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ESG disclosure landscape is changing in ways that will impact American companies

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SEC regulations on what companies must report on their environmental impact are expected later this year. As Ben Herskowitz and Todd Rahn of FTI Consulting discuss, large companies and companies in high-carbon industries have already started disclosing some of this information, but both size and sector are likely to undermine corporate climate disclosure programs.

Climate change is an increasingly important concern for regulators, investors, and businesses worldwide, and the Task Force on Climate-related Disclosures (TCFD) is at the forefront of this push. As the impacts of climate change continue to escalate, executives and boards are becoming more aware of the potential impacts on climate-related businesses.

The ESG disclosure landscape is changing in ways that will impact American companies in the coming years. Already, proposed regulations on climate disclosures are having a myriad of impacts on publicly traded companies, and some may struggle to comply. Especially companies in certain sectors and SMEs can face a steep learning curve.

In February 2021, the SEC announced it would focus on reviewing climate-related disclosures among public companies. The following year it proposed that it required listed companies to disclose information on their greenhouse gas emissions (GHG) and climate-related risks by 2024, and encourages companies to assess their exposure to climate risks and Regulations that require disclosure of efforts to mitigate.

This is a time of growing interest among investors and major institutions. Many observers expect the proposed rules to be final this year as early as spring.

Regardless of the SEC timeline or reduction possible the race to secure global capital from investors who increasingly integrate climate-related information into their investment analysis and climate reporting mandates in other jurisdictions and regions are already putting pressure on U.S. companies.

Those who prepare properly may reap reputational and financial benefits. But this is easier said than done, depending on factors such as size and industry.

Uneven disclosures across industries and market caps

Companies in traditionally carbon-intensive industries (such as energy and construction) are more proactive in disclosing climate-related information, while companies in less carbon-intensive sectors such as healthcare and technology lag behind. According to SEC: between June 2019 and December 2020, the industries with the fewest climate-related disclosures in their filings were:

  • interactive media and services
  • chemicals
  • banking
  • consumer retail
  • textiles and apparel

Companies in these sectors could have to work harder to catch up if the SEC starts mandating disclosure of climate information. SEC estimate complying with this adds over 26,200 hours for so-called “small reporting companies” (SRCs) and almost 30,500 hours for non-SRCs. Companies in underreported sectors make up a significant portion of the Russell 3000 Index.

Small businesses face unique challenges concerning ESG disclosure and preparation, as their limited size may lack the resources needed to meet reporting guidelines of the conference committee. The New York-based global think tank predicts that in 2022, more than half of the companies in the S&P 500 will disclose their greenhouse gas emissions. Moody’s Analytics notes that alignment with the TCFD recommendations varies by sector and company size, with larger companies in the US and Europe more likely to comply.

Evolving ESG perspectives are creating discrepancies in disclosure across sectors. As companies and wider society become more aware of the environmental impact of their operations, there is a growing concern about corporate emissions and supply chains. However, historically, companies in the energy sector have attracted a lot of concern due to the carbon-intensive nature of their activities, making them more likely to report on climate risks in their operations.

The industry continues to make different judgments on ESG, including metrics ranging from community relations to business ethics. For example, the weight of environmental considerations in MSCI’s ESG ratings for healthcare technology and apparel retailers is higher than in the oil and gas drilling sector, where environmental impacts account for nearly half of the sector’s ESG ratings (40.5% vs. 5.5%). 

Environmental risks have the greatest impact on oil and gas drilling companies, while medical technology and apparel retailers are exposed to societal risks such as labor management, privacy, and data security issues. Differences in how a company’s ESG efforts are judged mean that certain companies and sectors do not yet have the incentive to disclose certain areas of risk more than others. Therefore, it may not be ready to comply with upcoming SEC regulations.

The proposed climate disclosure regulations could prove just the tip of the iceberg. The SEC has indicated it is considering expanding disclosure rules to cover other aspects of ESG reporting. This will put more pressure on companies to prioritize such considerations. As the impacts of climate change become more apparent, regulators may take more aggressive action to require companies to disclose more about their exposure to climate risks and their efforts to mitigate those risks. Investors may be on the lookout as well. Improved ESG reporting can help companies identify and mitigate risks, enhance long-term value creation, and build stakeholder trust.

Measures companies can take now

Whether companies are trying to comply with the law, attract climate-sensitive investors, or address the concerns of other stakeholders, the proposed SEC regulation provides a framework for action. provide work.

Businesses should seek potentially material climate protections, recognizing that there may be limited resources and expertise gaps related to full and effective compliance with the SEC’s proposed climate regulations. A robust analysis of relevant risks and opportunities should be performed. value chain.

To establish effective governance, controls, and risk management processes, companies must first perform a detailed analysis of potentially material climate-related risks. Only after the likelihood, magnitude, timing, and potential financial impact of climate-related risks and opportunities have been assessed can companies make critical business decisions, such as determining appropriate metrics and targets and developing mitigation strategies. decisions can be made with confidence.

After assessing potentially material climate-related risks and opportunities under relevant climate scenarios, we recommend that companies take the following steps to comply with potential climate reporting obligations.

  • Identification: Engage with key stakeholders and decision-makers who take responsibility and ownership of climate-related disclosure and communication processes
  • Stock: Examine your current climate-related reporting and align it with your overall ESG and climate disclosure strategy.
  • Embed: Clear policies, processes, and controls for identifying and reporting climate-related information, including risks and opportunities and impact on financial statements.
  • Development: Processes and controls for identifying and measuring emissions within the upstream and downstream value chain, including critical systems and data sources.
  • Engaged: Work early with advisors and external auditors to identify and exploit potential benefits to minimize the disruptive impact on the organization.

Road ahead

The importance of climate-related and other ESG disclosures is increasing. Investors, customers, employees and other stakeholders demand greater transparency and accountability. Other jurisdictions are placing increasing emphasis on such reporting. As a result of doing business in a globally connected world, disclosure regimes are increasingly being applied to US companies.

Companies that fail to meet these expectations at home and abroad set the stage for reputational damage and lost opportunities. Firms that are slow to adapt to the new reporting requirements may face increased scrutiny from investors and regulators, and may face more barriers to accessing capital markets.

Now is a great time for small- and mid-cap companies to catch up with large-cap companies in terms of ESG disclosure and preparation. These companies can achieve long-term success by proactively identifying and disclosing climate-related risks. By prioritizing ESG considerations, companies also find opportunities to enhance their risk management processes and improve operational efficiency and long-term financial stability.

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