Impact of Upcoming Mandatory ESG Reporting for US-Based Companies

ESG Reporting

Businesses in the US have been waiting for the SEC to issue a critical climate risk disclosure requirement. This decision to mandate ESG reporting was initially expected in December 2022 but has, thus far, been delayed. The proposed rule would require all publicly-traded companies to provide disclosures on climate impact and risk, including greenhouse gas emissions resulting from direct and indirect business operations. Though many companies already offer these details in some fashion, the SEC’s objective is to standardize reporting so that investors have an easier way to evaluate a company’s climate risk.

From an investor’s standpoint, climate risk is a significant issue highlighting a business’ sustainability and longevity. Simply put, investors want to know that the organizations they support make efforts to view the future through an environmental lens, align their operations in anticipation of net-zero frameworks, and can remain agile in the face of change. Though it all makes good practical sense, many lawmakers have raised objections, saying it places undue financial stress on businesses that must channel resources into measuring and reporting greenhouse gas emissions. But what does it mean for businesses that must abide by the rule?

ESG Reporting: Why is it Important?

Many organizations are already reporting greenhouse gas emissions through voluntary frameworks like the Global Reporting Initiative (GRI), Climate Disclosure Standards Board (CDSB), or the Carbon Disclosure Project (CDP). Though these organizations each have their own methodologies and goals, they all help companies demonstrate greater transparency where corporate responsibility is concerned. The SEC’s Climate Disclosure Rule seeks to standardize reporting so that disclosures from different companies are easily comparable for investors and decision-makers. Along with the new rule, the SEC has established a task force to prevent fraud. Enforcement will increase, and businesses can expect greater scrutiny of their marketing statements as they must align with their disclosures.

Standardization would prevent companies from misrepresenting or exaggerating their metrics, which 72% of investors do not currently trust. Ultimately, if investors cannot rely on a company’s disclosures, it may impede growth and lead to missed opportunities. Standardized reporting demonstrates commitment and measures progress toward stated goals, sending positive signals to investors, employees, and other company stakeholders.

Strong Leadership is Essential

For most businesses, measurement will remain the most significant concern. Accurate, high-quality, and complete data are required for disclosure, and many companies are still challenged to achieve this, according to a recent Deloitte study. The right technology is critical, but strong leadership will perhaps be the most significant factor in program success.

Accurate ESG reporting requires meticulous planning and governance. The abovementioned study found that only 21% of companies surveyed have an active ESG committee or council focusing on ESG strategy, which may become a barrier to growth once the rule is in place. Executive leaders and boards must not only prioritize ESG goals but also champion the methodologies, frameworks, teams, and technology that will make it possible to reach those goals. For change to be effective, it must come from the top. Reporting must include disclosures of company controlled as well as indirect emissions, so greater care must be taken in evaluating and vetting business partnerships within the scope of ESG.

Scope 1 and 2 GHG emissions may be easier to directly control. Scope 3 emissions—those not produced by the company itself, but by organizations or entities indirectly connected to the value chain—may require greater scrutiny. Audits will need to be conducted to identify Scope 3 emissions and determine whether those elements can change and what impact they will have overall. Activities affecting the measurement under scope 3 might include:

  • Employee commutes
  • Fuel used for business travel
  • Fuel used by vendors delivering company products
  • End-of-life/end-user disposal concerns for products

For example, a drinks company may not currently track how their beverage containers are being disposed of. This would be an area to improve scope 3 emissions. Alternatively, as an example of measurable methods for improving scope 3 metrics, fashion brands such as Lululemon and Patagonia have implemented buyback or trade-up programs to keep used clothes out of landfills.

Though many companies submit metrics of some kind to substantiate efforts for promoting sustainability, as the final announcement and SEC mandatory ESG reporting deadlines come closer, much work to standardize these processes remains to be done. EHS teams may be called upon to contribute to growth in this area, but they cannot hope to succeed without sufficient help. With the right technology, support from strong leadership, and transparent governance, the necessary preparations can be made to meet these obligations.

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