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ESG Under The Biden Administration

Publicly traded companies are expected to provide comprehensive sustainability disclosures.

New Leadership, New Approach

Since his inauguration, President Joe Biden has taken steps to move forward combating climate change and addressing social inequality. One of his key steps has been to nominate Gary Gensler to lead the SEC. Gensler, a former Dodd-Frank Regulator and proponent of setting high standards for accountability, is expected to push the trajectory towards more transparent and standardized ESG  regulation for publicly held companies. Gensler served as the head of the CFTC during the 2008 financial collapse and has also served as a senior advisor on Sarbanes-Oxley, the federal law that expanded requirements for U.S. public company boards, management, and public accounting firms.  

In the last few years, we have seen a surge in sustainability disclosures, both financial and non-financial.  Companies have committed to disclosing ESG information with the help of frameworks such as the Task  Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards  Board (SASB). As companies are examining their operations to identify key disclosure metrics, of particular importance will be non-financial disclosures, such as carbon emissions and diversity issues. 

Investor and consumer demand and good corporate citizenship are the main drivers for enhanced non-financial disclosures. A recent study by EY revealed companies failing to meet investor expectations on  ESG factors risk losing access to capital markets. The majority of investors that were surveyed signaled a move to a more disciplined and rigorous approach when evaluating companies’ nonfinancial performance. Embedding formal frameworks in assessing long-term value, non-financial performance,  investment-decision making should be at the top of companies’ strategic agendas.  

Percent of respondents who say they conduct little or no review of non-financial disclosures

Source: EY, How will ESG performance shape your future? July 2020 

It is expected that under Gensler, companies will be more transparent with communicating their ESG  disclosures. The hands-on approach Gensler is expected to take is a breakthrough in the United States regulatory framework, with public companies being at the center of attention.  

The SEC is Asking for Public Comment

On March 15th, 2021, Acting SEC Chair Allison Herren Lee asked the public to comment on its  “disclosure rules and guidance related to climate change disclosures” as the commission’s staff undergoes a review of those rules. Lee has paved the road for uniform and consistent ESG  disclosures and recently made it clear that a mandatory ESG disclosure framework is needed. She is now preparing Gensler’s workload as he transitions to the SEC. Gensler is expected to create a  standardized framework to which companies from all industries can refer when identifying material ESG risks. Enacting rules that will make disclosures widely accepted and immediately effective and will not be an easy task. Companies should be concerned about complying successfully; there are dozens of reporting frameworks and – for now – a lack of reporting standardization. What is helpful for both companies and the SEC is the content that is included in the previous ESG bills and which frameworks companies prefer when reporting to shareholders.  

The previous bills hint at consistent and reliable ESG disclosures related to climate change-related risks,  as well as how companies will address these risks through their long-term strategies. The leading frameworks, TCFB and SASB (which have been referred to as a potentially viable “Common Standard”),  hint at comprehensive reviews of material risks stemming from climate change and company operations.  

As ESG net inflows continue to rise, it is apparent that people’s preferences are changing in how they expect companies to operate. Morningstar’s Sustainable Funds US Landscape 2020 report shows a  dramatic inflow of investment in ESG friendly strategies and this trend is expected to continue. Accelerated progress is needed to effectively identify and disclosure material ESG risks affecting companies, the world, and vice-versa. This accelerated progress can occur with a mandatory disclosure framework that is enforced by regulators and supported by Congress.

 

ESG Net Inflows

Source: Morningstar Sustainable Funds U.S. Landscape, 2020 report

Time for Standardization

There have been numerous complaints raised by investor advocacy groups arguing that voluntary reporting frameworks gave rise to inconsistent, and therefore faulty and poor disclosure practices. The voluntary reporting frameworks, a preferred method of disclosure by Jay  Clayton, the former SEC Chair, exacerbated inconsistent disclosures, leading to confusion and ambiguity. As we enter a new era of rulemaking, companies will have to rethink their compliance programs.  

Currently, companies are not required to disclose ESG metrics, but policy adoptions under the Biden  Administration and regulations under Gensler could change that. According to MSCI, an ESG ratings provider, over 2800 companies have been rated. Under Biden in office, that number is expected to grow. Companies will, first and foremost, have to provide ESG disclosures because of the increasing interest in transparency and accountability expectations from the Gensler-led SEC. .Secondly, the gap for ESG metrics will close at a faster pace than expected due to increased shift from principle-based disclosure sentiment towards a rule-based framework of disclosing information, similar to Regulation  S-K, the prescribed regulation under the US Securities Act of 133 that lays out reporting requirements in the form of qualitative descriptions for public companies.

The Biden Administration is advocating for these new measures through measurable ESG issues such as water usage, human rights abuses, and executive pay (full list below). This method has the potential to increase accountability, provide clear and uniform ESG reporting among all industries, and increase compliance sentiment. The previous bills placed greater emphasis on the environmental factors of company operations, however, we expect a more comprehensive framework to be proposed under Gensler’s leadership to include more social and governance disclosures. 

