ESG INTEL
...On Moving Forward with ESG Reporting Despite Delayed SEC Climate Rule
Written by Hussein Sayani
In 2022, the U.S. Securities and Exchange Commission (SEC) proposed a set of sweeping climate disclosure rules to standardize how the companies traded on its platform report their environmental, social, and governance (ESG) data. The proposed disclosures include greenhouse gas (GHG) emissions, energy consumption, climate risks, climate-related targets, and other climate-related metrics. As proposed, these ESG reporting regulations would more closely align requirements in the United States with those being implemented in major markets around the globe. The proposed rules were met with considerable controversy, leading to a record-breaking number of comments during an extended public review period with the finalization delayed until April 2023. However, sources now suggest the finalized climate disclosure rule may be further delayed until the fall[1], as the SEC reviews and weighs public comments and market trends before implementing major changes to ESG reporting.
How does this delay impact U.S. companies?
[1] Rives, Karin. “SEC Climate Disclosure Rule Delayed until Fall, Former Commissioner Says.” S&P Global Market Intelligence, 28 Apr. 2023, www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/sec-climate-disclosure-rule-delayed-until-fall-former-commissioner-says-75479173.
[2] Holger, Dieter. “WSJ News Exclusive | at Least 10,000 Foreign Companies to Be Hit by EU Sustainability Rules.” The Wall Street Journal, 5 Apr. 2023, www.wsj.com/articles/at-least-10-000-foreign-companies-to-be-hit-by-eu-sustainability-rules-307a1406.
[3] Workiva and PWC. Change in the Climate: Key Findings from Our Survey Measuring How U.S. Business Leaders Are Preparing for the SEC’s Climate Disclosure Rule, www.workiva.com/sites/workiva/files/pdfs/change_in_the_climate_report_02.24.23.pdf. Accessed 3 May 2023.
[4] Seemann, Axel, et al. “Do ESG Efforts Create Value?” Bain, 28 Apr. 2023, www.bain.com/insights/do-esg-efforts-create-value/.
[5] “The State of Play in Sustainability Assurance.” IFAC, 27 Feb. 2023, www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/state-play-sustainability-assurance.
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U.S Companies Face Increasing Pressure to Disclose ESG Data
Regardless of an SEC mandate, U.S. companies are facing increasing pressure from shareholders, customers, and local governments to disclose ESG information and demonstrate progress on ESG improvement goals. Several looming regulations at the local, state, and federal levels will require ESG disclosures outside of the proposed SEC climate disclosures. Notably, any company with over $1 billion in revenue that does business in California may need to comply with the state’s proposed Climate Corporate Data Accountability Act and the Climate-Related Financial Risk Act, which require disclosure of GHG emissions and climate risk. At the federal level, government contractors and suppliers will need to comply with the proposed Federal Supplier Climate Risks and Resilience Rule, as well as several agency-specific rules, all of which require reporting of GHG emissions, climate risk, and reduction targets.
The largest drivers are on the international front, with several policies from Europe set to redefine global ESG reporting standards. The European Union (EU) Corporate Sustainability Reporting Directive (CSRD) will be phased in as early as 2024 and will extend the EU’s ESG reporting requirements—which are far more comprehensive than the proposed SEC rules—to all foreign companies with at least one branch or subsidiary in the EU and $44.51 million in net revenue. The CSRD is expected to impact more than 10,000 foreign companies, many of which are based in the United States[2]. Starting in 2024, the German Supply Chain Act will require international companies with a branch office and/or 1000 employees in Germany to conduct ESG due diligence and address risks across their global supply chain.
Additional ESG policies set to phase in over the next few years also include the EU’s Corporate Sustainability Due Diligence Directive, which will require ESG disclosures and risk mitigation across global supply chains, and the UK’s Carbon Border Adjustment Mechanism, requiring product carbon footprints on imports and imposing fees based on their embodied carbon.
Given these pressures, it comes as no surprise that a recent Workiva survey on how U.S. business leaders are preparing for the SEC’s climate disclosure rules found that 89% of companies are already disclosing some ESG data and 70% of companies plan to proactively comply with the proposed SEC rules regardless of when they are implemented[3].
ESG Reporting is Here to Stay and the Time to Start is Now
ESG reporting continues to drive value creation, with a recent international survey of over 100,000 companies showing a strong correlation between investment in ESG programs and revenue growth[4]. The number of companies disclosing ESG data has increased each year, with 95% of the largest companies globally and 99% of the largest 50 companies in the US reporting ESG information in 2021[5] . As the SEC carefully weighs ESG disclosure options for the U.S., it is abundantly clear that stakeholder appetite for reliable, consistent, and decision-ready ESG information is not waning anytime soon and companies need to comply to maintain a competitive advantage.
Building and managing an effective ESG program requires time and effort. Nearly 40% of U.S. business leaders in the Workiva survey felt their companies were unprepared to meet the disclosure requirements due to technology, budgetary, and/or staffing constraints. Moreover, 70% of U.S. business leaders surveyed believe it may take up to two years to develop the data streams needed to comply with SEC disclosure requirements.
These survey results are consistent with Langan’s experience. Smaller companies are nimbler and can aggregate the data needed to comply with either the proposed SEC regulations or ESG data requests more quickly. Larger companies, on the other hand, have more complex operations and higher volumes of data that are often siloed across departments. Developing data streams to meet disclosure requirements for large companies is an extensive effort as it requires buy-in and collaboration between departments and, in some cases, implementing technology to manage the high volume of data.
While the extent of disclosures required by the SEC is yet to be finalized, the proposed rules and emerging local, state, and international regulations provide a strong indication of what will be required. It is highly likely that U.S. companies will need to report energy consumption and scope 1 and 2 GHG emissions, which are GHG emissions produced directly by a company’s business operations and indirectly via purchased electricity and other energy. The disclosure of physical climate risks that may impact a company’s operations (e.g., hurricanes, flooding, etc.) and transitional risks associated with the reduction of GHG emissions and adoption of renewable energy are also likely to be required. While additional disclosures such as scope 3, supply chain GHG emissions, and reduction targets may also be required, U.S. public companies can proactively begin working on aggregating data required for the most likely disclosures.
Langan’s ESG team provides a wide range of support, including education, strategy development, digital data support, disclosure support, carbon management, climate risk analysis, and more. We serve clients ranging from beginners launching an initial ESG program to experts seeking to supplement their in-house staff and add program features. Our specialty is helping companies rightsize and prioritize ESG projects into a program of continuous improvement.