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The U.S. Securities and Exchange Commission (SEC) has proposed amendments to modernize and enhance its existing disclosure requirements related to Environmental, Social, and Governance (ESG) matters. These changes are intended to create improved transparency, better corporate accountability, and increased investor protection for ESG-related investments.
Its proposed rulemaking package requires companies to disclose information related to ESG matters such as carbon emissions, water consumption, diversity and inclusion policies, human capital management practices, board composition and leadership structure.
In this article, we will explore proposed rules, how they will impact companies and how you can prepare.
In December 2020, the SEC issued a proposed rule that would require publicly traded companies to provide additional ESG disclosures in their periodic reports. This includes information about how they manage material ESG risks as well as their performance against standards set by authoritative bodies such as the Sustainability Accounting Standards Board (SASB). Companies will also be required to explain any discrepancies between their actual performance on ESG metrics and their stated commitments.
In terms of what this new rulemaking will look like in practice, the SEC has outlined several key areas of focus. First, companies must provide material information on how they are managing environmental risks within their operations. It should include an analysis of the expected impact of current trends in climate change and provide “quantitative measures” that show how decisions taken by management have reduced or exacerbated those risks over a given period of time.
Companies must also provide information about their social activities such as employee wellness programs or charitable contributions they make in the community. This includes providing quantifiable data around performance outcomes related to diversity initiatives as well as pay equity metrics.
When it comes to governance disclosures companies must provide additional details surrounding their board composition including gender representation at the executive level along with any skills-based criteria used for selection purposes. Also required are further details into executive compensation packages such as how performance is measured or whether incentive-based rewards are used among other things.
The scope of this disclosure is broadening significantly from the existing requirements, which focused primarily on financial metrics and sustainability risks associated with global climate change.
The SEC made clear that the proposed rule is not intended to dictate how companies should operate or manage their risk, but rather provide more transparency in how they go about doing so. Overall these new rules are designed to give investors an enhanced level of clarity when it comes to assessing a company’s overall performance from an ESG perspective before deciding whether or not to invest in them.
However, some call the proposed rule too ambitious and there has been considerable controversy around the inclusion of indirect emissions. That means the requirements and impacts are not only limited to major corporations but also their entire supply chain. Suppliers will be expected to make necessary changes and provide comprehensive reports as well.
The proposed rule is still in its early stages and there are many unanswered questions about how exactly it will be implemented. However, as experts in the ESG space, we know that making these changes will require a significant amount of preparation.
Companies must first take a close look at their current ESG practices and policies. They should assess how well they are currently tracking their environmental, social and governance performance already – this can include things like emissions reduction goals, diversity initiatives, workplace standards, as well as corporate responsibility programs.
Any existing internal reporting on ESG topics, such as progress against targets set by the company itself or external stakeholders such as investors or customers should also be reviewed. By doing so, companies can better understand their current ESG performance baseline which will be necessary when it comes to complying with the new regulations.
Companies need to analyze the proposed disclosure requirements in detail in order to assess what information they need to collect and report in order to comply with them. This includes not only assessing what data they will need but also developing procedures on how such data will be collected and reported periodically in order to stay compliant with the new regulation going forward.
Once a company has identified what information it needs for compliance purposes, it should begin working on making sure it is able to capture accurate data related to its ESG performance over time. It is essential to ensure there are systems in place that can adequately track progress year over year while also maintaining relevant records over extended periods of time if needed for auditing purposes down the road. This could involve establishing adequate systems for tracking such data across all relevant divisions of the organization – from sustainability measures like energy efficiency in operations through to HR-related topics like diversity initiatives – as well as conducting regular audits of those systems in order to ensure the accuracy of results reported externally each year under the SEC’s new ESG disclosure requirements.
Finally, companies need to consider how best to communicate accurate information about their ESG performance both internally and externally and establish a strategic communications plan. Doing so reinforces the confidence that the company understands its obligations under the new regulations while also helping build trust amongst shareholders who may be wary of investing because of concerns over whether certain risks have been adequately addressed by management or not.
By taking these initial steps towards proactively preparing for changes associated with the SEC’s proposed ESG reporting rule, companies can effectively stay ahead of any potential compliance issues while maintaining investor confidence through transparent disclosures about their environmental, social, and governance initiatives.
Those who do not properly prepare risk facing costly fines or other penalties if found out of compliance after new rules come into effect; conversely, those who plan ahead can position themselves as industry leaders in terms of sustainability transparency and reap all the related benefits from doing so.
Our team of experts can help you take a proactive approach to establish and effectively communicate your ESG initiatives. Click here to schedule a one-on-one consultation.
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