The push for mandatory ESG disclosures in the United States has dramatically increased in recent years, with these disclosures being a particular focus of the Biden Administration, the U.S. Securities and Exchange Commission (SEC), and the U.S. Congress.
While legislation on mandatory ESG disclosure continues to be considered in Congress, near-term action is expected to be taken by the SEC in the form of rule proposals, particularly in the areas of climate change, human capital management (HCM), and board diversity. Existing SEC disclosure standards applicable to climate change and HCM are largely based on principles of materiality and thus provide significant discretion to company management. The SEC’s proposed rules are expected to be more prescriptive and require more granular disclosure about climate change and HCM and, as a result, provide less discretion to management than under the current disclosure regime.
In the meantime, the SEC has reminded public companies—through the release of a sample comment letter—that the agency expects public companies to disclose material information about climate change in their SEC filings under existing disclosure rules. This and other recent statements by SEC officials are a clear signal that climate-related disclosure is now a more significant focus of the SEC than in prior years.
While the SEC’s proposed rules are still developing, many public companies are voluntarily including ESG disclosure in SEC filings, corporate websites, and sustainability reports. The level of voluntary ESG disclosure has grown exponentially over the past few years, primarily driven by investor demand and interest from other stakeholders. This evolution has resulted in some companies selecting frameworks to disclose quantifiable ESG metrics. Companies are also feeling pressure to increase their voluntary ESG disclosure as their peers increase such disclosure to avoid being labeled an ESG laggard by investors or rating organizations.
Enhancing your ESG reporting strategy
Whether ESG disclosure is ultimately mandated by the SEC or provided voluntarily, it is likely that your organization will be reporting even more ESG information in the near future. As a result, companies need to determine which ESG matters are important from a business and operational perspective, and then determine how to effectively report on the company’s ESG strategy, taking into account the topics and metrics that matter most to the company’s stakeholders.
To advance your ESG reporting strategy while planning for a mandatory ESG disclosure framework, there are several practices to keep in mind.
Align your ESG strategy with the company’s business strategy.
• ESG efforts should focus on advancing the company’s long-term strategy, rather than solely on satisfying specific criteria of ESG frameworks and rating organizations.
• Determine the ESG goals, practices, and philosophies that align with the company’s business, strategy and culture.
• The CEO should provide leadership on the company’s ESG strategy in coordination with the board.
Tell your ESG story effectively, consistently and reliably.
• Explain how the ESG strategy advances the company’s long-term business strategy.
• Report on ESG topics that matter most to your investors and key stakeholders.
• Think strategically about which ESG disclosure frameworks and rating organizations to prioritize, taking into account direct or indirect influence and adoption by investors and peers.
• Align your ESG disclosure across all mediums and channels of communication, including SEC filings, sustainability and other company reports, and the corporate website.
Understand that internal controls are just as important for ESG disclosures as they are for financial information.
• All statements by a public company on ESG matters are subject to securities law liability pursuant to Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.
• Ensure that policies, procedures, and internal controls are in place to confirm the accuracy and reliability of ESG data and metrics. Companies should apply the same rigor to ESG reporting as applied to financial reporting.
• Pledges (such as to reduce carbon emissions by a certain percentage by a certain year) should be grounded in a reasonable belief that the promise can be delivered and supportable by existing facts, and processes should be implemented to track progress.
• Enhancing your internal controls and procedures related to ESG disclosures can mitigate litigation risk and regulatory scrutiny.
Revisit the board’s oversight of ESG matters.
• Consider whether the full board will retain primary oversight responsibility for ESG matters or delegate ESG oversight to a board committee.
• Even where the full board is best positioned to retain primary oversight responsibility, board committees can play a significant role in oversight of certain matters and responsibilities relevant to ESG (e.g., assurance of ESG data by the audit committee and integration of ESG goals into compensation programs by the compensation committee).
• There is no one-size-fits-all approach and the governance structure companies implement to oversee ESG will likely evolve as their ESG strategy and disclosure develops.
• Whatever the board’s oversight structure, senior management should ensure that critical ESG information is regularly and consistently reported to the board or appropriate committee.
Keeping these practices in mind can help your organization define and advance its ESG reporting strategy while navigating the evolving ESG disclosure landscape.