Recently, the SEC has signaled an aggressive approach to ESG-related reporting misconduct, highlighted by significant enforcement actions and the establishment of a new Climate and ESG Task Force. This suggests that the SEC’s attention on corporate ESG disclosures goes beyond imminent climate disclosure rules.
Given the SEC’s widening regulatory purview over ESG reporting, it’s vital for companies to swiftly evaluate and amend their ESG-related disclosure policies and Reporting. This action is essential to prevent potential misrepresentations, which could lead to unwanted public attention from the SEC, regardless of any future regulations.
The SEC’s scrutiny of ESG disclosures is intensifying, along with an impending climate disclosure rule. Consequently, it becomes vital for companies and investment advisors/funds to prioritize controls, ensuring the consistent application of ESG policies and a credible representation of ESG assertions.
There are several steps companies can take:
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Assess ESG Readiness:
Companies should evaluate their readiness for ESG disclosures. A study by the International Federation of Accountants and AICPA indicates that over 95% of large companies report on ESG matters, with 86% of them using multiple frameworks and standards, potentially risking data quality and consistency. Therefore, companies should assess their readiness for these disclosures, especially in light of the upcoming SEC climate disclosure requirements.
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Engage Internal Audit:
The company’s internal audit function should be actively involved in evaluating ESG-related risks, reviewing ESG governance procedures, and verifying the accuracy and consistency of ESG disclosures. Internal audits can aid in developing ESG-related controls and ensuring the reliability of ESG disclosures.
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Establish Effective Detective Controls:
While robust preventive process controls are necessary, detective controls that ensure the consistency and supportability of a company’s ESG claims across all public disclosures cannot be understated. Companies should ensure controls exist to monitor the consistency and reliability of ESG disclosures across the organization.
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Ensure Consistency in ESG Strategies:
Investment advisors should ensure that the implementation of ESG strategies aligns with how they are marketed and described, considering recent SEC proposals seeking to enhance and standardize ESG factor disclosures.
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Third-party Assurance:
Obtaining third-party assurance over ESG metrics and disclosures can improve confidence in the integrity of the provided information and offer insights into the quality of a company’s ESG reporting processes. These actions can significantly enhance the readiness and effectiveness of controls around ESG disclosures, reducing the likelihood of triggering an ESG-related SEC enforcement review.
As the SEC steps up its focus on ESG reporting, other regulators are expected to do the same. However, upcoming regulations are not the only worry for companies regarding their ESG disclosures. Investors, advocacy groups, and other stakeholders are raising their voices through public complaints, lawsuits, and proxy contests, claiming that companies are giving misleading ESG reports. All these forces can stir up a storm of reputation and regulatory risks for companies that are not ready.
Credible ESG Data management and Reporting software can greatly streamline ESG reporting for upcoming SEC regulations. It offers efficient and accurate data collection, consistency with reporting standards, and real-time monitoring, reducing regulatory risk and boosting stakeholder trust. As such, it’s a crucial investment for companies navigating the evolving ESG landscape.
