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ESG Compliance: How Your Company Can Meet the Requests of Investors and Legislation
In recent years, environmental, social, and governance (ESG) compliance has become an increasingly important issue for companies across all industries. Investors, regulators, and customers alike are calling for greater transparency and accountability from businesses when it comes to ESG practices. In this blog post, we’ll explore how your company can meet the requests of investors and legislation to ensure ESG compliance.
First, let’s define what ESG compliance means. ESG compliance refers to a company’s adherence to environmental, social, and governance standards and regulations, as well as its efforts to report on and improve its ESG performance. It’s important to note that ESG compliance is not just a matter of “checking the boxes” on regulatory requirements. It’s about taking a proactive approach to sustainability and responsible business practices and demonstrating a commitment to long-term value creation for all stakeholders. Understanding how your firm should approach compliance in 2023 should be a top priority based on trends we are seeing with ESG, namely:
- New mandatory sustainability and ESG disclosure rulings expected in 2023 from the SEC & EFRAG
- Federal and state-level emissions and building performance standards
- Conflicting sets of legal and financial disclosure requirements across multiple jurisdictions.
- Research showing that litigation against climate-related greenwashing, or ‘climate-washing’ litigation, which seeks to hold companies or states to account for various forms of climate misinformation before domestic courts and other bodies, is gaining pace
So, how can your company ensure ESG compliance? Here are a few important considerations:
Complying with Upcoming Regulations vs. Voluntary Frameworks
Preparing for possible regulatory oversight and mandates where ESG factors and climate disclosure are concerned should be approached differently than the process of putting together ESG reports in line with the alphabet soup of voluntary frameworks and standards. A main concern for companies going into 2023 is preparing for the global patchwork of sustainability and ESG regulation and enforcement while dodging the threat of greenwashing claims and other ESG litigation. Last year we saw an influx of new sustainability legislation and regulatory requirements around the world including in the US, the UK, and the EU with more to come in 2023 as the wild west of voluntary sustainability action comes to an end. Companies must be proactive in monitoring current and emerging ESG regulations to ensure compliance and remain competitive.
In the United States, the Securities and Exchange Commission (SEC) recently announced that it will be increasing its focus on ESG compliance and disclosure with its climate-related disclosure rule, expected to be enacted in mid-2023. In November 2022, the EU passed the Corporate Sustainability Reporting Directive (CSRD), which will make comprehensive sustainability reporting a requirement for around 50,000 companies by 2026. The new EU Sustainability Reporting Standards (ESRS, the policy framework under the CSRD) combines financial data, ESG information, and assurance for the first time, replacing the previous Non-Financial Reporting Directive (NFRD).
- Cross jurisdictional conflicts or implications: (e.g., US companies or their subsidiaries may be responsible for general ESG reporting under the EU’s Corporate Sustainability Reporting Directive (CSRD)
- Intra-jurisdictional implications (e.g., US state-level laws and actions that conflict with federal legislation, regulation, or enforcement).
- Scope: The size and type of firm dictate who will be subject to mandatory disclosure and the extent of the information required in the reporting.
- Focus: Do regulations have a focus on the broader goals of ESG, just sustainability, or climate-related emissions reporting?
- Materiality: Double vs. Single level
- Scope Emissions: What scopes of emissions will regulations require for disclosure? Certain mandates may require scope 1, 2, and 3 emissions calculations, while others are expected to only require 1 and 2, unless a firm has already set a goal related to scope 3, in which case scope 3 would be required as well.
Firms not already doing so should consider adopting globally recognized ESG reporting standards and frameworks that are voluntary as of now, such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-Related Disclosures (TCFD), and the GHG Protocol to provide consistency and comparability in reporting. Some investors and banks have already begun to quasi-mandate these frameworks for their members and partners.
