By Kirsten Vosen, Audit & Assurance Deloitte Private leader, Deloitte & Touche LLP
As 2024 begins, environmental, social, and governance (ESG) considerations are front of mind in many corporate boardrooms, often as never before.
Pushed by both regulators and the public, more companies are feeling pressure to disclose how ESG matters can impact their business – both from a risk perspective and an operational perspective – and how they intend to live up to social responsibilities. A recent Deloitte survey of 2,000 C-level business leaders found that more than 60% felt a large to moderate degree of pressure to act on climate change either from consumers and clients (68%), shareholders (66%), employees (64%), or civil society (64%).
New regulations both in 2024 and in the years to come will likely require increased ESG reporting and compliance standards. And while these new regulations mostly – though not entirely – apply to public companies of a certain size, private companies should embrace ESG reporting as well.
The Landscape of New State, Federal and Global ESG Regulations
New ESG regulations are being developed at various levels of government – state, federal, and global. Here are just a few examples.
California’s recent climate legislation will require thousands of companies doing business in the state to report both how climate change will impact their business, and the scope of their greenhouse gas emissions. Approximately 80 percent of the over 10,000 U.S-based companies impacted by the legislation are privately held, according to a Deloitte analysis.
The US Securities and Exchange Commission is considering a rule that will require registered investment advisors to disclose their ESG strategies in any prospectus, annual report, or brochure they publish. The Biden administration proposed a bill that mandates many contractors working with the federal government to report their Scope 1, 2, and 3 greenhouse gas emissions, and new rules in the EU will likely raise reporting and disclosure requirements for many multinationals operating in Europe.
Why Private Companies Should Get Ahead of ESG Reporting
Private (and closely held) companies have generally not been required to provide climate disclosures. Investor and regulatory scrutiny has traditionally been reserved for large, publicly traded companies. But new laws, more engaged stakeholders, and an emphasis on value chains has put private companies in the climate spotlight. Yet the demand for regulation often comes from the customers and investors of private companies – people with a stake in the outcome of the business.
Adherence to these regulations can hold genuine business value, and there are good reasons private companies should be proactive about ESG reporting. Some of the potential benefits include:
Improved public reputation. A positive corporate reputation can be difficult to earn, and there are many examples in recent years of how easily it can be lost. Showing transparency and a measurable commitment to sustainable progress can go a long way toward earning goodwill and building the public’s trust.
Building important strategic relationships, early. ESG reporting often requires outside experience to implement correctly, and such guidance will likely become even more important as newer regulations come into play. Establishing strategic business relationships early can help make your reporting process easier and more robust over the long term.
Being more attractive to public investors. If you have ambitions to start the IPO process or access public markets, being proactively transparent about your ESG initiatives can make you more attractive to investors. Many investors already include ESG data requests as a part of their due diligence, and companies that can readily show information on their endeavors may be better positioned to win investment.
Ways to Build a Robust ESG Reporting Process
ESG initiatives usually involve many aspects of a company’s business, and it’s important to secure alignment and buy-in across the organization early in the process.
Assemble a diverse team of representatives from finance, audit, legal, and other strategically important departments to create a comprehensive understanding and commitment to fulfilling their respective roles and appreciating the importance of compliance.
Considering the likelihood of more regulations being enacted in the years ahead, consider establishing a process for monitoring and adapting to new regulatory developments that may impact your business. It’s also important to be proactive about adding new capabilities as new requirements emerge.
Finally, it is important to provide enough context, so the ESG information you share is comprehensible to regulators, investors, and the public at large.
While private companies are largely spared from many ESG reporting requirements today, integrating sustainability into your business strategy can better position your company for potential regulation in the future and can create business value in the long term.
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