation, and the looming threat of litigation risks silencing valuable disclosures.

The European Union pursues mandatory third-party assurance under the Corporate Sustainability Reporting Directive. This works reasonably well for quantifiable metrics such as greenhouse gas emissions but is ill-suited for qualitative or forward-looking claims. The supply of credible assurance providers is thin, independence rules restrict the market further, and compliance costs rise quickly.

Japan has chosen yet another path, leaning heavily on public enforcement by the Financial Services Agency and the Securities and Exchange Surveillance Commission. With about 4,000 listed companies and fewer than 400 SESC staff supported by around 300 officials in Local Finance Bureaus, resources are stretched far too thin. ESG disclosures cannot be systematically reviewed, and the result is systemic under-enforcement.

Japan’s natural experiment

Japan offers an unusually revealing case study because listed companies are required to disclose ESG information across three different mandatory documents: the Business Report (under the Companies Act), the Annual Securities Report (under the Financial Instruments and Exchange Act), and the Corporate Governance Report (under Tokyo Stock Exchange rules). Each is subject to different enforcement mechanisms. The framework is fragmented, inconsistent, and largely the product of regulatory history rather than deliberate design.

Between 2011 and 2024, there were only eight enforcement actions related to ESG information in Annual Securities Reports. Most concerned governance issues such as related-party transactions or executive compensation. None involved environmental or social disclosures. Even high-profile examples –TEPCO’s pre-Fukushima safety reporting or Fuji TV’s human rights policies – escaped meaningful enforcement. These cases underscore why relying solely on public enforcement is insufficient: systemic risks and human rights concerns can slip through the cracks.

Why familiar tools misfire

The comparative evidence shows why financial-era mechanisms misfire when applied to ESG. Third-party assurance is useful for verifiable data but cannot credibly verify narrative claims or future commitments. Litigation deters falsehoods but fails when courts dismiss claims as puffery or when they lack measurable price effects. Public enforcement could, in theory, cover both investor and stakeholder disclosures, but without adequate resources it remains reactive and inconsistent.

A hybrid solution

The way forward is a hybrid approach that allocates tools to their comparative advantage. Assurance should be reserved for high-impact, objectively verifiable metrics, such as emissions data, where it can add real value. Public agencies need greater resources and ESG expertise to oversee qualitative disclosures and systemic risks, recognizing that these serve wider societal purposes. Liability rules should be recalibrated to deter factual misstatements without chilling aspirational disclosure made in good faith.

This model also aligns costs with beneficiaries. Where accuracy primarily benefits investors, private mechanisms should dominate. Where disclosures are mandated for broader societal reasons, public enforcement should carry more of the financial burden. In short, assurance should be targeted, public oversight strengthened, and liability standards recalibrated.

Implications

For boards and executives, the message is clear: ESG disclosures should be treated with the same seriousness as management discussion and analysis in financial reports. Ownership should be clearly assigned, controls documented, and oversight exercised at the highest levels.

For institutional investors, engagement should focus on the governance of ESG claims – how data is collected, verified, and reported – rather than relying on litigation to secure accuracy. Supporting credible assurance for decision-useful metrics is more effective than expecting courts to police aspirational statements.

For regulators, the lesson is to avoid one-size-fits-all mandates. Phased and targeted assurance, better resourcing of agencies, and liability standards that distinguish verifiable facts from aspiration are essential. Fragmented systems, such as Japan’s three-document approach, should be harmonized.

ESG disclosure is here to stay, but without credible accuracy assurance it risks becoming a hollow exercise – fuelling both greenwashing and disclosure chill. The experience of the United States, the European Union, and Japan shows that familiar enforcement tools are not enough. Only a hybrid, purpose-built model – combining targeted assurance, strengthened public oversight, and context-sensitive liability – can make ESG information trustworthy, cost-effective, and worthy of the confidence that markets, investors, and society demand.

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Takuma Kumashiro is an Associate Professor at Graduate School of Law, Kobe University and Visiting Researcher at the Japan Securities Dealers Association.

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This blog is based on a paper presented at the Asian Corporate Law Forum (ACLF). Visit the event page to explore more conference-related blogs.

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