Consultants: Create internal task forces to deal with "onslaught" of new ESG disclosures, use realtime data tracking towards goals

Companies are increasingly tasking finance chiefs with developing systems to address environmental, social and governance issues, in the face of coming federal climate-disclosure rules and pressure from shareholders and employees.

While it might sound tempting to centralize ESG responsibilities in the finance department, which already deals with data and reporting, consultants said that isn’t practical given the scope of requirements and breadth of corporate interests.

Instead, he said, companies should create an internal task force that focuses on ESG requirements. Such a task force needs to reach out to leaders across the entire business who will then share data with a centralized team, said Michlewicz, whose company recently established a climate-reporting consulting service for clients.

One of the biggest challenges for many CFOs is figuring out how to establish a data baseline, or decide which data to collect, Michlewicz said. ESG disclosures are qualitative and can be vague, leading many companies to make bold claims to be net zero by a certain date, he said. But making sure data is accurate and can be tracked is important for figuring out forward-looking calculations.

EY’s Bell suggested looking into real-time performance tracking. “The truth is, it’s really tough for organizations right now to be able to track a lot of these metrics in real time,” he said, though he added that as more-comprehensive disclosure systems are put in place, organizations can make real-time decisions rather than seeing it as a compliance burden.

The coming SEC climate-disclosure rules, originally proposed by the agency in March 2022, would require public companies to report climate-related risks and emission data—including the so-called Scope 3 emissions that come from a company’s supply chain.

The rules would require SEC-registered domestic or foreign companies to include a raft of climate data in reports such as 10-K and annual reports. Any climate-related costs that are 1% or more of each line item total—such as revenue, inventories or intangible assets—would have to be reported.

The EU leads the pack in green regulation, including the CSRD, which will require even non-EU companies doing business in the bloc to disclose everything from greenhouse-gas emissions to gender pay differences. In the U.S., ESG regulations vary by state, with a recent Supreme Court ruling allowing, at least for now, states to pursue cases against oil companies.

According to a 2023 Rate the Raters survey conducted by the SustainAbility Institute at global sustainability consulting firm ERM, many investment teams are now required by their companies to incorporate ESG ratings and data into their investment decisions, yet more than half of businesses and investors said they have only moderate trust that ESG ratings accurately reflect ESG performance. Meanwhile, more than half of the companies surveyed said they engage with at least six ESG ratings providers, such as CDP, formerly known as the Carbon Disclosure Project, Institutional Shareholder Services’ ESG rating arm, Morningstar’s Sustainalytics, MSCI ESG, S&P Global ESG and EcoVadis.

Unlike credit-ratings firms, which typically hold annual meetings with companies, ESG ratings firms don’t meet as often with the businesses they rate and the ratings system isn’t standardized. “It’s far less of an interactive process,” Smith Group’s Scherrer said.

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