New ESG Reporting Requirements: How Companies Can Prepare Now

After a long run of seeming ascendance of environmental, social, and corporate governance (ESG) awareness among companies, investors, and government entities, there has recently been noticeable backsliding in the name of shareholder primacy and political divisions.

A new survey released by HSBC found that rising anti-ESG sentiment is starting to affect how fund managers think about integrating such considerations into their funds. Forty-four percent of North American respondents said their reasons for having an ESG strategy have become weaker over the past 12 months.

This is a noticeable shift in sentiment, considering that more than $100 trillion was under management in funds with an ESG connection in 2022, and it is persuading some Wall Street firms to change their messaging to avoid controversy. BlackRock CEO Larry Fink said last month that he has stopped using the term “ESG” because it has become too politicized.

That is a real shame because beneath the noise and political rhetoric lies a simple truth: ESG practices are not just buzzwords or greenwashing; they hold the key to a sustainable and equitable future for investors, companies, and consumers. The challenge lies in the old adage ‘You can’t manage what you can’t measure.’ In particular, increased transparency requirements related to the “social” criteria (the “S” in ESG) are especially tricky to quantify. But in a world where a company’s assets are increasingly human, the “S” is more important than ever.

This is why it is exciting that—despite the recent pushback and rhetoric from some corners—the U.S. Securities and Exchange Commission (SEC) appears to be moving forward with “S”-related rule making, specifically around human capital disclosures. They recognize that the workforce demands such rules, customers expect them, society depends on them, and many executives now have their compensation tied to them. There is every reason to apply the same standards of disclosure rules and assurance requirements around the data related to human capital as we do to data related to physical capital.

The SEC, which could (and should) forge ahead with formal rule-making related to human capital, is expected to announce climate-related disclosure requirements later this month. And while we don’t know exactly what those requirements will say, they are expected to cover governance of human capital–related risks and opportunities; diversity, equity, and inclusion (DEI) metrics and policies; labor practices; recruitment and retention; and rewards and benefits. Knowing that these categories are most likely to be included, here are some recommendations for what companies can do to prepare:

• Start now.  While there will likely be a glide path for implementing new rules, we expect that public companies will need to publish historical comparison data when the requirements kick in, which suggests companies need to prepare well ahead of time to meet any compliance deadline.
• Poll employees.  The most important thing companies should be doing to begin is self-identification campaigns among their employees while simultaneously ensuring they have the infrastructure for responsible data collection that maintains privacy. The more specificity companies ask for, the greater the participation they can expect in the employee survey.
• Be prepared to over-report.  SEC-mandated data disclosures may not enable companies to tell their whole story. Thus, organizations should be prepared to publish a supplemental human capital transparency report that provides the context behind their numbers.
• Invest in technology and process.  It would be impossible to overstate the degree to which data quality is essential in ESG disclosures. Processes to collect information—from policies to people data—need to be reliable, repeatable, and transparent. Whatever information is disclosed will probably have to have assurance (similar to a financial-data audit), so it’s time to move away from manual analysis and ad hoc spreadsheets.

ESG reporting is not just a matter of checking boxes; it’s about acknowledging what the critical levers are that drive long-term business performance and making them visible. Years ago, getting the depreciation schedule nailed down for new factory equipment was essential to give investors a fair representation of the business’s future prospects. In today’s service- and tech-dominated economy, companies that don’t disclose similar levels of detail about the health and value of their human capital are withholding critical, material information from shareholders.

When we report on the health of our human capital, we reveal the levers at our disposal to make those workforces more vibrant, diverse, engaged, and resilient. Those levers may include caregiving benefits, advanced people-analytics tools, or paid leave insurance. When we invest in and report on the health of our human capital, it benefits all of us—shareholders and workers alike.

Courtney Leimkuhler is co-founder and general partner at Springbank.

From: BenefitsPRO