This article was written by Jess LeDonne, Director, Policy and Legislative Affairs & Chad V. Scott, Consulting Manager.
As our Consulting Manager, Chat Scott, recently wrote about here, the European Commission has adopted the European Sustainability Reporting Standards (ESRS) as a part of the Corporate Sustainability Reporting Directive (CSRD). The ESRS's required environmental, social, and governance (ESG) related reports and disclosures go into effect next year and cover a wide array of topics including, but not limited to, climate, pollution, resource use, workforce, affected communities, and business conduct. Chad's article outlines the impacts - both direct and implied - of these requirements on U.S. companies, especially financial institutions, and as he succinctly puts it, "…it is not a matter of if ESG reporting will become a reality for financial institutions, it’s a matter of when."
Required ESG disclosures and reporting are not just a concern for financial institutions and public companies, and private companies should begin considering their ESG practices to prepare for future regulation and legislation in the area, which we expect to see in the coming years. It behooves all companies to consider these complex issues and ensure that you are prepared now for what is surely coming. Legislative compliance, especially with reporting and disclosures, can be prepared for in advance to ensure your team is not scrambling when as deadlines inevitably approach.
What is ESG?
ESG is an umbrella term meant to refer to any and all business related environmental, social, and governance practices. Historically, ESG criteria have guided potential investors when considering investing in companies. Of course, these kinds of general good business practices have always been a consideration for investors, but what we have seen in recent years is increased scrutiny on these criteria from other groups, including, but not limited to, clients, customers, employees, recruiters, auditors, and perhaps most importantly, federal and state rule makers and legislators.
Ultimately, even ignoring the looming legislative and reporting changes for a moment, ESG is simply good business. Initiatives aimed at improving a company's environmental impacts, social responsibility, and governance programs can very directly result in value increases, including reputation, strategic partnership opportunities, market growth potential, and more. A recent survey by Deloitte research and analysis found that, not only are companies and executives taking action around ESG initiatives, but also that they anticipate a wide range of benefits to follow those efforts, including talent attraction and retention, increased efficiencies and ROI, enhanced trust with stakeholders, and reduced risk, among others.
Clearly, ESG is becoming an important part of running a successful business. A 2017, Morgan Stanley study that found that 86% of millennials were interested investing in companies that have a positive social or environmental impact, and that 72% of Gen Z believed that responsible investing could improve sustainability outcomes. The growing focus on ESG means that the time is now to get your data and technologies in place to assess, track, and report on your ESG efforts. Working with a trusted advisor to ensure your finance, compliance, management, tax, and strategy teams are aligned on ESG efforts will pay dividends in the long run.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
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