ESG Reporting Is Taking Hold Ahead of Final SEC Rules
Companies with relationships in the European Union, along with some American cities, must already disclose their environmental impact.
In “Seven Ways ESG Reporting Is Already Here,” KPMG’s Maura Hodge and Sam Jeffery detail seven circumstances under which U.S. companies must report on their sustainability efforts, even though the SEC has not yet issued its final climate-related disclosure ruling. Hodge, who serves as ESG audit leader for KPMG US, discussed some of those circumstances with us, while also addressing the expectations of investors, customers and suppliers.
Directors & Boards: What are some examples of U.S. companies having to report on their ESG efforts internationally?
Maura Hodge: In the U.S., understandably, many companies are looking to the SEC on climate-related disclosures, and we are anticipating a final ruling as soon as April. That said, ESG reporting is in full swing in several places internationally, including in the European Union. The EU Taxonomy, Sustainable Finance Disclosure Regulation and the Corporate Sustainability Reporting Directive (CSRD) are already scoping in multinational companies that operate in the region. The CSRD is far more granular than what the SEC has proposed thus far, with its draft European Sustainability Reporting Standards requiring roughly 1,100 metrics. Likewise, the German Supply Chain Due Diligence Act is already in effect and includes a number of human rights and environmental protection provisions, including annual reporting down the road. There also continues to be movement from the International Sustainability Standards Board, which was formally established last year and promises to focus on meeting investors’ needs.
For U.S. companies that are doing business in regions that fall under these international jurisdictions, it is essential that management and the board keep a close eye on these regulatory changes, the related reporting implications and the implementation timelines.
DB: Are there examples of American cities that are requiring ESG reporting from companies as part of doing business?
MH: Just as ESG has gone global, it has also gone local. We’re seeing cities across the United States propose and pass their own legislation related to sustainability reporting. Cambridge, Mass., for example, requires large building owners to track and report on their annual energy usage to the city. The city then discloses that data to the public.
New York City also has energy efficiency requirements and greenhouse gas (GHG) emissions limits for large buildings. So, in addition to monitoring the international reporting environment, companies need to be mindful of any local rules and regulations in every location where they operate.
DB: What demands are customers and suppliers making on companies to show that they are committed to ESG?
MH: Companies across industries are increasingly recognizing the important link between business strategy and ESG engagement. A key reason for this is that stakeholders in companies’ value chains are demanding ESG disclosures as a prerequisite for doing business. Whether it’s customers requesting to see DEI metrics, or suppliers requiring scope 1, 2 and even 3 emissions disclosures when setting new contracts, engaging with ESG is quickly becoming the cost of doing business.
We are also watching the U.S. government, as the Federal Acquisition Regulation Rule on Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk was released for comment last year. Depending on the amount of annual government contracts, a company may be required to disclose GHG scope 1, 2 and 3 emissions, make annual climate disclosures and have set science-based targets.
DB: What are we seeing from investors in companies as it relates to ESG? Are they starting to have higher expectations when it comes to ESG performance?
MH: One of the driving forces behind the SEC’s climate proposal, and its pending final rule, is investor demand for ESG information. Investors are seeking greater transparency around financial and nonfinancial ESG data so that they can better compare investments and make decisions based on those comparisons. Investors have been seeking this information for years but, with only voluntary reporting, they saw a lot of discrepancy in the quality, accuracy and rigor of that data. Formalized ESG reporting is expected to diminish many of these inconsistencies.
However, it is important to remember that regulation is not the only means by which investors, and other stakeholders, can obtain ESG information. Annual shareholder meetings and proxy voting continue to be popular mechanisms for requesting and holding companies accountable on their ESG commitments.
DB: You describe ESG as a “competitive advantage” for companies. In what ways can ESG reporting serve to set a company apart from the competition?
MH: It is easy to think about ESG reporting as a check-the-box exercise. Yes, this is a compliance matter, but it’s also so much more. According to KPMG’s 2022 CEO Outlook Survey, 70% of U.S. CEOs say that ESG improves their financial performance. Companies are increasingly seeing ESG as an integral component of their business strategy. And with investors, customers, suppliers, business partners and employees calling for greater transparency around ESG issues, disclosing that information plays a big role in building trust between a company and its stakeholders. And lastly, it’s about building a business that will be resilient over the long term. As society shifts toward a lower carbon economy, it will be the companies going to market with a mature ESG strategy and ESG reporting program that will have the competitive advantage.