Mandatory ESG reporting in the USA

IThere are are currently no mandatory ESG disclosure requirements on the federal level in the US.

However, In 2022, the US Securities and Exchange Commission (SEC) proposed “amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors.” If the proposal is adopted, it will establish disclosure requirements for funds and advisers that market themselves as having an ESG focus and be a large win against ESG greenwashing. The proposed rules would employ mandatory and accurate disclosures in periodic reports and registration statements to address topics related to greenhouse gas (GHG) emissions and global climate change. While materiality remains a cornerstone for the majority of the proposed rules, certain disclosures—including GHG emissions—are now mandatory regardless of the circumstances. These disclosures are required to be incorporated into existing SEC filings, rather than a separate climate-focused document. This itself is big news.

https://www.sec.gov/news/press-release/2022-46

The SEC announcement on mandatory Climate Change Disclosures is wake up call for directors and boards. Boards need to gain knowledge and tools to deal with ESG. While there are increased risks of incorrect and non-disclosure, Boards need to adopt a holistic or integrated approach to ESG. This needs to be embedded in the core principles of the business. There is much concern that the SEC proposals and other announcements, and stakeholder (shareholders, staff, and customers) pressure are leaving companies with inadequate time and resources to catch up and implement ESG. Practically, what does this mean? Companies need to extract data to measure and report on emissions:

Scope 1 = the emissions from owned or operated assets (for example, the fumes from the tailpipes of a company’s fleet of vehicles)

Scope 2 = the emissions from purchased energy

Scope 3 = the emissions from everything else (suppliers, supply chain ,distributors, product use, etc.)

There are a few big challenges here:

1. Current ERP / Accounting Departments are not built to record these emissions and there is need for external integrated software solutions.

2. Scope 3 – especially emissions in supplier chains , subsidiary companies remain a challenge.

3. Increases Director oversight and risk.

The SEC regulations are a step in the right direction its focus is on the Environment Disclosure. It will lead to engage with specialized outsourced advisors , software and resources, and will lead to a focus on Net Zero, Science based Targets and ESG.

There are increasing considerations and risks for Directors. Call for Directors ESG strategy and oversight. Despite the increased ESG focus, many Directors indicated that boards often need more tools for effective ESG oversight.

This clearly highlights the urgent need for: • ESG Director training • Aligning company strategy with ESG

• ESG Accounting and Reporting

• Improving Governance – Board Risk and Opportunity Assessments.

• Adding non-executive directors who can contribute on ESG

• Specialized new ESG roles – director or head of ESG

ESG represents a substantial shift in the way companies and boards will operate their businesses. This is further reflected by Moody’s expanding of ESG integration into credit scores and this will affect positively or negatively on the company's abilities to keep or gain new customers. Companies and boards must take urgent action in this new ESG world.

https://www.sec.gov/sec-response-climate-and-esg-risks-and-opportunities