...On Why Companies Need an Effective ESG Program Now More Than Ever
Written by Robert Forster
Investors, customers, and other stakeholders are increasingly seeking Environmental, Social, and Governance (ESG) disclosures, which communicate a company’s performance on environmental impacts; diversity, equity, and inclusion; and ethics and oversight. The global ESG reporting landscape is rapidly shifting from voluntary reporting to mandatory disclosures.
At the United States federal level, the U.S. Securities and Exchange Commission (SEC)’s proposed Climate Disclosure Rule will require public companies to report greenhouse gas (GHG) emissions (scopes 1-2 and material scope 3 categories) and climate-related risk disclosures. The SEC is set to issue this rule in April 2023 with clarifications regarding the extent of the requirements. Another proposed regulation in the United States is the Federal Supplier Climate Risks and Resilience Rule. This rule would require reporting of GHG emissions (scopes 1-2 and material scope 3 categories) and climate-related risk disclosures through CDP, as well as setting science-based targets through the Science Based Targets Initiative for Large Federal suppliers (>$50M+ in annual contracts) and GHG emissions (scopes 1-2) for Mid-Sized Federal suppliers (>$7.5M, <$50M in annual contracts) if approved.
States are also enacting climate-related disclosure requirements, most notably California’s proposed Climate Corporate Data Accountability Act (SB253) and Climate-Related Financial Risk Act (SB261). These proposed regulations will require all U.S. public and private companies doing business in California with annual revenues exceeding $1 billion to disclose scope 1, 2, and 3 emissions reporting and climate-related risk disclosures. U.S.-based companies are also facing pressure to comply with the ESG requirements of other countries where they do business, particularly those in the European Union and the United Kingdom. The European Union passed the Corporate Sustainability Reporting Directive and the Carbon Border Adjustment Mechanism, and the United Kingdom passed the Climate-related Financial Disclosure Regulations. Both bodies of regulation extend their jurisdiction to non-resident companies with a business presence.
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Now more than ever, it is imperative companies develop an ESG program capable of maintaining compliance with increasing disclosure demands and requirements. There are four critical steps to developing and maintaining an effective ESG program, each requiring considerable time, effort, and planning to achieve:
Significant research, data gathering, and analysis are required to develop a thorough understanding of a company's ESG impacts. This involves identifying which ESG topics are material to a company, meaning they have significant economic, environmental, and social impacts that influence stakeholder assessments and decisions. With a comprehensive understanding of these factors, creating a tailored ESG program that meets company and stakeholder needs is more manageable.
Companies must develop strategies to address ESG topics and support their mission, values, and long-term growth. These strategies must include measurable targets and metrics to track progress over time and should be integrated across all aspects of business operations, including supply chain management, product development, and stakeholder engagement. This process requires careful planning, alignment with the company's culture, and a commitment from leadership to prioritize ESG performance.
To stay effective and relevant, companies must regularly collect, analyze, and report on their ESG performance. Doing so can help avoid reputational damage, loss of investor trust, and missed business opportunities. Through continuous monitoring and reporting, companies can track their progress on key ESG metrics, demonstrate their commitment to sustainability, and proactively identify emerging risks and opportunities. Prioritizing ESG efforts and reporting is essential for companies to become sustainable and responsible.
Companies must regularly engage with stakeholders to understand their perspectives, needs, and expectations, as well as to communicate their ESG performance and progress. This engagement is critical to the success of an ESG program, as it builds support and trust that the program aligns with stakeholder needs and expectations.
Developing a Comprehensive ESG Program
Federal- and State-Level Rulings
An ESG program empowers a company to build a sustainable and responsible business that creates long-term value for all stakeholders. However, building a successful ESG program takes time and effort. Starting now helps your organization stay on top of required disclosures and remain competitive in the market. Not all companies will be directly required to disclose under these upcoming regulations, but as mandatory ESG reporting becomes the norm, lack of disclosure still may adversely impact your organization. Companies not required to disclose will still need to provide their latest ESG metrics to remain competitive. Customers and investors will request GHG emission metrics to use in their scope 3 GHG inventories. In addition, stakeholders at large will likely turn to third-party rankings and data that may be inaccurate in the absence of self-disclosed metrics.
Whether you’re just getting started with ESG, have an established program, or need assistance to progress, Langan’s team has the expertise to help.
Building an Effective ESG Program
Learn more about developing a holistic ESG Program.
1. Establish a thorough understanding of a company’s operations, stakeholders, and environmental and social impact
2. Integrate ESG considerations into core business strategies and operations
3. Continually monitor and report ESG progress
4. Regularly collaborate and engage with stakeholders