Some would have you believe that environmental, social, and governance issues are somehow dying phenomena. They’re not. “ESG,” the acronym financial professionals and some corporates use to encompass them certainly is, though. A recent poll showed that “ESG” was one of the most divisive terms in America. It came in at number five behind “woke” and was also in the company of terms like “equity” or “DEI,” shorthand for diversity, equity, and inclusion. “Authenticity” even made the top (or bottom) 30 list.
It would be one thing if that were the end of the story – that corporate responsibility is no longer expected or rewarded. But the noise in the U.S. is a distraction from the truth: the global trend towards more robust sustainability reporting is charging ahead.
The landscape is experiencing one of the most, if not the most transformative shifts since the practice began. Regulatory advancements and evolving stakeholder expectations have resulted in the Securities and Exchange Commission’s (SEC) final climate-related disclosure rules and the European Union’s Corporate Sustainability Reporting Directive (CSRD). Both legally required disclosure frameworks are aimed at enhancing transparency and accountability in corporate sustainability disclosures.
Quite the contradiction when you consider words and terms associated with environmental and social sustainability being among some of the most polarizing. The facts remain, however. We’ve written ad nauseam about the link between sustainability factors and financial performance, which is further underscored by the record number of climate resolutions filed at North American companies this year.
With this context, it’s almost baffling how some were (and apparently sill are) opposed to the SEC’s adoption of new rules requiring registrants to disclose climate-related information represents a significant step towards standardized reporting. These will provide investors with consistent, comparable, and reliable information on how companies address climate-related risks. Key components include the disclosure of material climate-related risks, their impact on the company’s strategy, business model, and outlook, and the quantification of certain effects of severe weather events and other natural conditions. Additionally, accelerated and large accelerated filers are required to disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions, subject to third-party assurance, though Scope 3 GHG emissions disclosure is not mandated.
In the EU, the CSRD seeks to expand and standardize sustainability reporting, focusing on the integration of sustainability into corporate reporting frameworks. It emphasizes the need for companies to disclose their impacts on the environment and society, as well as how these impacts affect financial performance. Like the SEC climate-related disclosure rule, CSRD aims to enhance the comparability and reliability of sustainability reports across the EU market.
We’d be remiss if we didn’t note that CSRD requirements are not only for EU companies. In a few years (2028), US companies will be required to report as well if they wish to continue conducting business in Europe. CSRD is also considerably more extensive the SEC’s rule; if you sit in the value chain of one of these companies, prepare now. It’s only a matter of time before your customers come knocking for information you don’t have.
But all is not lost! There are incremental steps that can get you where you need to be. Leading sustainability reporting frameworks like the Global Reporting Initiative (GRI), International Sustainability Standards Board (ISSB), and Task Force on Climate-related Financial Disclosures (TCFD) are crucial for creating a coherent reporting strategy. These frameworks also provide comprehensive guidelines for disclosing economic, environmental, and social impacts, offering a basis for the interoperability with the CSRD and SEC rules.
As we look to the future, sustainability reporting standards and regulatory requirements will play a pivotal role in shaping corporate strategies, investment decisions, and consumer behavior. The integration of non-financial factors into reporting frameworks not only responds to regulatory pressures but also reflects a broader shift towards sustainable development and responsible purchasing and investment practices. Companies that proactively adapt to these changes, leveraging the frameworks of GRI, ISSB, and TCFD, and aligning with regulatory requirements like those of the SEC and EU, will not only comply with emerging standards but also position themselves favorably among investors and other stakeholders, all of which increasingly prioritize sustainability.
While compliance is certainly the flavor of the day, the exercise of sustainability reporting is bigger than that. Much bigger. The key for reporters will be finding a delicate balance between technical aptitude and effective communication. ESG, DEI, and equality are still contentious. In our view, one, if not all will disappear from the dialog. However, it’s safe to agree for agreement’s sake, that it’s hard to contest responsible business practices or a responsible business. Figure out what you believe in as a company – its purpose – and stick to it. Remember that actions speak louder than words, and in this game progress and results are required, not optional. Lastly, in a field rife with acronyms, avoid jargon. It will get you nowhere fast. Just ask our recent fallen hero, “ESG.”
