One of 2022’s biggest stories is the U.S. Securities and Exchange Commission (SEC) jumping into the environment, social and corporate governance (ESG) responsibility discussion.
The SEC issued a proposed rule on the Federal Register focusing on the environmental aspect of ESG that would require publicly traded companies to disclose climate-related info in their annual 10-K filings, namely:
- management of climate-related risks, such as greenhouse gas (GHG) emissions, and
- how climate risks (e.g., severe weather events) could impact business operations or financial conditions.
The public comment period has closed, but a survey by SaaS provider Workiva found that:
- 17% of businesses welcome the proposed rule
- 51% say they support ESG, but feel it’s over the top
- 23% say that this data doesn’t belong in SEC filings, and
- 35% are concerned they don’t have the resources to meet the rule’s requirements.
Compliance concerns
A poll of Finance pros that handle SEC reporting and disclosures for their companies offered this snapshot of top concerns (in no particular order) about where businesses could get tripped up on compliance with the climate disclosure proposed rule:
- Providing a detailed breakout of their organization’s climate impact on financial statement line items if it’s greater than 1%
- Inclusion of Scope 3 GHG emissions (defined by the EPA as “the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain”) in their SEC reporting
- The attestation requirement for GHG, and
- The reasonable assurance requirement related to GHG best practices.
Twenty-four state attorneys general are also concerned, and they’re teaming up to challenge the proposed rule before the U.S. Supreme Court on the grounds that reporting of GHG is onerous and violates the “major questions doctrine” that says federal agencies like the SEC can’t impose significant and costly new requirements without an act from Congress.
A letter to the SEC signed by the AGs states, “Environmental regulation is outside the commission’s area of expertise.”
Nevertheless, ESG persists
However, regardless of what the Supreme Court decision is on the SEC proposed rule, the ESG genie is out of the bottle.
In an episode of the “ESG in Focus” podcast from consulting firm EisnerAmper, the company’s director of ESG and sustainability solutions, Danielle Barrs, gave a real-life example of taking on the E in ESG – reducing a manufacturing company’s energy costs and carbon emissions by converting a brownfield site to a solar farm.
Many companies like yours, publicly traded or not, are at least getting into the habits of identifying issues they care about, conducting a gap analysis and coming up with ESG goals, metrics and a strategy.
Nearly 60% of businesses have started generating ESG reports within the last three years, according to research by Workiva.
Also, 70% of businesses that have committed to addressing environmental, social (including diversity, equity and inclusion investments) and governance issues, and are collecting data and reporting to their shareholders what actions they’re taking, say it’s had a positive business impact. For example, Corie Bowers, Workiva’s director of solution engineering, reported during a webinar that publishing the company’s ESG report on its website has been a useful recruitment tool.
“In the three recent positions that our team filled, all of the applicants we ended up going with came to us and had ESG priorities in mind as they assessed an employer,” she said.
Additional business impact
Also in the “ESG in Focus” episode – titled “Understanding the Benefits of ESG and Sustainability” – Lourenco Miranda, EisnerAmper’s managing director, said business leaders need to approach environmental, social and governance issues through the lenses of risk assessment and business opportunities.
“ESG gives the CFO a methodology to identify all the vulnerabilities that the company has toward an environmental risk. It could be climate change risk, it could be something that is related to land utilization (or) water scarcity,” he said.
By identifying and mitigating the risks such as the ones Miranda named, you demonstrate that you’re protecting your cash flow and bottom line, which can put your company in a position to have better access to capital and investors.
“Suppose that you’re a CFO and you want to get financing from a bank. The bank will look at your ability to generate cash flows and how you manage your risks and opportunities. The banks will also look at if you are reporting them, if you’re disclosing the level of transparency, and they will give you a rate for your debt,” said Miranda.
“If you can show to the bankers, you can show to the market, that you are managing your risks properly (including using) sustainability opportunities to mitigate those risks, you can reduce your cost of capital, increasing your valuation.”
Travis Epp, audit partner and partner-in-charge of EisnerAmper’s manufacturing and distribution group, also chimed in during the podcast.
“For the most part, I would say the biggest step forward is that more companies are now including ESG and corporate sustainability in their mission statements. And … investors and lenders are including ESG and corporate sustainability as part of their analysis when they review companies,” he said.
