Companies underlie various regulations about what they must report depending on where they are located and/or selling their products. Changing regulations for each country can be irritating and hard to oversee. In our series, we’ll give an overview of what sustainability reporting is mandatory and becoming mandatory in the following years and the most significant industries. Today we’re covering the US:
Sustainability reporting is part of the so-called ESG reporting. ESG stands for environmental, social, and governance factors. In the US, companies of all sizes have been encouraged to produce ESG reports in the past – to guide their own decisions and to help investors get further company insights, leading to a more sustainable and socially responsible future.
Up to now, there is no stand-alone mandatory sustainability reporting in the US. The United States Securities and Exchange Commission (SEC) only requires companies to report on information that may be material to investors, which includes ESG-related risks.
In the past, the US has relied on voluntary reporting, hoping for it to be driven by competition and engagement. Even though this strategy worked out quite well (in 2015, approximately 81% of S&P 500 companies issued a sustainability report, compared to less than 20% in 2011 (source:Governance and Accountability Institute)), since the beginning of the Biden administration mandatory sustainability reporting comes more into focus.
What is the ESG Disclosure Simplification Act?
In June 2021, the House of Representatives passed landmark legislation titled the ESG Disclosure Simplification Act. The legislation would make several ESG-related reportings mandatory for public companies in their SEC filings. The SEC would be directed to adapt its disclosure rules accordingly and define the metrics for the reporting.
The required disclosures cover five topics:
- ESG Metrics
- Political Spending
- Pay raises
- Climate disclosures
- Tax havens and offshoring
The passing of the legislation is still very unsure, as the House of Representatives approved the landmark legislation only by a slim margin. But even if the bill does not pass, there are various developments toward mandatory sustainability reporting in the US (see below).
United States Securities and Exchange Commission proposal
On the 21st of March 2021, the United States Securities and Exchange Commission (SEC) proposed a new regulation, which has sparked many discussions since then. While the SEC has always encouraged companies to disclose their climate-related risks, publishing this data has been voluntary. The new regulation will change this.
What does the regulation entail?
The regulation would require U.S.-listed companies to disclose their Scope 1 and 2 emissions, including an auditing requirement. But the detail that sparked the most interest was the mention of Scope 3 emissions. The proposal would oblige companies to disclose the greenhouse gasses generated by suppliers and partners, known as Scope 3 emissions if they are material or included in the company’s emission targets.
Whom will the regulation affect?
The new regulation would be mandatory for all public companies with an existing SEC reporting requirement. But as many private companies are already on the path to an initial public offering (IPO), they often begin filing in preparation. They will, therefore, likely be asked to include this data by their investors.
What is sustainability reporting?
Sustainability reporting is a method used by companies to disclose their environmental, social and governance (ESG) practices and impact. This information is made public in annual reports or through separate sustainability reports. The purpose of sustainability reporting is to provide stakeholders with transparent and comprehensive information regarding a company’s sustainability initiatives and performance. It allows stakeholders, such as investors, employees, customers, and the public, to assess a company’s sustainability efforts and hold them accountable for their impact on society and the environment.
The importance of sustainability reporting
Sustainability reporting is gaining significance as consumers seek greater transparency and accountability from businesses. With heightened awareness of environmental and social concerns, consumers are increasingly choosing products based on a company’s sustainability efforts. By focusing on sustainability, companies not only appeal to socially conscious customers but also gain a competitive edge in the market.
Sustainability reporting enables companies to pinpoint areas for enhancement and adopt more sustainable practices. This not only aids the environment but also cuts costs and boosts efficiency in the long term. It further empowers companies to monitor their journey towards sustainability objectives and highlight their commitment to stakeholders.
Types of sustainability reporting
Organizations commonly use different types of sustainability reporting to communicate their sustainable practices and impacts. Corporate social responsibility (CSR) reports examine a company’s social and environmental aspects, while environmental reports focus solely on environmental impacts and mitigation efforts. Integrated reports combine financial data with sustainability information, offering stakeholders a comprehensive view of a company’s performance.
