The SEC is about to change the ESG equation

The rules that govern corporate reporting are changing fast—and many companies are struggling to keep up. The next test is likely to come sometime in 2024, when the US Securities and Exchange Commission is expected to enact rule changes for disclosing climate-related risks—from greenhouse gas emissions to the impact of extreme weather. These changes would constitute a potentially big shift in how businesses approach ESG measurement and reporting. Applicable both to US companies and to any non-US company required to file with the SEC, the rule changes would be decidedly global in scope, joining other new frameworks, such as the European Union’s Corporate Sustainability Reporting Directive, in a fast-changing regulatory landscape. 

In light of the sea change potentially underway, PwC conducted a survey of business executives to assess how prepared companies are for it. As the figures above suggest, the answer is: less than they’d like to be. Most pressing, respondents said, is a lack of the necessary technology for meeting the new requirements. A smaller share cited a shortage of appropriately skilled staff. A little less than two thirds pointed to potential budgetary shortfalls. By contrast, almost all those surveyed—95%—said they’re taking proactive compliance-related measures and are prioritising ESG more than before the rule change was announced. How can leaders ride that momentum and close the looming compliance gap? They should start with these three key actions:

1. Assess sustainability risk across the business. Make sure everyone involved understands how various climate change scenarios can affect your company’s financial performance and operations. What if global average temperatures are held in check, rising less than two degrees Celsius? What will change if they rise more? This is an area in which it’s particularly important to break down silos and bring a cross-functional approach. One function can no longer have a monopoly on climate risk.
2. Determine impact to the financial footnotes. Companies may need to describe how climate risks impact their financial statements—or are reasonably likely to do so in the future. To meet that mandate, develop “impact pathways” to connect those events to likely accounting entries. From there, it will be important to identify the financial statement line items most likely to be affected.
3. Get stakeholders aligned and educated. Companies will undertake a lot of organisational changes to comply with the climate disclosure rule. These may include employees taking on new roles, responsibilities shifting between functions, new systems and processes and, not least of all, higher stakes and increased expectations around how companies tell their climate stories. Some employees may need upskilling. Others may simply need clear communication about what’s different and why. No matter what, effective communications and change management rooted in trust are critical.

Combined with increased stakeholder demands for transparency and accountability, the SEC’s new framework will require leaders to address climate risk, and its impact on performance, head-on.