With the introduction or evolution of major ESG-related regulatory mandates and voluntary disclosure standards, we are entering a new era of sustainability reporting – 2024 marks a pivotal year for companies to position themselves for the changes ahead.
In the next two to three years, companies will be subject to a myriad of regulations. In the U.S., the SEC is expected to release its final Climate Disclosure Rules this April to be implemented in 2025. In the EU, the transitional period of the Carbon Border Adjustment Mechanism (CBAM) has gone into effect with the first reporting period ended on January 31st. Looking ahead, companies around the globe are also preparing for compliance with the Corporate Sustainability Reporting Directive (CSRD) beginning as early as 2026.
Even with the significant rise in regulation, there is a notice- able lack of specific guidance around how these requirements should be implemented. Despite the uncertainty that still looms around these tangible details, companies can still take a few key steps over the course of 2024 to get started and ensure they are adequately prepared to meet these new expectations:
1. Understand the Applicability of Requirements
Determine the scope and timing of relevant ESG regulatory requirements as they apply to the business and operations. For example, companies should identify which of their EU imports are covered by CBAM based on whether they fall under designated categories of goods. Similarly, the implementation timeline of CSRD requirements for companies is based on a phase-in schedule according to specific entity criteria. Companies should continue to monitor updates on evolving ESG regulations of the regions in which they operate.
2. Establish Governance and Accountability
The foundation of any strong, effective ESG-related program is clear assignment of oversight and responsibility for management of relevant topics or regulatory regimes. With key priorities and requirements in mind, companies should create a dedicated and cross-functional ESG governance structure within the organization to oversee and drive progress. This may involve establishing a board-level committee, appointing ESG officers, or integrating ESG responsibilities into existing roles or structures. Clearly defining responsibilities, as well as establishing accountability mechanisms, are critical to ensure that the organization complies with ESG-related regulations and achieves its sustainability objectives.
3. Conduct a Materiality Assessment and Climate Scenario Analysis
While the specific metrics of disclosure obligations may vary, two commonalities are that these regulations are focused on material sustainability-related risks and opportunities, and many are centered around climate change. Performing a thorough materiality assessment to identify and prioritize ESG issues that are most relevant and impactful for the company and its stakeholders is a critical step for informing reporting in line with CSRD or the International Sustainability Standards Board (ISSB).
Similarly, many climate-related regulations and voluntary reporting frameworks, including the SEC proposed climate disclosures and the Task Force on Climate-Related Financial Disclosures (TCFD), require companies to identify, discuss, and manage their material climate risks, opportunities, and impacts. A climate scenario analysis is a powerful tool for com- panies to understand how the global risks of climate change will impact their business, to limit financial losses, manage dis- ruptions to operations, and provide investors with insight into how they are preparing for a changing climate.
Mandated sustainability-related disclosures entail increased scrutiny of the accuracy and thoroughness of ESG data. Companies should implement robust systems to gather, analyze, measure, and report ESG-related information. As part of this, companies should establish proper processes or procedures to prepare for assurance of sustainability disclosures that will be required under various regulations in the future.
5. Engage with Stakeholders
Throughout this process, companies must continue to understand and monitor the expectations and concerns of key stakeholders, including investors, customers, employees, and communities. At the end of the day, a primary purpose of the increased standardization of ESG-related disclosures is to provide stakeholders with complete, accurate, and decision-useful information. Therefore, companies must engage with their stakeholders to ensure sustainability priorities and progress is being effectively communicated.
