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ESG for private companies: How regulations will trickle down

Nov 15, 2022

Currently, most environmental, social and governance (ESG) regulations are aimed at public companies. But ESG goes well beyond compliance. Customers and other stakeholders are placing increasing pressure on private companies to show a commitment to ESG practices.

Building ESG management into your business strategy can lead to meaningful competitive advantages. Paying attention to ESG now can help you stay ahead of market forces as ESG expectations continue to evolve.

The ESG regulatory trickle-down effect

Even if your private company isn’t subject to ESG regulations, your public company customers could be. Soon, your company may need to track ESG data so that your large customers can comply with their own reporting requirements.

Right now, several efforts are underway to standardize ESG reporting, both globally and in the U.S.:

  • US Securities and Exchange Commission proposed climate disclosure rule: If enacted, this rule would require public companies to disclose climate-related information in their registration statements and period reports.
  • EU Corporate Sustainability Reporting Directive: This law will phase in throughout the European Union (EU) beginning in 2024. It will apply to large European businesses as well as non-European countries that generate a turnover of €150 million in the EU and have at least one subsidiary or branch there. To ensure quality, reporting must be certified by an accredited independent auditor.
  • International Sustainability Standards Board: An effort of the IFRS Foundation, this board is a consolidation of several existing sustainability organizations. The group is charged with developing globally accepted and comparable reporting standards.
  • International Standard on Assurance Engagements (ISAE) 3000: This revised standard includes environmental, social and governance disclosures.
  • Modern slavery and human trafficking regulations: California's Transparency in Supply Chains Act requires large retailers to disclose their efforts to eradicate slavery and human trafficking from their supply chains. Similar rules are in place in the UK, Australia and (beginning in 2023) Germany. Some of these rules impact the size of your business or where you sell your product, meaning private companies could also be affected.

Some of the above are (or may become) mandatory requirements, while others are best practices and certifications. What’s clear is that there’s a groundswell of attention being focused on this issue. As ESG reporting becomes more reliable and commonplace, stakeholders will increasingly demand participation in these programs.

Expect ESG data requests

To meet their own ESG requirements, larger companies will be reaching down through the supply chain to measure ESG activity and meet corporate targets. Private companies can expect to see an uptick in requests for ESG compliance documentation, scorecards and surveys.

Large companies may select their vendors based on the maturity of their ESG efforts. Meanwhile, your existing customers may request sustainability data and adherence to new ESG goals. Failure to meet these requirements — or scoring low on supplier benchmarking reports — could jeopardize your customer relationships.

Additional ESG benefits for private companies  

Meeting business-to-business customer requirements isn’t the only reason private companies are embarking on ESG efforts. Emerging research suggests there are several other benefits to be gained, including:

  • Employee expectations: Generally, people want to work for good corporate citizens. Strong ESG efforts can help attract and retain employees.
  • Access to capital: Increasingly, lender and investor capital is being tied to ESG. A commitment to ESG can open the door to new funding sources and business partners.
  • Consumer affinity: When surveyed, consumers report they’re more likely to buy from companies that value sustainability and social impact.
  • Financial performance: Greater awareness of ESG factors can help cut costs.
  • Enterprise value: If your exit plans include a sale to private equity or a larger strategic buyer, ESG practices could drive up business value.

How private companies can respond

Private companies should assess their customers’ ESG goals. Focusing on your customer’s ESG needs — and then working to align your business accordingly — could help strengthen those relationships.

Beyond your customers’ goals, consider other ESG issues that are relevant to your business. Identify other stakeholders and the trends and opportunities that directly impact your operation.

For example, social issues like fair hiring and pay equity may be a more important local issue than greenhouse gas emissions. If you’re a manufacturer, waste diversion practices may be compelling. Take the time to decide what’s most meaningful to your company.

How Wipfli can help

Our experienced advisors can help create an ESG roadmap that fits the core values of your business. Whether you’re just starting an ESG program or want to formalize your efforts, we can help you assess your current state, analyze stakeholder interests and build a reporting practice that creates real value. Contact us now or learn more about our ESG services.

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Author(s)

Sarah K. Williams, CPA
Senior Manager
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