Key ESG Metrics

Environment

  • Carbon Emissions
  • Product Carbon Footprint
  • Water Usage
  • Raw Material Sourcing
  • Biodiversity & Land Use
  • Toxic Emissions
  • Electric Waste

Social

  • Labor Management
  • Health & Safety
  • Diversity 
  • Human Rights
  • Privacy & Data Security
  • Access to Healthcare
  • Supply Chain Labor Standards

Governance

  • Executive Pay
  • Business Ethics
  • Corruption & Instability
  • Board Diversity
  • Tax Transparency
  • Ownership

A Shift in Focus

As we enter a new regime of pro-disclosure, transparency, and accountability, companies will set out their plans for winning and retaining sustainability-minded customers. Incentivized by effective standard disclosing practices, primarily, through competitive pressure, companies must disclose fast and must disclose accurately. Effectively, companies will find themselves in a disclosures race fueled by SEC-set standards of consistent, reliable, and comparable information. Additionally, as institutional investors play up the role of fiduciary duty, the ESG reporting regime will go mainstream.  The question has shifted from if disclosures will happen to when and how they will happen. 

The COVID-19 pandemic has highlighted a greater emphasis on company operations by prompting investors to be wary of harmful activities affecting the environment and society. Forming new strategies,  assessing existing policies, vetting entire operations, and formulating CSR reporting will become a  business-as-usual practice for companies, under Biden’s leadership. Given Gensler’s regulatory background, coupled with pressure from market participants and regulators, the time to prepare an effective compliance strategy has come sooner than expected. 

Looking Ahead

With a shift in investor sentiments, anticipated ESG disclosure requirements, and competitors’ pressures,  it is essential that ESG-reporting becomes a priority for every business. While the SEC sets forth to create its mandatory framework, companies can get ahead in the ESG race by focusing on incorporating proactive ESG governance within the firm, identifying and addressing ESG-related risks, creating a data management system, and setting ESG relevant targets. 

The next step would be to compile and communicate ESG results. Disclosing the correct information can be a daunting task for companies who may be just starting to think about effective disclosure programs. Sia Partners can help companies prepare for effective ESG disclosure ahead of increased pressure for disclosure standardization. Sia’s experts in regulatory strategy will continue following disclosure developments and will provide preparedness guidance.

To effectively comply with the anticipated SEC-set ESG  Disclosure Standards, we recommend a three-tier plan:

Identify

Identify required ESG metrics by engaging internal and external stakeholders.

Establish

Deploy tools to gather ESG information more quickly. Develop internal dashboards to monitor ESG factors. Enact concrete changes to improve ESG metrics.

Disclose

Effectively disclose the mandatory information in a timely and consistent manner. 

How Sia Partners Can Help

Sia Partners carries experience in policies and regulations surrounding ESG and corporate social responsibility. With expertise in establishing target operating models and governance frameworks, Sia Partners experts can help in areas of risk management, operations, compliance, data analytics, and regulations. Our international capabilities and network can help develop ESG disclosure policies for companies and provide implementation services. We are committed to helping clients in all sectors navigate the global transformation towards a changing regulatory framework and a low carbon economy. Our latest green investment in Greenly, a carbon emissions calculator, can help companies measure, quantify, and reduce carbon footprint. The platform allows companies to manage and act on their carbon emissions, bringing the latest monitoring technology to the forefront of business operations. 

A key part of proper disclosure encompasses ESG metrics and indicators. Companies will face the task of collecting and evaluating ESG data to meet the demands of regulators. Sia Partners can help. We bring decades of transformation experience and innovative data science-based solutions to help you rapidly assess the current state, examine future-state options, and implement impactful change for your organization. We deploy sophisticated analytics and digital tools alongside our subject matter experts, ensuring you receive support tailored to your organization’s context and needs. Our consultants rapidly assess your workforce, financial, and competitor data and define actionable insights that guide every step of the project, from assessment to detailed design and implementation. Our Transformation Hub, an online portal of proprietary tools and aids, means that you have end-to-end visibility on the design process, with downloadable tools at your fingertips, on-demand, around the clock.

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Sources

Compliance Week, Biden’s SEC set to require disclosure of ESG, climate change risk, December  2020 

SEC, Public Input Welcomed on Climate Change Disclosures, March 2021 

SEC, Playing the Long Game: The Intersection of Climate Change Risk and Financial Regulation,  November, 2021 

Harvard Law School Forum on Corporate Governance, BlackRock Nudges Companies Toward a  Common Standard (SASB + TCFD), January 2020. 

Institute for Policy Integrity and Environmental Defense Fund, Mandating Disclosure of Climate Related Financial Risk, February 2021. 

MSCI, ESG Ratings Corporate Search Tool. 

How will ESG performance shape your future? 

The Intersection of Operational Resiliency and ESG Scores 

The Future of ESG Disclosures in the United States 

The Impact of COVID-19 on Sustainable Investing