ESG Reporting Gathers Momentum Heading into 2024
Environmental, social, and governance (ESG) issues garnered significant media attention in 2023 and 2024 is likely to follow suit. We witnessed the publication of two new global sustainability standards, alongside the passing of two contentious laws in California. These new California laws mandate the largest entities operating within the state to disclose climate-related information starting in 2026.
A Quick Overview
Today, businesses are facing increasing pressure to adopt sound ESG practices and provide transparent disclosures in their financial statements on these matters. Perhaps the biggest challenge in understanding ESG is identifying and addressing all the different concepts, data and actions that fall under its umbrella. Here’s a rundown of some examples:
Environmental Practices. These include consumption of energy and other resources, efforts to lessen carbon emissions, recycling, and sourcing and usage of materials.
Social Practices. These include an unbiased hiring process; fair labor policies; diversity, equity and inclusion measures; and workplace safety procedures.
Governance Practices. This subcategory includes ethics, integrity in how business is done, anti-fraud measures, pay equity, legal compliance, cybersecurity and other privacy measures.
Complying with Developing Guidance
The pressure to report on ESG matters isn’t just coming from the general public. It’s coming from various rule-making entities. For example, in June 2023, the International Sustainability Standards Board (ISSB) issued the following two standards:
1. International Financial Reporting Standard (IFRS) S1, General Requirements for Disclosure of Sustainability-Related Financial Information, which provides a global baseline for disclosing sustainability-related risks and opportunities, and
2. IFRS S2, Climate-Related Disclosures, which provides reporting requirements specific to climate-related disclosures.
Portions of the international standards went into effect on January 1, 2024. However, the guidance is pending approval by more than 140 jurisdictions worldwide, and the United States isn’t among the countries that have adopted these standards yet.
In October 2023, California passed two controversial new laws that will affect large entities doing business in that state, starting in 2026. First, the Climate Corporate Data Accountability Act will require business entities with more than $1 billion in total annual revenue 1) to report annually their Scope 1, 2 and 3 greenhouse gas emissions and 2) to obtain assurance for their reported emissions. The second law, Greenhouse Gases: Climate-Related Financial Risk, will require business entities with more than $500 million in annual revenue to disclose their climate-related financial risk based on recommendations of the state’s task force on climate-related financial disclosures. Both laws are expected to face legal challenges.
Recognizing the Benefits
For now, ESG reporting is largely voluntary for smaller private businesses. However, many choose to implement sustainable practices — and share their progress with customers, employees and others — for various business reasons.
In certain industries, ESG reporting may help attract new business opportunities. For instance, large companies and governmental bodies that build new facilities may consider ESG practices in determining which general contractors to solicit or accept bids from. And some even look into subcontractors and suppliers as well.
Likewise, sustainable business practices may expand your business’s access to capital. For example, Wells Fargo committed to $500 billion in sustainability financing between 2021 and 2030. Banks that engage in sustainability financing programs may provide economic incentives to borrowers that meet agreed-upon annual targets for reducing greenhouse gas emissions. Conversely, they may impose economic penalties for failure to achieve emissions targets.
In addition, job seekers and employees may consider employers’ ESG practices in deciding where to work. Companies that tout solid ESG practices may have a leg up on other employers when it comes to attracting and retaining skilled workers in today’s tight labor market.
Responsible ESG practices can also help mitigate risks and control costs. For instance, by going green, your business may be able to reduce fuel and energy consumption, streamline its supply chain, and minimize waste. Addressing social practices can help prevent employment litigation and curtail workers’ compensation costs. And tightening up governance can prevent costly fraud and data breaches.
More to Come in 2024
ESG will continue to be a developing topic, as we push further into 2024. Stay tuned for additional updates so you can be informed on any implications to your business and broader industry.