Boards have a long list of worries in 2012, amongst which is the push towards more prescriptive environmental, social and governance (ESG) reporting.

A recent Australian Institute of Company Directors survey found an increasing number of directors perceive ESG as important within their business. Nearly 90 per cent of the 523 directors surveyed believe the level of regulation on climate change will increase.

Industrial relations and occupational health and safety are other key ESG issues that directors believe will change a lot in the next two years.

The sustainability reporting debate has a much lower profile than executive pay, but in some ways the push towards prescriptive reporting on ESG risks, such as environmental exposures, has more profound implications for companies, boards and institutional investors.

If some big investors have their way, companies will produce more quantifiable information on a wider range of ESG risks, and companies will have less scope to use their judgment on ESG disclosures.

This debate could rise several notches in 2012. The carbon tax's introduction in July will bring more prominence to ESG reporting, or lack thereof in some companies.

One can imagine an ASX 200 company eventually caught with a bigger carbon exposure than the market expects, and superannuation funds demanding to know why fund managers were not aware of the risk and why the company did not disclose it.

More shareholder activism on non-financial matters could inflame the debate in 2012. The Occupy protests worldwide graphically show the mood towards corporate greed and poor sustainability practices. 

A potential downside of companies providing more ESG information is the risk that some activist groups will use it to attack boards at annual general meetings and promote their narrow agenda.

The rise of social media makes it easier for activist groups to coordinate their attack on a company's ESG footprint.

Yet nothing talks like money. The Australian Council of Super Investors (ACSI), which represents funds that have more than $300 billion in assets under management, found just over half of the top 200 listed companies are yet to move towards meaningful sustainability reporting.

In its prominent 2011 report, "Sustainability Reporting Practices of the ASX 200", ACSI said: "Unfortunately, this once again indicates [there is a] significant proportion of ASX 200 companies who do not understand the material nature of sustainability risks and the importance investors place on the disclosure of performance against the effective management of these risks.

"ACSI intends to ensure that all companies in the ASX 200 are cognisant of the material significance of these risks and we expect to see vast improvements in future years."

Of note will be how many companies adopt the "ESG Reporting Guide for Australian Companies" published by ACSI and the Financial Services Council in 2011.

The guide has some commendable features, and is based on companies producing more measurable ESG metrics.

This can be a problem for some companies that are unwilling to produce information on ESG risks they believe are immaterial to the share price, or old news. The guide might trigger more intense debate on sustainability reporting in 2012 if companies choose to ignore the requests of super funds on this issue.

Sustainability reporting is such a complex issue.

At one extreme it suggests some listed companies and their boards are failing to understand and report ESG risks, and breaching their continuous obligation requirements.

At another, it suggests some companies are ignoring the concerns of their largest shareholders.

In the middle are fund managers, who some in the superannuation industry believe are doing a poor job of building ESG risks into valuation methodologies.

Watch for fund managers and their service providers, such as sharebroking analysts, to produce much more research on corporate ESG risks in 2012 and beyond if super funds threaten to cancel some investment mandates over this issue.

Companies will need to carefully consider their response to this push on sustainability reporting in 2012. Many top 50 companies already produce detailed sustainability reports and put great effort into the issue.

Providing more quantifiable data on long-term ESG threats has significant risks if handled poorly.

Companies can rightly argue there is no strong investment mechanism yet to reward good ESG reporting, or punish those companies that are lax.

As such, some boards are likely to resist calls for more prescriptive ESG reporting that could burden companies, especially smaller ones, and ensure change occurs at a manageable, considered pace.

Whatever happens, prepare for a more heated debate on sustainability reporting in 2012.