Most public companies have made strides to provide meaningful environmental, social and governance (ESG) reporting to their stakeholders. However, even these leaders are concerned about complying with new proposed regulations from the SEC, which would require public companies to disclose extensive climate-related information in their SEC filings.
CFOs are feeling particular pressure from this proposal, since they, along with the CEO, would need to certify the accuracy of climate-related data contained in such filings. They would also need to certify that the company has applied appropriate procedures and controls to record, process, summarize and report that information.
This process is similar to traditional financial reporting for public companies, but ESG data included in SEC filings is largely nonfinancial and isn’t likely to come from the general ledger or an enterprise resource planning (ERP) system. Much of this data is unstructured, granular and found in disparate sources, including paper files and records prepared and maintained by third parties (sometimes inexperienced with legal, compliance or accounting processes). In some instances, it may not be consistently tracked or readily available.
Answering the What, When, Where and How of ESG Data
When the SEC proposed making climate-related disclosures more than just good governance, but also a regulatory requirement with teeth, it sent a clear signal that public companies must approach ESG reporting and disclosures with the same respect and rigor as they would other critical operational and compliance reporting. Their ESG reports should be based on complete, accurate, high-quality, auditable data. That reality has CFOs seeking answers to the following questions:
- What are the data and metrics that we need to disclose?
- When will we be required to disclose it?
- Where is the data we need to disclose?
- How do we bring it all together and develop trusted insights?
- How do we execute an efficient ESG program that takes into consideration ever-evolving reporting and disclosure requirements?
When it comes to climate-related disclosures, though, CFOs should first address this twofold question: What – and when – do we need to disclose?
The SEC has proposed disclosure compliance dates for large accelerated filers, accelerated filers and non-accelerated filers around three groups: Scopes 1, 2 and 3. It has also set dates for smaller reporting companies for Scopes 1 and 2. (You can find details here.)
Once you have a grasp on the what and when of climate-related disclosures, you can start addressing the where and how of organizing data for reporting. The following three steps can help provide those answers, and allow your company to lay the groundwork for well-organized data management across its entire ESG program:
Conduct a materiality assessment to determine where you are now — and want to be
This process will help the company better understand not only what it may need to report on from a regulatory perspective, but also what its stakeholders care about most. From there, you can determine what information you need and develop a process to locate it, centralize it, and set up processes to make tracking and gathering this data repeatable (and less arduous) in the future. The materiality assessment will help determine which ESG frameworks and standards the company may want to align with to meet its ESG objectives.
Establish formal processes and controls and align the right enabling technology
Your organization will need to develop a governance program around ESG data and invest in technology to help manage it appropriately and accurately (think: repeatable, trusted data). Investing in data analytics and visualization tools will help make sense of and integrate unstructured data.
Because some ESG data must be auditable, you’ll need to institute strong controls for handling it and ensuring it’s of high quality and trustworthy — just as you do for the financial information the company files with the SEC. In addition to establishing management controls around relevant ESG data, consider where you may need to engage internal audit or external, independent auditors to provide assurance, especially for climate-related disclosures that cannot rely on guesswork.
Build your ESG A-team
ESG reporting and disclosures are pervasive, and expectations continue to evolve. Addressing these needs will require a multidisciplinary approach bringing together impacted stakeholders from virtually all lines of business and corporate functions. Depending on the size and needs of your organization, you may want to create a specialized committee and tap external experts to help shape your ESG program and ensure it will enable the company to meet its outlined sustainability and corporate social responsibility goals.
Your organization may want to hire or designate an ESG leader to help drive ESG strategies and initiatives. This person will work closely with key stakeholders (boardroom to back office) to help ensure the company is gathering reliable, auditable data sets and integrating systems to aggregate the right data and increase data availability.
These steps can help CFOs and their companies start getting ahead with ESG data management and reporting at a time when it has never been more important to not fall behind.
Protiviti Managing Directors Chris Wright and Mark Carson and Director Kulbir Singh contributed to this blog post.