Who benefits from sustainability reporting? Various stakeholders gain from it, such as investors seeking socially responsible investments, employees looking for companies with strong values, and customers concerned about their purchases’ impact. Regulators and policymakers also benefit by monitoring companies’ sustainability efforts to make well-informed decisions.
Challenges in sustainability reporting
While sustainability reporting has numerous benefits, there are also challenges associated with it. One major challenge is the lack of standardized reporting methods, making it difficult to compare the sustainability performance of different companies. Another challenge is obtaining accurate and reliable data, especially from global supply chains.
Sustainability reporting plays a crucial role in promoting sustainable practices and creating a more transparent business environment. Companies that prioritize sustainability reporting not only benefit themselves but also contribute to building a better and more sustainable world for future generations. With continued efforts towards standard
The importance of sustainability reporting
Sustainability reporting is gaining significance as consumers seek greater transparency and accountability from businesses. With heightened awareness of environmental and social concerns, consumers are increasingly choosing products based on a company’s sustainability efforts. By focusing on sustainability, companies not only appeal to socially conscious customers but also gain a competitive edge in the market.
Sustainability reporting enables companies to pinpoint areas for enhancement and adopt more sustainable practices. This not only aids the environment but also cuts costs and boosts efficiency in the long term. It further empowers companies to monitor their journey towards sustainability objectives and highlight their commitment to stakeholders.
Types of sustainability reporting
Organizations commonly use different types of sustainability reporting to communicate their sustainable practices and impacts. Corporate social responsibility (CSR) reports examine a company’s social and environmental aspects, while environmental reports focus solely on environmental impacts and mitigation efforts. Integrated reports combine financial data with sustainability information, offering stakeholders a comprehensive view of a company’s performance.
Who benefits from sustainability reporting? Various stakeholders gain from it, such as investors seeking socially responsible investments, employees looking for companies with strong values, and customers concerned about their purchases’ impact. Regulators and policymakers also benefit by monitoring companies’ sustainability efforts to make well-informed decisions.
Is ESG reporting mandatory in the United States?
There is currently no federal mandate for ESG (Environmental, Social, and Governance) reporting in the United States. However, there are various initiatives and regulations that require companies to disclose certain ESG information.
When will the regulation come into place?
The SEC is planning a phased implementation. Larger organizations would have to comply with the regulation by 2023, while smaller ones would have time until 2024 to follow.
Do you want to know what you’ll need to be ready for the SEC proposal? Find out more here.
International Sustainability Standards Board (ISSB)
In 2021 the International Financial Reporting Standards Foundation (IFRS) announced the creation of the International Sustainability Standards Board (ISSB). The ISSB was then tasked with developing mandatory corporate ESG disclosures. The goal is to find a global baseline of sustainability disclosure standards by the end of 2022. The intention behind it is to standardize sustainability disclosures for investors. The ISSB disclosure standards will be based on the Sustainability Accounting Standards Board (SASB) standards. The SASB Standards identify the subset of sustainability issues most relevant to financial performance in 77 industries with numerous reporting elements under each. The ISSB sustainability standards will likely involve a significant amount of sustainability-related disclosure requirements, with the mandate of collecting company-wide information every quarter and controls to ensure the accuracy of the data.
It’s unclear when the ISSB standards will come into place. For 2022 a public consultation on the proposal is planned. What is also unsure is if the US will use the ISSB’s standards. It seems likely, though, looking at the fact that most sustainability reporting updates in the US are investor-focused.
Ways to comply with growing sustainability regulations
Sustainability is a crucial aspect of business operations in today’s world. With the increasing concern for the environment, governments and organizations are implementing strict regulations to promote sustainable practices. Compliance with these regulations has become essential for businesses to stay competitive and avoid penalties.
Here are some ways that businesses can comply with growing sustainability regulations.
What does this mean for you?
We’re still far from having a global standard for sustainability reporting and its methods. But one thing is for sure: mandatory disclosure of sustainability information will happen in the coming years. Companies should be prepared and advised to establish ESG reporting already today.
Especially Scope 3 reporting poses a challenge for many enterprises, as they lack data, insights, and ways to get actionable insights. If you want to learn more about the difficulties of Scope 3 reporting and how to overcome them, make sure to read our article.
