US Regulators Crack Down on ESG Disclosures

US Regulators Sharpen Focus on ESG Disclosures

US financial regulators have increased the spotlight on ESG disclosures in a bid to enhance scrutiny over rising transparency and corporate accountability concerns. As a result, the US Securities and Exchange Commission has made key improvements to strengthen efforts by firms to provide more accurate, all-rounded information concerning ESG-related issues for investors.

The new set of rules would mandate listed public companies to report on much more information on the nature of the climate risks they face, their strategy on the management of these risks, and other performance metrics for all the major ESG metrics. This is happening at a time when there has been a trend towards increased corporate transparency with an added focus wherein investors are paying more attention to issues of sustainability and social responsibility during the decision-making process. Focus on Climate Risk

Disclosure of climate-related risks The SEC would make it a requirement for companies to disclose how these climate-related risks would impact their business in the long run. Companies would file reports on the governance of those risks and the more standardized measurements of greenhouse gas emissions. In other words, the idea behind this proposed rule is to provide investors with the opportunity to understand how climate-related risks affect their bottom line and hence make more informed investment decisions.

This means that the SEC demands there has to be a coming out on whether and how the boards of companies oversight on climate risks. Businesses have to further detail how they determine and control the physical and transition risks that involve climate change. This will, therefore, provide a clue as to what a company is doing to counter or adapt to the risks involved.

Social and Governance Disclosures

This further includes additional disclosures of social and governance issues, as introduced by the SEC. It covers issues that pertain to diversity and inclusion efforts, employee relations, how companies govern and compensate executives. As opined by the SEC, the long-term value will be affected by the non-financial factors, and hence, proper information relating to them must be presented to the investors at their instance before companies.

Other than this, the new rules will also compel the companies to make public statements on their policies related to political spending and lobbying. Also, the SEC wants companies to give details about their potential conflicts of interest on those activities. According to the SEC, increased transparency in such issues will enable the investors to assess the far-reaching implications of a company's operations and the overall governance posture of the company.

Hurdles for Companies

The new disclosures would create significant potential challenges in terms of data collection and reporting by companies. Very few companies have a history of tracking ESG metrics on a comprehensive and standardized basis. Significant investments in data collection and reporting systems will be required to transition toward more detailed and consistent disclosures.

It may mean, to many organizations, a total overhaul of the reporting on the current practices or even new employment or hiring of a consultant to do sustainability reporting under these new laws and regulations. Smaller organizations are much worse off since they have their reduced resource capacities for managing effective change of newly adopted reporting policies in the market.

Pushback and Support
Some business groups criticized the move of the new rules as one that has big potential burden when implementing it while others praise SEC for its bold initiative toward the harmonization standardization of the disclosure on ESG. Some proponents of new rules believed that standardized reporting information relevant to ESG will facilitate normalization of the companies, giving proper observation, and analysis among investors while considering the sustainability in their long-run investments.

Such critics of the proposed rules would be more concerned with unnecessary costs to businesses and distractions from core financial disclosures rather than creating these new reporting requirements. The view held by some was that the SEC should focus more on financial performance and less on such social and environmental issues.

Despite all these, the SEC said it believes that enhanced ESG disclosures are necessary for proper functioning of the financial markets. It has also added that the new rule is oriented towards protecting investors by further information of risks that might have a bearing on long-term value.
Conclusion
It is because of the SEC's persistent effort in pursuing proposed ESG disclosure rules which will make companies and investors more prepared for greater expansion and standardization of an approach in ESG reporting. This is still in its nascent form as processes for public comment and feedback procedures are in place, heading toward final regulations.

This means that, after finalizing new rules for reporting standards, every sector of companies will take a really heavy blow. The businesses need to be adjusted to new reporting standards based on growing demands regarding greater transparency about ESG factors; hence, it calls for being competitive and regaining investor confidence.

Source: U.S. Securities and Exchange Commission.