ESG Disclosure Regulation

ESG Disclosure Regulation

September 13, 2022

Updated March 11, 2024

ESG (Environmental Social Governance) disclosure regulations are dynamic and continue to evolve. Even the topic of “non-financial disclosure regulation” is a source of confusion for many companies attempting to develop ESG strategies.

In this guide, we shed some light on ESG disclosures, the applicable regulations, and tips for preparing for the future of ESG.

Table of Contents

What Are ESG Disclosures?

ESG disclosure refers to the process of publicly communicating and reporting ESG performance and impact. ESG disclosures are sometimes also referred to as ESG reports or sustainability reports.

Companies share ESG disclosures with stakeholders – investors, business partners, employees and consumers – in an effort to be transparent about their ESG priorities, goals and impact.

According to a 2022 Moore Global survey (PDF), 83% of the large businesses placing greater importance on ESG reported that this improved customer retention. Companies placing greater emphasis on ESG also reported seeing headcount grow more than twice as fast as those less committed.

Disclosures enable companies to communicate their impact with key stakeholders, so they can make informed decisions about who they invest in, who they work for, and who they purchase from.

Is ESG Disclosure Required in the US?

No, ESG disclosure is currently not a regulatory requirement in the US. However, many moves are being made in that direction, most notably by the Securities and Exchange Commission (SEC).

Historically, the SEC has required companies to disclose their financial information. For example, companies are required to file both annual and quarterly reports. However, in 2022, the SEC announced that they would be working toward adopting ESG disclosure rules.

As part of the rulemaking process, the SEC requested public comment on climate disclosure to ensure “decision-useful information” for investment decisions that is consistent, comparable and reliable. These actions align with current policy trends that suggest a future where ESG disclosure is a requirement within the US. For now, companies should prepare by developing ESG strategies and commitments to ESG reporting.

US States with ESG-Related Regulations


Which Countries Require ESG Disclosure?

Currently, Malaysia and Hong Kong are the only countries that require ESG disclosure reporting. The European Union (EU), United States, and Canada are all currently refining ESG reporting requirements based on public comments; the expected timeline for compliance requirements is 2024.

The Malaysia Code of Corporate Governance (MCCG) lead the way in 2000 and has been reviewed and updated four times, most recently in 2021. The Bursa Malaysia Sustainability Reporting Guidelines (PDF) apply to listed companies.

The Hong Kong Exchange (HKEx) has required ESG reporting since 2013.

Both HKEx and Bursa Malaysia exchanges use a "comply or explain" approach for ESG requirements. (For example, an acceptable non-compliance explanation would be if a particular standard was not relevant or material to the corporation.)

Companies with multinational operations need to stay abreast of ESG reporting requirements that may impact them today and in the future.

SEC Climate Disclosure

Although the SEC has been providing investors with financially material information about the environmental risks faced by public companies since the 1970s, a heightened awareness of accelerating climate risk in recent years has prompted the agency to provide its first official guidance on the topic in more than a decade. In March 2024 the agency adopted the new rules for climate reporting.

SEC Climate Disclosure Proposal Rules (March 2024)

The new rules require publicly traded companies to not only measure and report their annual greenhouse gas emissions but also to identify and describe their climate plans in terms of:

  • Governance – Who will provide oversight of climate risks and opportunities, and what will management’s role be in assessing and managing performance?
  • Strategy – What are the climate risks and opportunities an organization faces, and how will they affect its business and financial plans?
  • Risk management and disclosure – How will the organization assess and manage climate risks including impacts from severe weather events?
  • Goals and transition plans – What initiatives does the organization plan to undertake to meet its climate goals, and how will moving to low- and zero-carbon solutions financially impact the company?
  • Assurance of emissions statements – How will the company implement the controls around emission data that will ensure valid numbers when it comes time for a third-party audit?

The largest companies (i.e., “large, accelerated filers”) will likely have to begin reporting their climate risk data in 2025 and provide emissions data in the following year with the phase in of a “limited assurance audit” in 2029.

7 Tips to Adhere to the SEC Regulation

The SEC climate disclosure rule is here. Organizations must be aware of how these regulations impact their operations and value chain. Below are some tips businesses can use to get started.

  1. Understand financially-material climate metrics: Organizations should begin by getting to know the current climate measurement and reporting standards, including any best practices and how their competitors are responding.
  2. Develop a climate and energy strategy: Organizations who have yet to do so should develop an sustainability strategy that integrates climate and energy management to guide their efforts. To do so, businesses must complete a materiality assessment to determine which topics are most important and those that support the organization’s strategic plan and key results. The strategy should include climate and these material topics, sustainability goals, and key performance indicators (KPIs).
  3. Select an ESG framework: Organizations should select an ESG reporting framework that aligns with the company’s communications strategy and stakeholder expectations. (i.e., know your audience.) Broadly accepted disclosure frameworks include the International Sustainability Standards (ISSB), TCFD, and GRI. These frameworks provide a standardized structure for reporting by highlighting key factors organizations should consider and defining what should be included in an ESG disclosure. NOTE: as of June 30, 2022, SASB, IIRC and CDSB have been consolidated into the ISSB.
  4. Put together an internal sustainability team: While the board is ultimately responsible for sustainability, management teams are responsible for implementation. An internal sustainability team or committee with cross-functional executive sponsors can help lead the charge within an organization. These teams are responsible for performing assessments, developing KPIs, publishing ESG and sustainability reports and other key tasks. Defining a team responsible for sustainability ensures initiatives are prioritized and mobilize the entire enterprise.
  5. Start gathering and analyzing climate data: SEC disclosure will require accurate and accessible data. Organizations should consider putting processes and systems in place now to start compiling relevant data. This includes defining where data is gathered from, how it is stored and who is responsible for analyzing it. Best practice includes internal controls to ensure the data is verifiable and can be used to support business decisions.
  6. Start measuring and reporting greenhouse gas emissions: This can be broken down into activities the company can control or influence. Capture early “wins” by starting with Scope 1 and Scope 2 emissions. Scope 1 includes direct emissions from facility and fleet operations (for example, building heating and vehicle fuel consumption). Scope 2 includes indirect emissions from purchased electricity. Both Scope 1 and Scope 2 emissions are mandatory disclosures under the SEC rule for large accelerated filers. In order to meet investor and customer requirements, organizations need to look at their suppliers and entire value chain, which means that smaller companies will also need to start measuring this data.
  7. Prepare for ESG audit and assurance: Even though an independent verification of greenhouse gas emissions might not be required in year 1, organizations need to prepare for the inevitable. Companies need to put good controls around their data, so that when they publish it at the end of the year, they know it’s a number that their boards can sign off on. Although the ESG audit will be less restrictive initially, over time it will become just as restrictive as financial statement audits. This means that businesses need to provide the same internal controls and data quality for their climate data as they do for their financial data.

Is Your ESG Reporting Compliant With Regulations?

Armanino can assist with data audits, risk assurance and regulation compliance. Contact our ESG consultants today for an assessment.

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