The SEC is reportedly moving quickly towards establishing ESG-related disclosures for private companies. The department sought public comment about a potential ESG framework earlier this year and the window for feedback recently closed (on June 15), though it is expected that the SEC would accept feedback provided after this date.
The disclosure framework will likely seek to bridge the gap between the information provided by private companies and the information investors need to make intelligent investment decisions that reflect climate and other ESG-related risk. We anticipate that the SEC will endeavour to standardize reporting for ESG factors, like greenhouse gas emissions.
What is ESG and why is it important?
ESG, or Environment, Social and Governance, refers to certain non-financial factors in business and investment decision making. These factors consider the environmental impact and sustainability of operations; societal factors, including worker conditions, data protection and privacy, and gender and diversity; as well as governance standards, including board composition and executive compensation.
From a private company’s perspective, it’s importance stems from the increasing value that consumers and investors are placing on these factors:
Benefits of Transparent ESG Reporting
Companies should start to give consideration to either implementing or improving current ESG reporting to bring themselves in line with consumer expectations and likely future compliance standards. Here are some useful first steps:
Step 1: Define your ESG strategy.
If you haven’t already formalized your ESG strategy, you will need to develop and implement that first. For more information on developing your ESG strategy, this article is a useful starting point.
Step 2: Determine your ESG reporting standards.
There are a host of reporting standards presently available. Unfortunately, we don’t have insight into which framework the SEC will rely on, or if they will choose a particular set of standards. However, by simply starting to collect and measure data and report on it, you will likely find yourself in a better position to comply with future reporting requirements.
In the meantime, we suggest looking to your competitors to see which standards they rely upon. Speaking with an industry consultant may also prove worthwhile.
Step 3: Develop reliable and consistent data collection methods.
You should determine which methods you use to collect data and stick to them. The results are more meaningful if they can be accurately compared over time, to demonstrate improvements or areas to improve. By defining your standards in advance, you make meeting your commitment to transparent reporting significantly easier.
Step 4: Document your findings in a transparent and consistent way.
When defining the metrics your company will rely upon to report to your consumers and investors, you should consider reporting on the metrics you use internally in analyzing ESG risk.
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