Stakeholders want to be associated with an enterprise that is aligned with their own ideologies and goals of risk and returns and so Environmental, Social, and Governance reporting (ESG) has been a feature in the financial statements of most large companies for some time. The disclosures foster transparency and trust for employees and customers, as well as a performance measurement for investors to direct their strategy. However, this topic has become prominent lately due to current political administrations in major global jurisdictions, namely the EU and US who have made climate change and environmental justice policy their key political posture. Forcing companies, via a wide range of new regulations and legislation, to formally disclose more information, including all the non-financial aspects of ESG. Nudging from regulators, influencers and activists also mean that institutional investors are putting more priority on ESG performance and related metrics when making investment decisions.
In addition to the environmental reporting and sustainable business practices, diversity, equity, and inclusion (DEI) reporting have also been placed on the regulator’s radar, and new rules are likely to emerge for EU and US public companies, investment funds, as well as private companies and subsidiaries operating in these geographies.
Recent Regulatory Developments
- In the UK, the FCA now requires listed companies to report on their compliance with Taskforce on Climate-related Financial Disclosures (TCFD) recommendations and disclose how they consider climate change impacts.
- More rigorous criteria for ESG-labelled products are being implemented.
- Last year in the US, the SEC, enhanced its Climate Risk Disclosure Requirements and plans further rules for Human Capital Management and Board Diversity Disclosure.
- In July 2021, the European Commission adopted a regulation for large companies, banks, asset managers and insurers to report KPIs quantifying the proportion of environmentally sustainable economic activities in their business, investments, lending or underwriting activities.
- A new Corporate Sustainability Reporting Directive (CSRD) has proposed that all large or listed companies would also, for the first time, introduce an audit requirement for reported sustainability information.
Moving forward companies can expect even more scrutiny of their sustainability efforts, and boards will face increasing pressure to adopt enhanced ESG reporting.
New global ESG-related standards will continue to evolve in 2022, while global standard-setting bodies such as the newly formed International Sustainability Standards Board will address a common baseline for disclosure standards consistent across jurisdictions and industries. We will likely see increasing convergence in the data, metrics, and reporting requirements.
All these new regulations bring costs and complexity to reporting. However, companies ahead of the curve on their compliance journey can reap possible competitor advantage by being early adopters. Companies that fail to consider disclosure developments early may find themselves shut out of a specific market or at risk of ESG-related litigation, regulatory penalties, and investor migration.
Addressing Evolving ESG Regulations
Once a company has committed to the ESG reporting journey, it should establish a strategy, identify opportunities and risks, and adjust its reporting process to achieve those goals. Developing a roadmap to integrate business processes such as compliance, risk management, product development and sales, data analysis, and investor relations and reporting, a company can more easily address ESG regulations. By embedding ESG KPIs into financial and operational plans, a company can improve decision making, identify growth opportunities, and combat risks such as credit, climate, and reputational, as well as everything it needs to comply with dynamic ESG reporting requirements.
Technology solutions can be deployed to address ESG regulations; one leading provider is CCH Tagetik which provides a pre-built and configurable solution that can streamline data collection, calculation, and KPI disclosure.
CCH Tagetik’s regulatory expertise provides a foundation for ESG data intelligence as regulations and frameworks evolve. It provides compliance with any ESG requirements, can analyse and communicate sustainability performance and provide what-if analysis to improve the impact of sustainability plans while reducing cost.
While ESG reporting sounds simple in theory, compliance is complex, frameworks are many, and regulations are developing but done right ESG reporting has the potential to make a company outperform. To explore the benefits of configurable pre-built ESG software or review a quick guide to ESG compliance with CCH® Tagetik ESG & Sustainability Performance Management click here.
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