The Securities and Exchange Commission (SEC) has recently announced that Environmental, Social, and Governance (ESG) reporting is among its “significant focus areas” in its 2022 examination priorities, closely followed by the long-awaited climate-risk disclosure rules. This shift in the regulatory environment means that ESG reporting has become a business and market imperative for many industries. Unlike the European Union (EU) which has a regulatory disclosure regime for corporates and investments, the United States (US) has no such regime in place, adding to the challenges of ESG reporting for US companies.
The SEC's commitment to the ESG imperative includes the creation of the Climate and ESG Task Force, pro-ESG disclosure position by SEC Chairman Gary Gensler, interpretive guidance, more rulemaking, and enforcement actions. The efforts aim to encourage registrants to report on their performance in relation to ESG metrics through proactive compliance and enhanced disclosures tailored to their business, in order to better manage risks and address threats before they arise.
The SEC has also recently issued Staff Legal Bulletin 14L, which raises the burden for registrants seeking to exclude E&S (environmental and social) shareholder proposals from proxy statements. This shift in policy reflects the SEC's recognition of the social policy significance of E&S issues, rather than focusing on the connection between a policy issue and the registrant.
Management teams should take note of the various ESG metrics set forth by the Sustainability Accounting Standards Board (SASB) and consider which topics matter most relative to the business model. For example, a company in the manufacturing industry may place a higher emphasis on energy management and waste and hazardous materials management, while a company in the technology industry may focus more on data security and customer privacy.
In addition to environmental concerns such as greenhouse gas emissions and air quality, the SASB's metrics also cover areas such as human rights, community relations, and employee engagement. Other metrics include product design, supply chain management, and business ethics.
Here's a full reference of ESG metrics set forth by the SASB.
1. Environment
Greenhouse Gas (GHG) Emissions
Air Quality
Energy Management
Water & Wastewater Management
Waste & Hazardous
Materials
Management
Ecological Impacts
2. Social Capital
Human Rights & community Relations
Customer Privacy
Data Security
Access & Affordability
Product Quality & Safety
Customer Welfare
Selling Practices & Product Labeling
3. Human Capital
Labor Practices
Employee Health & Safety
Employee Engagement,
Diversity & Inclusion
4. Business Model & Innovation
Product Design & Lifecycle Management
Business Model Resilience
Supply Chain Management
Materials Sourcing & Efficiency
Physical Impacts of Climate Change
5. Leadership & Governance
Business Ethics
Competitive Behavior
Management of the Legal & Regulatory Environment
Critical Incident Risk Management
Systemic Risk Management
It is important for companies to tailor their disclosures to the specific risks posed by their business and operations. This will not only help companies to comply with upcoming regulations but will also demonstrate a commitment to sustainable business practices and long-term viability, which is increasingly important to investors and other stakeholders.
In conclusion, it is clear that the SEC expects ESG disclosures to be detailed enough to enable investors and other stakeholders to evaluate material risks. While the SEC has issued some ESG reporting requirements and guidance, there is still a lack of consistency in terms of the level of specificity required. As we await more clarity on ESG reporting requirements, companies can look to review the responses of their peers to SEC inquiries about ESG disclosures to gain insight into the expectations of the SEC and the behavior of their peers. By proactively addressing ESG risks and following the guidance provided by the SEC, companies can better manage potential financial, operational, and reputational risks, and ensure that they are in compliance with upcoming regulations.