Firms should pay close attention to following the TCFD in particular and conducting any carbon accounting in line with the GHG Protocol. The Task Force on Climate-related Financial Disclosures (TCFD) is a set of guidelines to help companies disclose climate-related financial risks and opportunities to investors, lenders, insurers, and other stakeholders. More than 2,000 companies around the world use TCFD guidance to report on their climate governance and strategy, including 83 of the world’s largest corporations. Practice and preparations for possible ESG regulation should be conducted using the TCFD as a guidepost as regulatory proposals from the ISSB, EFRAG, and SEC with expected adoption dates this year all mutually accept and align with the TCFD’s recommendations. In the United States, the Securities and Exchange Commission (SEC) is basing its upcoming climate disclosure rules on TCFD. The SEC stated that the TCFD will make corporate climate risk reporting more “consistent, comparable, and reliable”. Its mandates on reporting emissions will also follow the methodologies and calculations outlined by the GHG Protocol, making the protocol an important entity to keep up to speed with.
Gathering the right data for ESG Compliance
The first step in achieving ESG compliance is to gather accurate data. This data should be collected from a variety of sources, including internal operations, supply chain partners, and other stakeholders. Once this data has been collected, it should be properly managed and analyzed to identify areas of strength and weakness. Firms already collecting and reporting ESG data to voluntary frameworks should approach this process going forward with more rigorous data standards in order to prepare for possible regulations that will require ESG data to be financial and investor grade.
Data goals to ensure compliance:
- Track progress: Companies should be tracking progress over time to measure impact. This is essential for meeting the requests of investors and regulatory bodies, who often require regular updates in reporting cycles on ESG performance. Monitoring data in real-time on a monthly, daily, or even hourly basis is also great practice for achieving investor-grade data quality to pass audits and identify areas of improvement within operations.
- Make sure goals are science-based and based on reasonable projections: Goals stated towards emissions reductions, waste, water use improvements, and more should align with science-based methodologies and reasonable expectations based on base year emissions inventories. Firms that commit to unreasonable goals and do not regularly demonstrate or report on progress towards those goals will be at increased risk of litigation for greenwashing and false investor information.
- Standardizing data collection: Establishing a standardized approach to data collection will ensure consistency and accuracy across all departments and operations. This process should eliminate data silos across firm-wide departments and achieve efficient communication between teams.
- Utilizing software and tools: ESG software and tools can help companies collect, manage, and analyze ESG data more efficiently and effectively. Auditing data upon pre and post-ingestion, real-time analytics, instant reporting, accurate calculations, and more are all part of the immeasurable benefits of using cloud-based software for sustainability data management.
Operationalizing ESG to streamline reporting and face investor scrutiny
- Conduct a materiality assessment: A materiality assessment can help you identify which ESG issues are most relevant to your business and stakeholders. This will allow you to prioritize your efforts and allocate resources accordingly and will help ensure that the company is focusing on the areas that matter most in terms of regulatory compliance.
- Develop a comprehensive ESG policy: Your ESG policy should outline your company’s commitments and goals when it comes to environmental, social, and governance issues. It should also include specific actions and timelines for achieving these goals.
- Engage with stakeholders: ESG compliance is not just about meeting regulatory requirements. It’s also about engaging with stakeholders and demonstrating a commitment to responsible business practices. This includes engaging with investors, customers, employees, and local communities to understand their expectations and concerns.
- Seek third-party verification and certification: Third-party verification and certification can provide added credibility and assurance that your company is meeting ESG standards and regulations. This can include certifications like the Global Reporting Initiative (GRI) or the Carbon Trust Standard. Additionally, ESG data auditing and sustainability-related consulting services are on the rise as major consulting companies and start-ups understand the heightened need for these services. Regulations are aimed at moving ESG and carbon data away from limited assurance to reasonable assurance expectations and requirements over the next few years.
In summary, ESG compliance is becoming increasingly important for businesses of all sizes and industries. By taking a proactive approach to sustainability and responsible business practices, and implementing effective reporting and tracking systems, companies can meet the requests of investors and legislation and demonstrate their commitment to long-term value creation for all stakeholders.
WatchWire is a sustainability and energy management software-as-a-service (EMSaaS) provider. Across the globe, WatchWire helps commercial and corporate real estate portfolios, Fortune 500 industrial/manufacturing and big-box retail, government, healthcare, and educational facilities reduce emissions, meet their sustainability and net zero goals, and reduce energy expenses while simplifying sustainability and carbon reporting.
Additionally, through advanced, automated data auditing, the WatchWire platform can catch billing errors, saving users money and helping them actualize a superior ROI.
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