As people increasingly evaluate products and services through the lens of sustainability, ESG (environmental, social, governance) reporting is becoming the land of opportunity. But in this rush to incorporate ESG – in what is currently a highly unregulated environment – the quality and consistency of implementation is often found lacking.
Amid the rising claims and commitments from companies promoting ESG products and services, investors and consumers are making a renewed call for accountability. In response, regulators, as well as risk rating agencies, have aligned their focus to meet this demand and hold companies responsible.
Forward-thinking companies, wanting to avoid the risks of noncompliance, are changing their approach to ESG implementation, focusing on authentic and tangible change.
ESG regulatory and rating shifts
Toward the beginning of 2022, Morningstar removed the ESG label from a third of their ESG funds, determining that these funds were not truly incorporating ESG into their portfolio criteria. The Securities and Exchange Commission (SEC) has also responded to this concern and continues to demonstrate a growing focus on protecting investors from “greenwashing” exposure by developing additional disclosure requirements.
The comment period is soon to wrap up on an SEC proposed rule regarding ESG investment claims. This proposal is centered on investment advisers and investment companies and seeks to categorize certain types of ESG strategies. Funds and advisers would be required to provide more specific disclosures in fund prospectuses, annual reports and adviser brochures.
The SEC’s proposed rule on climate-related disclosures is also attracting a lot of attention from U.S. companies. The rule calls for, among other things, companies to measure and disclose their greenhouse gas emissions and to provide detail on how companies plan to achieve their ESG commitments.
In addition to these imminent ESG regulations, the SEC levied their first fine related to ESG misrepresentation. More specifically, the SEC charged the investment management arm of BNY Mellon Corp with misstating and omitting information about ESG investment considerations for mutual funds that it managed.
ESG rewards outweigh any risks
With the risks involved in ESG reporting, organizations might begin to question whether this is the right time to start their ESG journey. However, in the current market, the risks of not functioning in a wholistic manner far outweigh these concerns. It’s evident that stakeholders aren’t about to let up on their demands for entities to value sustainability alongside financial metrics.
Far from shying away from ESG reporting, companies have renewed their focus to bring about lasting impact. Common tactics we’ve seen include:
- Involving top executives who have the power to enforce structural changes
- Collecting data coinciding with key performance indicators
- Setting realistic measurable goals, and
- Developing clear narratives to improve how companies share their story.
Many executives are seizing this moment of opportunity, before ESG regulations have passed and change is required, to review their processes, determine a path forward and begin the journey.
How Wipfli can help
If you’re interested in exploring ESG and learning how it can benefit your business, visit our ESG services page. From there you can learn more about Wipfli’s approach to ESG, download our ESG e-book and whitepaper, and contact us to discuss your own ESG program.
Or learn more with these educational resources: