ESG Reporting and Readiness
Investment-grade ESG reporting is the new mandatory for companies looking to ensure regulatory compliance and reduce ESG risk including the growing threat of ESG activism. A company’s ESG reporting contains information relevant to the impact it has from an environmental, social, and governance perspective. In addition to the company’s corporate sustainability report, ESG disclosures are increasingly appearing in SEC filings, such as the 10-K and the proxy. Indeed, investors and regulators are becoming more specific in dictating expectations for the 10-K and enhanced proxy disclosures. So, the relevant question is no longer if you should report material ESG data, ESG risk, and ESG targets in these filings. It’s where, what, when, and how to report that matter now. The answers will become increasingly nuanced as the rules continue to evolve.
In this environment, ESG reporting guidance and proxy advisory services must go beyond keeping up with SEC mandates and drafting ESG disclosures that effectively address shifts in investor sentiment. Companies need detailed roadmaps for what material E, S, and G data to collect, what processes and controls to put into place for verification purposes, and what new qualitative information needs to accompany the data to best illustrate the company’s ESG narrative and the soundness of the investment thesis.
With the ESG compliance stakes higher than ever, your ESG proxy advisory experts and financial reporting experts must be on the same page and ideally at the same table to deliver unified support. A comprehensive approach empowers you to develop programs and write policies and proxy disclosures that elevate your investor communications to the high standards investors expect and regulators demand while positioning you to take full advantage of every opportunity to discuss how your business is positioned to respond to the relevant risks and opportunities in these material ESG areas.
Why does your company need investment-grade reporting?
Investors are seeking out relevant ESG information as part of their investment decision-making process. In addition to investors, many government and regulatory bodies around the world are beginning to require this type of reporting, including the Securities and Exchange Commission (SEC) with the move to mandate climate-related, cybersecurity, and human capital management disclosures.
The 10-K and proxy are now viewed less as a reporting chore and more as a valuable opportunity for sharing the company’s commitment to a diverse set of ESG principles that enable the company to better navigate challenges and deliver long-term value.
For many companies, the need to comply with evolving regulatory guidelines and mandates is impetus enough for enhancing ESG reporting capabilities. However, compelling reasons for reporting in the 10-K and proxy go well beyond compliance. Over the years, these documents have evolved into integral tools for investor communications. Investors go to these documents for material information about the company that is updated annually. And now, ESG is a part of that material information they are seeking to evaluate their investment decisions.
The 10-K and proxy are now viewed less as a reporting chore and more as a valuable opportunity for sharing the company’s commitment to a diverse set of ESG principles that enable the company to better navigate challenges and deliver long-term value. In many cases, these are the very same principles to which trillions in capital are pledged and with which large institutional funds must align their votes in order to honor their own environmental and social commitments.
What regulations exist for dictating ESG reporting requirements?
Both globally and within the U.S., the regulatory landscape shifts continuously and quickly. But one constant is that regulatory momentum clearly is on the side of increasing and standardizing ESG-related disclosures in the proxy and 10-K. In the U.S., the SEC has proposed additional new rules mandating that public companies disclose more climate-related data, including data about greenhouse gas emissions, climate risk assessments, scenario analyses, and board oversight of climate risks, among other climate-related topics.
Public companies are also subject to additional new and developing SEC rules that address enhanced cybersecurity disclosures and human capital management disclosures including diversity data across all levels of the company. While many companies have voluntarily reported on such information prior to requirements in place, the ways the information is reported and where the information lives vary widely company to company. With the new regulations, there will be more consistency in the ESG disclosures reported across companies.
Beyond the U.S., the European Union is implementing increased disclosure requirements as well. EU rules specific to climate change include Taxonomy Regulation (including specific metrics for banks, insurers, and asset managers), Sustainable Finance Disclosure Regulation, and the Corporate Sustainability Reporting Directive, all of which have implications for ESG reporting for companies with operations in Europe.
How can a company ensure ESG reporting is truly investor-grade?
Companies that have been sharing ESG data for years in their CSRs will need to take numerous steps to make sure the information is ready for the 10-K and the proxy and that the CFO can comfortably confirm its validity. The purpose behind improving the disclosures within these filings is to elevate shareholder communications and make material ESG information easily digestible for all stakeholders while confirming disclosures meet all ESG compliance rules. Both data collection processes and financial controls expertise are integral in this process and to ensure 10-K and proxy disclosures are ultimately audit ready.
As you think through what and how to disclose ESG information in your filings, a comprehensive, research-driven, and targeted approach to reporting readiness will help with developing the ESG disclosures you should be filing today and may be required to file tomorrow as investor expectations evolve. Some key topics to consider include environmental sustainability, employee diversity, board oversight of ESG, and ESG metrics in executive compensation. The details of the final disclosures in each of these areas should be based on peer benchmarking data and investor sentiment as much as possible and may look different for different companies depending on the industry and your company’s unique operations. The goal should always be robust and strategic disclosure that helps investors more easily make decisions as well as make comparisons between organizations.
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