ESG Compliance: The Stakes Are Getting High

How is your company preparing to disclose ESG data as part of your, or a partner's, reporting obligations? If you haven't yet thought about it, the time is now to do so.

As companies face increasingly complex ESG disclosure mandates, their upstream and downstream partners often face pressure to report as well. Taking a proactive approach to set a clear ESG strategy that aligns with your business goals, engaging your team to update and create new processes and procedures, and using the right technology to gather ESG data will ease the pressure and help protect and grow your valuable business partnerships. Even if your industry or region does not yet have ESG disclosure requirements, they are coming.

Many companies across industries and regions are already required to disclose some level of Environmental, Social, and Governance (ESG) data as part of their reporting obligations. Typically, this requirement is mandated for publicly traded companies, especially those listed on stock exchanges. Additionally, regulatory bodies, institutional investors, and stakeholders are pushing for greater transparency and accountability in corporate practices, leading many organizations to “voluntarily” disclose ESG data.

The duration for which companies must disclose ESG data varies depending on the jurisdiction and regulatory framework. Some regulations mandate annual reporting, while others may require quarterly or even more frequent updates. However, the trend is towards more frequent and comprehensive reporting as the importance of ESG factors in investment decision-making continues to grow. These disclosures are non-financial data designed to improve transparency and accountability, and to encourage companies to adopt more sustainable practices. They can also help to protect investors from greenwashing, where a company makes misleading claims about its ESG performance.

With significant regulatory requirements coming to fruition, such as the Corporate Sustainability Reporting Directive (CSRD) in the European Union (EU) and new programs in California, the landscape of ESG reporting is evolving rapidly. The CSRD, being phased in from 2024 through 2029, requires companies to report more broadly on sustainability-focused topics, including:

• Environmental matters: Encompassing the establishment of any science-based targets and comprehensive climate risk-related reporting.

• Social responsibility: Covering information about the treatment of employees and the communities where they operate.

• Respect for human rights: Sharing their human rights standards, and those from their partners and suppliers.

• Anti-corruption measures: Details about measures in place to prevent corruption and bribery.

• Board diversity: Information on the diversity in leadership, including age, gender, educational, and professional background.

In France, the stakes for non-compliance are even higher, with the introduction of possible jail time for leaders as a penalty for failing to meet sustainability disclosure requirements. This underscores the growing importance and seriousness of ESG reporting on a global scale.

Even if reporting is not yet mandated for your organization, taking a proactive approach to set a clear ESG strategy that aligns with your business goals, engaging your team to update and create new processes and procedures, and using the right technology to gather ESG data will ease your transition and help protect and grow your business and sustain partnerships. Many organizations are required to report on Scope 3 impacts, which are the greenhouse gas emissions of partner organizations, both upstream and downstream.

Understanding Scope 1, Scope 2, and Scope 3 Emissions

To comprehensively address ESG reporting, it is crucial to understand and report emissions across all three scopes:

1. Scope 1: Direct emissions from sources owned or controlled by the organization, such as company-owned vehicles and manufacturing facilities.

2. Scope 2: Indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the organization.

3. Scope 3: All other indirect emissions that occur as a result of the organization's activities but are not included in Scope 1 or Scope 2. These can encompass a wide range of sources across the value chain, including emissions from purchased goods and services, business travel, employee commuting, and more.

Understanding and reporting emissions across all three scopes allows organizations to comprehensively assess and manage their greenhouse gas footprint, identify opportunities for emissions reduction, and enhance their overall sustainability performance.

There is a lot of information online on these requirements, but as they are complex and unique from industry to industry and region to region, it makes sense to hire an experienced professional to assist you in designing your strategy, defining the data to capture, and determining the optimal software solutions.

Taking these steps now will not only ensure compliance with future regulations but also position your company as a leader in sustainability, building trust with stakeholders and securing a competitive advantage in an increasingly ESG-conscious market.