Over the last 16 years, I’ve worked with companies ahead of the curve on their sustainability journey and others just starting out. The pace overall was leisurely because there wasn’t as much momentum as there is today.
Today, organizations understand that sustainability is no longer a “nice to have” but a “must-have.” Without it, their business is at risk—not only from a climate change perspective, but also from a brand, revenue and market perspective, as well. As such, governments are taking action by implementing sustainability initiatives and regulations that will encourage and enable—or force—companies to take action to reduce their impact on the environment.
In the US, one of the most significant of these is an ESG disclosure framework from the Securities and Exchange Commission (SEC). The framework will likely have a wide-ranging impact on publicly traded companies in both the US and worldwide, because aggregated supplier information will also be shared with the SEC when companies share their Scope 3 information.
When the SEC framework is put in place—likely in a few months—all public companies doing business in the US will be affected, not just those in sectors typically associated with high emissions or other negative environmental impacts. Even companies with strong ESG track records will feel the effects, as they may need to divert resources away from other strategic initiatives to comply with the new disclosure requirements.
How to be ready for the new ESG requirements
Companies that start preparing now will be best positioned to weather the storm and come out ahead of their competitors. Although there's no one-size-fits-all solution, here are four actions that US companies can take to prepare for the potential SEC requirements, estimated to be in effect by December 2022.
- Review ESG data in both corporate sustainability and annual reports
Companies should review not only the data shared in their sustainability report but also that which is provided in their Form 10-K and proxy statements to the SEC. While many larger companies have begun reporting on their Scope 1 and 2 emissions and even Scope 3 (per the GHG protocol) in their sustainability reports, as will be expected with the SEC ESG disclosure, they may not be providing the level of detail required.
Companies will need to ensure they are aligned with the SEC’s expectations (specifically, following the GHG protocol and TCFD and GRI standards). To do so, they should ideally review the company’s materiality assessment, which delineates which factors are material to the business. This is because if Scope 3 is considered material to the company’s operations, it must be reported. This review will provide companies with a good starting point for understanding the additional information they may need to disclose.
While most companies currently disclose more detailed ESG data in their sustainability report than in their 10-K, many also understand that the level of information provided in the 10-K must become more detailed.
In a recent survey of ESG disclosures of 50 companies in the Fortune 100, 76% increased their disclosure related to environmental and social goals and targets. Environmental disclosures, with a focus on climate change, moved to the top ESG topic for SEC filings. The information provided in the 10-K must be aligned with what’s provided in the sustainability report.
- Start transforming your operations so your company is ready to change rapidly
The turnaround time for SEC disclosure will be relatively quick, given the size of most companies impacted. Companies will be expected to report on Scope 1 and 2 emissions for fiscal year 2023 in February 2024, and begin tracking Scope 3 emissions in preparation for reporting by February 2025 for fiscal year 2024. (This assumes Scope 3 is material to their business, which is the case for most organizations, or that they have set a GHG reduction target for this scope.)
Companies will need to start collecting and disclosing a range of data to meet these requirements, including, for example, from fleet emissions (Scope 1) and energy use (Scope 2), as well as waste emissions, business travel, employee commute, product emissions, transportation, leased assets and more (Scope 3).
Doing so will require a significant transformation for many companies, which will need to start tracking and reporting on accurate and timely ESG data that they may not have collected in the past, not just from their operations but also from their suppliers up and down the value chain.
This provides an opportunity for rethinking the way business is run, to moving to a more agile, innovative, flexible and data-enabled model that not only provides the information needed but also allows the company to make timely and informed decisions to reduce emissions as a result.
Depending on the needs of the company, this may involve investing in new technology, moving to a circular business model, rethinking the supply chain or making other operational changes.
- Follow European mandates to stay ahead of US requirements and keep up with European competitors
European companies are already well ahead of their North American counterparts when it comes to addressing ESG issues. The EU’s Corporate Social Responsibility Directive (CSRD) is aligned with the SEC’s ESG disclosure requirements—if not more stringent.
For example, the CSRD requires companies to have third-party assurance of their ESG report, as well as plans in place for mitigating climate risk. If operating in the EU, North American companies will need to make sure they are disclosing all relevant information following the CSRD in order to remain competitive.
On the flip side, this means that European companies doing business in the US are much better prepared than their North American counterparts to meet the SEC's new disclosure requirements. By being proactive and aligning their practices with those of their European counterparts that are already subject to similar requirements, North American companies can both keep pace with the increasing global focus on ESG issues and be prepared for the SEC’s ESG disclosure requirements.
- Address not just strategy and processes but also technology
While most companies have set their sustainability goals and begun developing a strategy and creating the requisite processes, one area that often comes last is the technology to support these processes and goals. This represents a missed opportunity as technology plays an increasingly important role in the field of sustainability.
Technology is a main driver for success when it comes to aggregating, tracking and managing the data points that align with the KPIs and goals to meet the SEC ESG requirements.
A variety of software programs and online tools are available that can help track emissions, energy use and other sustainability metrics. In addition, many companies are now using sensors and other devices to collect real-time data on their energy consumption and measure their carbon footprints.
By investing in the right technology, companies can gain a better understanding of their impact on the environment, make more informed decisions about how to reduce their emissions and support the implementation of a successful sustainability strategy.
Getting ready for the future of ESG
The SEC's potential requirement that publicly traded companies disclose their ESG practices presents both challenges and opportunities for publicly traded companies. By taking the time now to assess current practices and set reduction goals, companies can put themselves on the path to success—and avoid being blindsided by the disclosure requirements when they go into effect.