Over the past few years, many stakeholders have been asking questions to companies on how they are addressing environmental, social and governance (ESG) risks and, more specifically, climate-related risks. This has led to increased demand from investors for disclosure transparency. For example, some stakeholders would say that being able to understand how a beverage company is managing the risk of efficiently having access to the increased amount of water needed to support potential growth should be addressed just as financial metrics are. However, the demand for transparent disclosures should not be viewed as a negative or just a form of compliance but as an opportunity for companies to take credit for their innovative and disruptive efforts.
SEC’s Proposal on Climate Impact
The word “sustainability” is frequently used interchangeably with ESG. We've seen the terminology evolve over many years — corporate citizenship, corporate responsibility, philanthropy and sustainability, to name a few. At this point, many in the capital markets have organized around the term ESG to understand and evaluate business impacts and dependencies on the environment and society.
Although ESG relates to a broad range of environmental, social and governance risks, the driving interest right now is on the E, more specifically climate-related impacts. Fitting under the umbrella of ESG, climate addresses how companies manage both their physical risk, such as a higher rate of extreme storms and intensified weather conditions, as well as their transition risk, such as policies and regulations related to greenhouse gas emissions.
With the increasing attention by many stakeholders and, most notably, investors, regulators such as the U.S. Securities and Exchange Commission (SEC) have begun focusing on climate-related disclosures. On March 21, 2022, the SEC issued a proposed rule that would standardize climate-related disclosures provided by public companies and serve as a driver for organizations to enhance their sustainability practices. The proposed climate rule would use a phase-in approach that would require public companies to include “inside the financial statements” disclosures related to their material climate-related financial impacts, as well as an “outside the financial statements” disclosure where companies would disclose their greenhouse gas emissions, climate governance, climate risks and the progress toward their goals. Although the current proposal only impacts public companies, private companies may also need to understand the ESG needs of their major customers and investors.
Where Can Accountants Start?
Because of how new and rapidly changing the ESG regulatory environment is, it has left most companies and accountants to ask themselves, “where can I start?” Through my experience researching the ESG landscape, knowing where to start can be overwhelming. Here are five questions I believe can help you figure that out:
- Does the company have appropriate oversight responsibility for climate-related or other ESG risks and opportunities?
- Does the company know their stakeholders and the material issues they are interested in?
- What is the company doing to operationalize their ESG strategy and to achieve any climate-related goals?
- Does the company have a framework of processes and controls to support complete, accurate and timely measurement of ESG-related data?
- Does the company have the appropriate transparent disclosures around the material ESG topics?
Considering these factors can provide a starting point to understand how mature a company is on their ESG reporting journey and where you may want to focus.
How ESG Reporting Can Add Value to a Company
By knowing your company’s stakeholders, understanding material issues and developing processes to track progress, climate-related datapoints can be leveraged to identify cost-effective ways to improve performance. The process of compiling and assessing ESG-related data, specifically related to climate impacts, can help companies discover risks that may not be captured by conventional financial analysis. It can also help companies discover avoidable costs. This process can provide the opportunity for leaders to drive risk mitigation, enhance resilience, foster innovation, increase employee engagement and, perhaps more importantly, become more operationally efficient.
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