ESG is in the spotlight after the Securities and Exchange Commission (SEC) proposed new guidance on the enhancement and standardization of climate-related disclosures for investors.
ESG — which stands for environmental, social and governance — has grown increasingly important to not just investors but also consumers in general. It looks at a range of company practices around the environment, such as climate change; social ethics, such as diversity, equity and inclusion (DEI); and governance, such as a company’s leadership and business practices, including those around cybersecurity.
The SEC’s proposed guidance focuses on the environmental portion of ESG, specifically around how companies measure greenhouse gas emissions and other climate-related risks. It would apply to public companies.
What does this mean for private companies?
Many private companies are already reporting on ESG, but because there are not yet standardized requirements and processes, and because different businesses care about different issues, this reporting is not consistent.
One potential outcome of the SEC’s proposed requirements, which would go into effect in 2024, is that they will likely drive greater standardization around greenhouse gas and climate change reporting. Some reporting frameworks (such as SASB and GRI) are already in place, but the adoption of an ESG program within a company will help identify the framework under which the company will report.
For nonpublic companies, the pressure to report on ESG is growing. While public companies are facing increasing pressure from investors, nonpublic companies are facing that same pressure from customers, vendors, supply chains and professional associations. For example, if you’re a supplier to a public company, you may be required to put ESG standards and programs into place to continue working with that customer. If you’re a member of an association, you may be required to adopt and comply with the association’s ESG policy and standards.
Pressure is coming from multiple places, and it’s only going to continue growing, so nonpublic companies should pay attention to how ESG reporting becomes standardized and how they can implement an effective program of their own.
What ESG actions can nonpublic companies take right now?
To prepare to report on ESG, there are four strong steps businesses can take right now:
1. Educate your board/senior leadership on ESG
Your first step is to educate your board and senior leadership on what ESG is, why it’s important and how it benefits your company. Without buy-in from the very top, any attempts to implement ESG are ill-fated. Once they understand ESG, get their agreement that it’s important to them, as well as their position on how far they want to commit to going with ESG.
2. Determine what’s important
There are a great many issues within ESG that your company can report on. Greenhouse gas emissions might not be relevant to your industry. Perhaps social issues, like diversity, are more important to your customers. Perhaps it’s employee wellbeing. Think through and decide what’s most important to report on.
3. Identify your data points
In order to report on your chosen ESG issues, what data will you need? Your third step is to identify what data you already collect, what data you need to begin collecting and how you’re going to pull and consolidate that data from disparate sources. Look at different technology solutions and how they can assist you with data collection, consolidation and visualization.
Don’t forget to determine how you will measure your progress toward achieving your ESG goals. Because your data will likely come from a variety of sources, you may need multiple iterations to ensure your data is accurate and measuring what you intended it to. Data validation is important to ensuring sound and reliable results.
4. Implement internal controls around your data
To maintain the integrity of your data, it’s critical to implement internal controls around its governance. A CPA and consulting firm can help you determine what these controls should be. Third parties will also be valuable when it comes to validating your data, as they can attest to its accuracy. Because investors and customers alike are questioning the accuracy of ESG reporting, since there are few standards around it, this will help prevent accusations of “greenwashing.”
How Wipfli can help
The value of embracing ESG shouldn’t be overlooked. Increasing associate engagement, growing community involvement, improving investor relations, strengthening the supply chain and supplier diversity — the benefits are wide-ranging. And leaders cannot ignore the rising pressure from customers, vendors, investors and associations.
If you’re interested in exploring ESG and learning how it can benefit your business, contact Wipfli to discuss how to establish a program and a framework applicable to your organization.
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