by Candus Hinderer
With a new administration, comes new regulation, and at the top of this administration’s agenda is climate change legislation, also known as the “E” in ESG – Environmental, Social and Governance, that we are hearing so much about.
Now, we all know the rule of 1/3 for adoption of anything new, especially when it comes to disclosures:
- 1/3 are early adopters – ahead of the curve. These are the folks in line for the latest Tesla or in this case companies that have a high score with the Dow Jones Sustainability World Index (DJSI),
- 1/3 are cautious and will wait to see how the first 1/3 reacts, and
- the last 1/3 are resistors who will not change unless forced to do so by law.
The resistors need to pay attention: ESG reporting regulation is coming.
The SEC announced a new position this month, “Satyam Khanna will serve as Senior Policy Advisor for Climate and ESG…in this new role, Mr. Khanna will advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.”
As this role is solely focused on Climate and ESG, companies should prepare for additional disclosures, and not just climate-related. See below chart for components of each category:
Here’s the Sooner
There won’t be much ramp-up time required because there are organizations similar to the FASB that the SEC has already relied upon to develop its most recent Human Capital disclosures, and they have ESG reporting frameworks ready to go. These include the SASB – Sustainability Accounting Standards Board and the TCFD – Task Force on Climate-Related Financial Disclosure. Get familiar with these acronyms as we should be hearing much more from these advisory organizations in the months and years to come. As a matter of fact, in BlackRock’s recent CEO Letter, Larry Fink highlighted them both when discussing why data and disclosure matter.
This Isn’t All Bad News
Data has shown that during 2020, ESG-driven, or “purpose-driven” companies have outperformed their peers. Again, I refer back to BlackRock’s CEO letter, “During 2020, 81% of a globally-representative selection of sustainable indexes outperformed their parent benchmarks. But the story goes deeper. It’s not just that broad-market ESG indexes are outperforming counterparts. It’s that within industries – from automobiles to banks to oil and gas companies – we are seeing another divergence: companies with better ESG profiles are performing better than their peers, enjoying a “sustainability premium.”
What we are seeing is that investors’ desire for ESG accountability is pushing companies to think about long-term sustainability and this approach seems to be ADDING value to the company, not reducing it.
Next Steps
Boards and Management need to make sure ESG is on the agenda in the company’s long-term strategy and risk oversight discussions.
1. Examine what early adopters in your industry are doing by consulting with the DJSI. There, companies can find ESG scores for most publicly traded companies.
2. Next, review the ESG frameworks and resources at SASB and TCFD to help build the policies, processes and metrics that are important to your company and your investors.
3. To speed up implementation, companies can include monitoring and reporting of the new ESG metrics within the same process used for non-GAAP reporting. This will ensure accuracy and quality reporting and will not require recreating the wheel.
ESG standards are what investors AND employees are looking for, and they are looking for it in a purpose-driven company that holds their same values. So rather than being the 1/3 that resist, companies should embrace the reporting that will improve transparency as well as market value.
And in the end, wouldn’t we rather be riding in the Tesla than waiting at the bus stop?
by Candus Hinderer
With a new administration, comes new regulation, and at the top of this administration’s agenda is climate change legislation, also known as the “E” in ESG – Environmental, Social and Governance, that we are hearing so much about.
Now, we all know the rule of 1/3 for adoption of anything new, especially when it comes to disclosures:
- 1/3 are early adopters – ahead of the curve. These are the folks in line for the latest Tesla or in this case companies that have a high score with the Dow Jones Sustainability World Index (DJSI),
- 1/3 are cautious and will wait to see how the first 1/3 reacts, and
- the last 1/3 are resistors who will not change unless forced to do so by law.
The resistors need to pay attention: ESG reporting regulation is coming.
The SEC announced a new position this month, “Satyam Khanna will serve as Senior Policy Advisor for Climate and ESG…in this new role, Mr. Khanna will advise the agency on environmental, social, and governance matters and advance related new initiatives across its offices and divisions.”
As this role is solely focused on Climate and ESG, companies should prepare for additional disclosures, and not just climate-related. See below chart for components of each category:
Here’s the Sooner
There won’t be much ramp-up time required because there are organizations similar to the FASB that the SEC has already relied upon to develop its most recent Human Capital disclosures, and they have ESG reporting frameworks ready to go. These include the SASB – Sustainability Accounting Standards Board and the TCFD – Task Force on Climate-Related Financial Disclosure. Get familiar with these acronyms as we should be hearing much more from these advisory organizations in the months and years to come. As a matter of fact, in BlackRock’s recent CEO Letter, Larry Fink highlighted them both when discussing why data and disclosure matter.
This Isn’t All Bad News
Data has shown that during 2020, ESG-driven, or “purpose-driven” companies have outperformed their peers. Again, I refer back to BlackRock’s CEO letter, “During 2020, 81% of a globally-representative selection of sustainable indexes outperformed their parent benchmarks. But the story goes deeper. It’s not just that broad-market ESG indexes are outperforming counterparts. It’s that within industries – from automobiles to banks to oil and gas companies – we are seeing another divergence: companies with better ESG profiles are performing better than their peers, enjoying a “sustainability premium.”
What we are seeing is that investors’ desire for ESG accountability is pushing companies to think about long-term sustainability and this approach seems to be ADDING value to the company, not reducing it.
Next Steps
Boards and Management need to make sure ESG is on the agenda in the company’s long-term strategy and risk oversight discussions.
1. Examine what early adopters in your industry are doing by consulting with the DJSI. There, companies can find ESG scores for most publicly traded companies.
2. Next, review the ESG frameworks and resources at SASB and TCFD to help build the policies, processes and metrics that are important to your company and your investors.
3. To speed up implementation, companies can include monitoring and reporting of the new ESG metrics within the same process used for non-GAAP reporting. This will ensure accuracy and quality reporting and will not require recreating the wheel.
ESG standards are what investors AND employees are looking for, and they are looking for it in a purpose-driven company that holds their same values. So rather than being the 1/3 that resist, companies should embrace the reporting that will improve transparency as well as market value.
And in the end, wouldn’t we rather be riding in the Tesla than waiting at the bus stop?
