Preparing for the ESG Landscape

February 15, 2022

A blog post by Beth Kaplan, managing director, Deloitte & Touche LLP

Organizations are facing elevated pressure to sharpen their focus around climate and environmental impacts as the ESG landscape goes through an accelerated transformation to meet current and future regulatory requirements. Organizations will need to build an ESG readiness plan to meet compliance and performance targets with an ESG strategy framework that can fit into the Controllership playbook.

The accelerating pace of change around climate concerns and how society relates to the environment is sharpening organizations’ focus on ESG risks that many businesses increasingly face. This heightened awareness is elevating pressure on organizations to assess, manage, and disclose their ESG positions and commitments. As companies start to mobilize around their commitments against current and emerging regulatory requirements associated with ESG, the need to unlock enterprisewide collaboration will be more important than ever.

Controllership can play a key role in navigating the nontraditional ESG landscape by spearheading the development of internal controls and governance that will drive an ESG strategy and readiness plan. To organize readiness and reporting strategies through the Controllership playbook, we must first define what encompasses the ESG landscape, including recent developments in ESG regulatory requirements and what is likely on the horizon for the reporting environment. From there, we can model an ESG strategy and readiness plan through a Controllership lens—using regulatory operating models, digital enablers, and other strategic levers in the Controllership playbook.

What is ESG?

The ESG landscape includes an array of disruptions, activities, and commitments around the environment, social capital, business and innovation, leadership and governance, and human capital.

Source: SASB Materiality Map

Recent developments and what’s next for the ESG environment

Recent developments by standard-setters and regulators are changing the disclosure landscape regarding ESG. In 2021, the International Organization of Securities Commissions (IOSCO) Technical Expert Group appointed the SEC as co-chair to accelerate global sustainability reporting standards focused on enterprise value and drive international consistency of related disclosures that will stand up to the new International Sustainability Standards Board (ISSB).¹ In March 2021, the SEC requested public input on climate change disclosures, which is a common request early in the development of new regulations.² In June 2021, the SEC Chair instructed SEC staff to develop recommendations for mandatory company disclosures on climate risk and human capital, which would lead to the SEC Final Rules on Climate Change Disclosure, Corporate Board Diversity, Human Capital Management Disclosure, and Cybersecurity Risk Governance.³ The EFRAG SRB standard is expected by summer 2022, with reporting requirements anticipated to go into effect in 2023.⁴

The move toward ESG disclosure in regulated filings spotlights the necessary role of assurance and governance for ESG activities in order to meet new standards and communicate the financial relevance of ESG performance. This ongoing transformation, along with the anticipated developments on the horizon, points to the critical role Controllership can play in the regulatory environment and ESG framework for organizations.

Building an ESG strategy and readiness plan through Controllership

For the business, ESG risks and opportunities are business risks and opportunities. As the pace and impact of societal and environmental disruptions continue to intensify, organizations need to build the capacity to drive ESG performance and resilience with a new strategy and set goals.

With the current pace of transformation, the challenges around performance and commitment to sustainability will likely only continue to intensify, and the number of stakeholders involved in ESG strategy and governance will continue to grow. Organizations may need to release yearly sustainability reports, climate change reports, social capital and human capital information, and other disclosures and performance targets in the current environment. The required information for these reports may already be hitting the threshold of difficulty for an organization to sustain. With the addition of new regulatory requirements and anticipated SEC disclosures, the roles of finance, risk, internal audit, and compliance will grow further against the increasing complexities around data governance, controls, and overall strategy. Controllership will likely play a key role in ESG governance if a sustainability team owns it, or it may even switch to complete Controllership ownership.

Thankfully, there is no need for Controllership to reinvent the wheel when developing the readiness plan to meet compliance and performance targets—the ESG strategy framework can fit into the Controllership playbook. Controllership is already equipped to handle SEC and statutory reporting, new accounting standard implementations, finance transformation, first-time audits, and closing the books—so why not ESG? Controllership is already positioned to handle the complexities and help lead the charge for ESG compliance.

Using the governance process and disclosure strategy framework for finance transformation as a framework, the ESG information easily fits to create a new playbook. Here is an example:

To expand on our series exploring the ESG landscape, we will continue to offer considerations for reporting strategies and readiness, including operating models around emerging disclosures and regulatory requirements. In addition, we will expand on establishing performance targets and how controllers can add value to their role in the current and future state of the ESG environment.

To hear more about ESG readiness and preparedness, including Controllership’s expanding role and some early lessons learned in the current state, listen to our dbriefs webcast: ESG readiness and reporting accelerated through Controllership’s playbook.