December 14, 2023
The momentum continues toward mandatory reporting on climate and other environmental, social and governance (ESG) issues in California, the U.S. overall and Europe. The looming regulations, and pressure from Boards, legal counsel, customers, investors and stakeholder groups, are influencing what and how companies are reporting.
The move toward more metrics-focused reporting is one of the most notable trends. ESG ratings and voluntary frameworks such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD) set the stage for a metrics-based approach and the regulatory requirements will be defining the future.
The focus on metrics is creating a compelling need for more and better data collection, analysis, validation and transparency. We are getting to the point where every data point, every fact, indeed every statement will be scrutinized internally – it’s time to get ready for more of a legal and regulatory compliance mindset in reporting.
Is all this focus on metrics and fact-checking an overreaction? No, their time has come. Are they actually overdue? Probably, and ESG reporting may never be the same.
“The auditors are coming; they’re already here.” was a recurring theme at IR Magazine’s recent ESG Integration Forum in New York City. Multiple speakers talked about the need to begin applying best practices for financial data management to ESG data. Consider the following:
- Compliance, auditing and accounting backgrounds, and an ability to interact with the Board’s Audit Committee, are becoming important for ESG teams.
- The focus goes well beyond metrics: Anything stated as a fact should be evaluated, validated and documented.
- Metrics-based reporting is likely to show up in data tables, scorecards, indexes and even the Form 10-K of U.S. public companies. Storytelling reports may become a mere supplement to the metrics information, and some of those reports could fade away altogether.
- Any comments about “priorities for the coming year” could come to be viewed as forward-looking statements, which carry additional SEC and legal compliance burdens.
- Validation by internal audit and compliance is ramping up fast, and wide-scale external assurance, assuming it’s available, may not be far away.
(One notable update on the pending climate disclosure regulation being developed by the U.S. Securities and Exchange Commission: There is a good chance a final rule will be released during the first quarter of 2024 to meet a regulatory deadline – or the SEC may have to start the rulemaking all over again. The final rule is likely to be less onerous than the proposed rule, and legal challenges are inevitable – but the fact that a final rule is probably forthcoming adds even more urgency to the focus on metrics-based reporting, data management, auditing and validation.)
Are you ready for all this? You will need a road map to evolve from the current state of your reporting to mandatory, metrics-driven reporting that will likely begin in earnest in the 2025/2026 time frame. Let Dix & Eaton be your guide. Contact me for a free consultation on how to navigate the next stage of your ESG reporting journey.