In 2022 many issues on corporate Sustainability and ESG assumed a refined focus. New regulations came into play that are shaping the sustainability agenda and changing the way companies do business in different jurisdictions.
More and more boards, in recognition of the important role ESG plays in driving long-term value creation, are disclosing how their governance structure is evolving to consider ESG more intentionally. Nowadays, having a defined plan for overseeing the integration of ESG into strategy and disclosure, is a must-have for companies in order to demonstrate the significance and prioritization of ESG efforts, to both investors and broader stakeholders.
US regulations on Sustainability/ESG
In 2022, the proposal of U.S. Securities and Exchange Commission (SEC) for changes to be made to the Investment Company Act Names Rule, aimed to prevent misleading and greenwashing in investment funds. This rule would require “certain funds to adopt a policy to invest at least 80% of their assets in accordance with the investment focus that the fund’s name suggests.” This includes when a fund’s name contains the term “ESG” or terminology such as “sustainable,” “green” or “socially responsible.” Additionally, under the new requirements, companies must measure and publish their Scope 1 and Scope 2 carbon emissions beginning in 2024. And for larger companies, required reporting on Scope 3 emissions (or carbon emissions from customers and the supply chain) may not be far behind. The Investment Company Act Names Rule is slated to be finalized in October 2023.
The SEC has also announced it will consider a new rule for Human Capital Management Disclosure, which is likely to include diversity, equity and inclusion metrics, among other aspects. Finally, SEC is expected to release its first rule on climate-related financial disclosure and attestation.
EU regulation that will affect US companies
On top of that, the EU’s Corporate Sustainability Reporting Directive (CSRD) introduces more detailed sustainability reporting requirements and also extends the scope of the reporting requirements to all large companies, as well as non-EU companies that have significant activities in the EU. This means that some U.S. companies are soon to be affected by the CSRD and they need to be prepared for increasing ESG assurance opportunities.
All evidence is pointing to the fact that companies need to be prepared for an influx of ESG reporting mandates and regulations in 2023. But keeping pace with constant regulatory updates has become a challenge for both businesses and investors. Additionally, another commonly cited concern among firms when securing or planning to secure ESG-related assurance engagements, is that they “find it challenging to gather the necessary internal resources and experts to perform the work”.
Here are the key changes companies should quickly establish in order to prepare for the ESG challenges ahead.
- Build out teams with sustainability roles, from coordinators to C-level executives.
- Educate their staff on sustainability issues, in order to make it easier for them to adapt to new policies and embrace the changing operational processes to a more sustainable business model.
- Create an ESG strategy and secure an ESG policy budget.
- Make sure that their partners and stakeholders are also following sustainability practices.
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After a three-year hiatus, the Center for Sustainability and Excellence (CSE) is returning to New York City, presenting ON-SITE its signature Certified Sustainability ESG Practitioner Program, Leadership Edition 2023, June15-16, 2023.
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