ESG stands for Environmental, Social and Governance and this type of disclosure requires companies to disclose how they manage these three aspects of sustainability. The goal is that the market will then reward companies who are doing a good job in one or more of these areas and punish those who aren’t.
Investors should always be aware of what ESG means and why it is important. It can help them make better investment decisions by knowing which companies are trying to do their part in taking care of our planet. It also provides investors with information on how the company’s management practices affect shareholder value over time.
- Understanding ESG disclosures and Why They Matter to Your Organization
- The evolution of ESG and disclosures
- Why do we care?
- Regulation of ESG disclosures by the SEC
- What are the eSgA Policies
- Stricter enforcement coming SEC
- Why companies need to disclose ESG info
- Does SEC require ESG disclosure?
- How ESG impacts consumers, investors and government/regulatory bodies
- It can be used to better understand companies
- The Complexity of ESG Disclosures for audit committee review
- The importance of public debate for institutional investors
- In summary of your corporate disclosure policy
- Caveats and Disclaimers
Understanding ESG disclosures and Why They Matter to Your Organization
In recent years it has become an increasingly visible issue in corporate social and legal contexts as investors attach importance to sustainability. ESG reports are rapidly evolving and the possibilities for companies to promote a company’s performance rise. At the same time however, these disclosures have expanded their scope — and investors expect new information. This article covers the basics of ESG disclosure, why it’s essential and how the company can overcome the barriers to creating effective – ESG reports (16 Reasons Why You Should Make One).
The evolution of ESG and disclosures
The types and threats faced by organizations have dramatically evolved over the last two years. Topics such as climate change and social inequity are transforming the business environment faster than ever before, because you are either with the program or you are not. And those who are not, will be left behind. More stakeholders are increasingly demanding a management approach to dealing with potential threats to sustainable practises. There is an increasing demand for Audit committees to receive relevant and timely metrics to be synthesized into public knowledge. A company’s strategy to manage and report on ESG performance leads to key functions of the audit committee such as control and risk management.
Why do we care?
ESG disclosures are important for companies because it allows them to understand the impact of their actions on different stakeholders. This information then becomes useful in developing policies that are more resistant to scandals or misuse, improve reputation and become less vulnerable to risk.
ESG disclosure also impacts consumers who can use it as a tool when making decisions about where they invest their money and even how they choose which products they want to buy. And finally, it impacts government and regulatory bodies who can use the information to determine if existing laws are good enough or if new ones need to be implemented.
Regulation of ESG disclosures by the SEC
According to the Securities and Exchange Commission this will be a major topic for current SEC secretary Gary Gensler. The SEC says its comments on Climate Change disclosure would mark the beginning of a potentially significant revision to corporate reporting of ESG matters within the near future. There is strong evidence that answers to the important eSgA policies faced by corporations in the United States are best reached by legislative procedures. The SEC represents the opportunity in its role to strengthen investor input into how ESG is perceived by regulators.
What are the eSgA Policies
The eSgA policies are the result of a significant number of rulings by the SEC that have been made, based on protecting investors from misleading disclosures. There are two major concerns for corporations when it comes to reports and investor relations:
- The securities laws do not specifically mention disclosure requirements about ESG issues. However, the SEC has indicated that disclosure about environmental, social and governance policies is important when there are material risks to the company’s business.
- The Securities and Exchange Commission has released guidance on how it plans to approach climate change disclosures in its examination process, which could have significant implications for investors. The SEC have said that they hope this will take the burden away from corporation emissions disclosure requirements, which would be beneficial for companies around the world.
On the other hand, it is still uncertain how investors can proceed with ESG issues and how they should approach them. The SEC has said that providing sufficient disclosure about these matters will also depend on what particular disclosures are requested by analysts or shareholders. The SEC says it expects investors to be able to ‘understand whether a factor or trend that could affect a company’s financial performance exists, and whether it will have a material effect on the business’.
Stricter enforcement coming SEC
The SEC says it is up to investors to judge the quality of information companies disclose about ESG, and they need to thoroughly review all publicly available information on this topic. This will be another area monitored by the SEC. It has been reported that regulators have been under pressure from advocacy groups for years, so they may want more comprehensive reporting of these issues.
It is currently not clear what the outcome of such a revision will be and how this will impact corporations around the world. However, it is evident that the SEC has taken notice of ESG disclosure requirements and plans on enforcing them more strictly in future.
Why companies need to disclose ESG info
So, how can we encourage more companies to disclose ESG information? First of all, the financial industry has a role to play. For example, managers and analysts should be actively looking for this information and encourage companies to disclose it. They need to require the use of clear language in these reports, which will help investors understand their duty when investing. This is why managers and analysts must know how to read and analyze them correctly. It can also be helpful if more investors ask for ESG disclosures.
