How your organization addresses the numerous Environmental, Social, and Governance (ESG) challenges in a meaningful and sustainable manner must be top strategic priority. According to the Governance and Accountability Institute, 92% of S&P 500 businesses have released ESG reports and pledged to disclose how they will cut greenhouse gas (GHG) emissions in future reports in response to investor pressure. Political activists, shareholders, social media, customers, and employees are putting pressure on decision-makers to base investments on ESG issues.
Add a third group to the mix now. The Securities and Exchange Commission (SEC). The SEC plans to require publicly traded companies to disclose their approach to tackling climate risk, including their plans to meet any targets they have set for reducing that risk, on their Form 10-K under a new climate risk regulation. In March 2022, the SEC released new requirements for reporting climate risk. These regulations require disclosure of:
- Potential risks and significant effects of climate change on the company’s operations, business plan, and outlook
- Processes for risk management and risk management of climate-related risks
- Scope 1 and 2 Greenhouse Gas (GHG) emissions
- Scope 3 emissions that are significant or that are part of the company’s overall GHG emission reduction goal.
- Qualitative and quantitative climate risk disclosures, such as the financial effects of climate change and other environmental factors as well as transitional operations on financial statement line items
These guidelines have been accessible for public feedback even though they are not final. More than 14,000 public comments on the proposed regulation are being examined by the SEC right now. According to the SEC, even a small business would have to make considerable investments to comply with GHG emissions disclosures, with large businesses spending upwards of $500,000. Business leaders will need to employ consultants, accountants, auditors, and other sustainability professionals to conduct an impartial assessment of ESG related filings to get independent verification of the reported data.
Along with the increase in cost, the another challenge is the lack of a cohesive standard of reporting. There are more than 100 companies globally that specialize in grading ESG performance all using differing methodologies and standards of performance. Confusion is being caused by these contradictory frameworks, which eventually contribute to the lack of trust in the accuracy of ESG reporting.
At Engage, we think it’s better to concentrate on selecting one of the four frameworks listed below:
- Global Reporting Initiative (GRI) – https://www.globalreporting.org/
- Sustainability Accounting Standards Board (SASB) – https://www.sasb.org/
- Task Force on Climate-Related Financial Disclosures (TCFD) – https://www.fsb-tcfd.org/
- United Nation Sustainable Development Goals – https://sdgs.un.org/
We believe aligning your business with at least one of these four frameworks will provide the best option to eventually comply with any future SEC regulations.
If you think just because you are not a publicly traded company that ESG reporting doesn’t concern you, think again!
First, Stakeholder expectations for ESG reporting can have a significant impact on private business. Though they are not subject to all the same regulations as public companies, a private company’s customers who are public firms are. As the demand for ESG reporting keeps increasing, private organizations are being subjected to more ESG-focused surveys, requests for compliance documentation, supplier scorecard data, and benchmarking. Your customers want to know about your ESG policies and actions, and in many cases, they need to know. Customers are demanding that the companies they do business with uphold codes of conduct, respond to ESG questionnaires, and commit to a variety of risk mitigation measures as they craft their ESG goals and manage their compliance obligations. Understanding the ESG objectives of your customers can help you maintain and even improve these relationships.
Second, not having an ESG strategy may make it harder for you to secure funding. Lender and investor funding connected to ESG measures is steadily increasing and becoming table stakes. Lenders can offer additional opportunities and possibly lower borrowing costs when borrowers can show a commitment to ESG measures. Many private equity firms have made a strong case for linking certain ESG measures, such as diversity and greenhouse gas emissions, to their capital allocation strategy.
Third, strong ESG values are being demanded by your workforce. People prefer to work for companies that promote ESG initiatives such as DE&I (diversity, equality, and inclusion), volunteerism, and environmental preservation. In terms of staff recruitment and retention, a strong ESG strategy gives firms an edge over the competition. Businesses should communicate their ESG initiatives as a component of an all-encompassing ESG strategy.
Ultimately, ESG reporting is here to stay, and there will be increasing pressure to comply, whether your organization is public or private. For the long-term viability of your business, make the commitment today to build a solid ESG strategy that distinguishes your position in the marketplace.