Making the ESG journey a priority

May 18, 2022

A blog post by Katie Glynn, senior manager, Deloitte & Touche LLP

As the need to establish an environmental, social, and governance (ESG) readiness plan approaches, organizations may struggle to get their ESG programs launched within the ever-expanding materiality and nontraditional landscape. Focusing on a few key components closer to the starting line may help organizations unlock more value and better navigate the ESG journey.

With the growing focus on environmental, social, and governance (ESG) issues and expanding ESG regulatory landscape, many organizations are increasing the prioritization of ESG preparedness and efforts dedicated to ESG topics and objectives. Recently, we discussed organizations' need to develop an ESG framework to assess, manage, and disclose ESG initiatives around current and emerging regulatory requirements and how the controllership function may be in a position to help spearhead these efforts by utilizing an existing Controllership playbook. But the question is often, “where should we start?”

Developing an ESG readiness framework may seem overwhelming given the expanding materiality and nontraditional makeup of the landscape, which includes disruptions, activities, and commitments around the environment, social capital, business and innovation, leadership and governance, and human capital. With a seemingly endless array of topics, coupled with the addition of new SEC regulatory proposals and requirements, many organizations may spin their wheels in the attempt to make improvements to ESG programs or launch initiatives that align with the expanding regulatory environment.

However, ESG is a journey, not a destination. It is a dynamic process that requires continuous learning and improvement. So instead of setting sites on the finish line or casting an unconstrained view across the entire landscape, focusing on a few key areas closer to the starting line may help organizations gain momentum with ESG programs and unlock the most value out of an ESG framework in the current and future state. Here are some considerations to help identify priorities and better prepare for the ESG journey.

Understand the growing regulatory environment

Recently, the SEC began issuing proposals that would standardize the climate-related disclosures provided by public companies and serve as a catalyst for organizations to enhance their sustainability practices. Additionally, the SEC expects more proposals in the coming months related to human capital and governance. The most recent proposal standards, issued March 21 2022, about cybersecurity and climate disclosures include enhanced and standardized climate disclosures related to climate and risk strategy; targets and metrics; Greenhouse Gas (GHG) emissions; and enhanced disclosures on cybersecurity risk and incidents, management, strategy, and governance. The recent and expected proposals on disclosure requirements for cybersecurity, climate, and human capital will require an increased measure of quality around ESG reporting and understanding each one will be paramount to preparing assurance ready ESG programs.

Additional ways to help understand and plan for SEC proposals include:

• Continue applying existing frameworks and standards, including but not limited to the Task Force on Climate-related Financial Disclosure (TCFD), GHG Protocol, and Sustainability Accounting Standards Board (SASB) standards
• Share comments on the proposed rules with the SEC within the comment period
• Plan for compliance requirements as proposed by the SEC

For more details about the recent SEC proposals, read our analysis of the SEC’s proposed rule on climate disclosure requirements.

Narrow down ESG objectives

Controllership may be in a position to help narrow down material ESG objectives based on stakeholder interest and business impact by developing climate governance and assurance plan. There will be an increased need for integration and interconnection between information, functions, and processes with more links between financial and non-financial information due to the regulatory implications and growing stakeholder involvement in ESG activities. Controllers and other stakeholders can start with establishing or refining climate governance by identifying board and management oversight on climate-related matters with clear roles, responsibilities, and charters.

After ESG Governance is established, management can engage with internal and external stakeholders to collaborate on target setting and related data collection around climate risks and opportunities for the business. Once these risks and opportunities are identified, evaluating against their possible short- or long-term impacts can help you identify the material objectives for ESG that are aligned with your organization’s broader strategic initiatives.
 

Prioritize material data and reporting processes

The SEC's expected and proposed disclosure requirements for cybersecurity, climate, and human capital will require higher granularity and control for disclosed data, increasing demands for data quality and accessibility. To transform to a future state of high-quality ESG reporting, organizations should evaluate their current ESG reporting environment, assess the strength of processes and controls for climate-related data, and leverage existing financial reporting control structures to develop near and long-term plans for climate disclosures. While establishing these ESG controls, organizations can further optimize the process and drive more reporting agility—including enhanced data quality, timeliness, automation, and relevance—by standardizing governance and controls and aligning reports with recognized standards (e.g., TCFD, GHG Protocol). Agile reporting processes and the necessary control structures may better prepare organizations for the anticipated accelerated reporting timelines and assurance-ready disclosures.

These considerations can help you create an ESG readiness plan that doesn’t have to overwhelm or disrupt an organization. With the Controllership playbook already in place that can model an ESG framework, focusing on foundational data and reporting processes and governance and oversite structures may help organizations put their attention on the vital components of their ESG programs and narrow down the material objectives that will serve their strategic initiatives.
As ESG initiatives and regulations escalate, the demand for relevant and timely information about the regulatory environment, SEC disclosures, and reporting timelines will continue to expand so keep an eye out—we will continue offering information relevant to recent and potential future SEC proposals and guidance around the current and future state of ESG.

To take a deeper dive into the recent proposals and how to lead ESG readiness through a Controllership playbook, listen to the Center for Controllership's Dbriefs webcast: Expanding ESG readiness through a controllership playbook.

Source: https://www.sec.gov/files/33-11028-fact-sheet.pdf