Does SEC require ESG disclosure?
No, not yet. ESG disclosures are not mandatory, and many companies do not disclose them. However, in the past few years, investors and sustainability organizations have been pushing and encouraging more and more for this type of disclosure to become mandatory. With the advent of the pandemic, the genie cannot go back in the bottle and companies will be under greater scrutiny when it comes to ESG reporting. ESG disclosures are not mandatory, but can provide important information for investors.
How ESG impacts consumers, investors and government/regulatory bodies
If you think about it, the acronym ESG touches all aspects of our lives:
- Businesses engage in ESG practices to reduce their environmental footprint and produce more sustainable products and services.
- Consumers expect companies to instill responsible social policies that protect employees and communities around the world, especially if they are your customer or client.
- And finally, we elect our government and regulatory bodies to help make sure companies comply with international standards.
A good example of this is the Dodd-Frank Wall Street Reform and Consumer Protection Act (2010) in the United States, which requires all publicly traded companies to disclose financial risks associated with climate change if their operations or activities have a material impact on their earnings.
It can be used to better understand companies
For investors, ESG can be used as another layer of information. By understanding the risks and opportunities associated with ESG factors in their portfolios, they are able to make better decisions when considering how to invest in or divest from certain companies. For instance, an investor who is invested in a coal mining company may consider divesting to reduce the risk associated with investing in a company that is underperforming due to climate change regulations.
On the other hand, there are benefits for companies who disclose ESG performance through their annual reports because it provides investors with additional information on how they manage these risks and opportunities. By following ESG disclosures, investors can better understand what impact certain factors have on a company’s earnings and can gain insight into the overall health of the company. For example, an investor may be interested in investing in a food company who discloses their environmental impact using ESG information.
You may also want to read What are ESG Certifications?
The Complexity of ESG Disclosures for audit committee review
The SEC will continue to face a significant challenges as it attempts to develop new guidance for disclosures about financially material sustainability issues. Given the diversity of US corporate culture it’s unlikely that any particular ESG issue will be relevant to all companies. New ESG disclosure obligations will carry additional burden for midsize and small cap businesses that may lack the required resources to adequately address all of these concerns. The new agency will establish a non-requiry period in which companies can get data about internal activities including internal investigations. It may help the SEC to start by requiring principles-based disclosure while companies develop internal processes needed to generate and audit the data underlying ESG metrics.
The importance of public debate for institutional investors
Many United States lawmakers agree political action is necessary to bring about substantial change. The proposed regulation would require the SEC to provide audit results in any filings by an outside agency. There is an unprecedented interest in ESG in this moment and it is time for meaningful public discussion about how the country should develop policies on ESG. The policies decisions must be made in the coming years regarding ESG and corporate governance and corporate America the paramount importance of the law and governance of America must be paramount. The decision making must be regarded as legal by both regulatory authorities.
In summary of your corporate disclosure policy
In summary, ESG disclosures are here to stay. For investors, it can be used as another layer of information from which they may make better decisions that will assist them in achieving their goals. For companies, it provides a mandated platform for improvement upon these factors and requires transparency with its stakeholders. Finally, it is time for public discussion about how the world should move forward with policies on ESG that are both legally sound and beneficial for the markets.
Caveats and Disclaimers
We have covered many topics in this article and want to be clear that any reference to, or mention of institutional investors, corporate policy, audit committee review, business selective potentially material information, such model, other market professionals, risks, voluntary certain statutory prohibitions, industry conferences, reporting, business environment, data, certain investing, such companies, metrics, company spokespersons, institutional investor, standards, requirements, audit committee, sustainable investing strategies, performance, standards, corporate social responsibility, bulletin boards, requirements, blackout periods, required climate risk, investment decisions, board members, listed companies, issues, sustainable investing, data collection, same time, ESG and climate change, other stakeholders, governance, decision making process, risks, law, business, many organizations, services, confidentiality, governance, identify, inform, economic, focus, understanding, intended, industry, provisions, rules, account, stakeholders, guidelines, news, financial, risk, shareholders or other types of report in the context of this article is purely for informational purposes and not to be misconstrued with investment advice or personal opinion. Thank you for reading, we hope that you found this article useful in your quest to understand ESG.
Research & Curation
Dean Emerick is a curator on sustainability issues with ESG The Report, an online resource for professionals focusing on ESG principles. Their primary goal is to provide resources to help middle market companies, SMEs and SMBs transition to a more sustainable future.