The Pace of Change Around ESG May be Changing, But Your Path Shouldn’t

With the Biden administration’s focus on climate risk and the new SEC leadership, we see the likelihood of more robust required disclosure regulations around environmental commitments, human capital disclosures and ESG (environmental, social and governance) reporting increasing. These potential trends may serve to amplify the impact of growing investor and customer expectations that businesses need in order to demonstrate that their purpose is not just words, but actions that benefit all of their stakeholders and their organization.

Companies looking to provide investors and consumers with high-quality data to inform decisions shouldn’t wait for federal mandates around disclosures to begin reporting on ESG. After all, such initiatives are not simply about ticking a regulatory box but creating sustainable business advantages and value. Strategic ESG initiatives are not only good for a company’s stakeholders, its community and our broader society, they are also good for their bottom line.

Businesses have an opportunity to serve as a leading example of how a strategic ESG plan can help mitigate risks, improve the bottom line and build trust with stakeholders. Here are the actions businesses should take to address rising expectations around environmental and other ESG priorities.

Understand climate risks and align ESG efforts with the business strategy

ESG issues are often material to a company’s core strategy and long-term value creation, and many areas within ESG, if not addressed, can expose a company to risks across the environmental, social and governance spectrum. However, a strategic focus on these issues can help alleviate these risks, provide for growth opportunities and build trust with stakeholders by reinforcing that a company is a good corporate steward.

In addition, environmental commitments, such as net zero emissions, and other ESG efforts often require a reshaping of corporate strategy and in turn, a company’s operating and financial model. It’s critical to assess both opportunities and risks to understand the implications of commitments on business growth and identify where reshaping or reinvention is needed.

Establish a baseline and reduction target for emissions

ESG commitments need baselines and milestones, and a strong focus on reporting can help companies understand where they are, track progress against goals and better communicate with stakeholders. For net zero commitments around GHG emissions, companies typically assess emissions across their value chain for one year, setting a baseline to track progress in reductions over time. Companies can then look for ways to make changes across geographies, product lines, supply chains, downstream logistics, investment portfolios, product use or end of life disposals to help reach GHG reduction targets.

When tracking and reporting on net zero commitments or any ESG initiative, companies should prioritize the availability, standardization, accuracy and consistency of their data to demonstrate meaningful progress over time and provide a view into how a company compares to its peers. Until regulators provide further guidance on ESG disclosures, businesses can analogize to financial reporting and implement processes and controls to start reporting on ESG.

Assign oversight responsibility

Close oversight from executive leadership, including the board, is essential to ensure that ESG issues are successfully integrated into the business strategy, effectively executed, and accurately and consistently reported to investors and stakeholders. In fact, these challenges are starting to gain attention in the boardroom - 45 percent of directors say these issues were regularly part of their board’s agenda in 2020, compared to 34 percent the year before. In addition, the audit committee may want to consider whether some level of review of ESG disclosures is needed to provide confidence and trust in the quality and transparency of information reported, whether by internal audit or the external auditors.

The Biden administration has made several announcements signaling its commitment to taking on climate change, and with Gary Gensler’s appointment as SEC Chair, the potential for new disclosure requirements is receiving significant attention and debate. Companies should be emboldened by the opportunity, rise to the occasion and address issues across the environmental, social and governance spectrum. The careful management of these essential ESG initiatives can make any business with such a focus a stronger company in the long-run.

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