Growing ESG expectations
Recent market-driven and regulatory developments are accelerating standardized ESG reporting and impacting the expectations of stakeholders, particularly investors. With the Biden Administration making climate change a focus of its policy agenda (including the recent creation of the SEC’s Climate and ESG task force in the Division of Enforcement), we anticipate that expectations around ESG disclosures and communications will increase and evolve.
While ESG reporting has historically taken place outside of SEC submissions, companies may consider whether to integrate material ESG metrics into regulatory filings to tell a more holistic and integrated value creation story. Sustainability factors reasonably likely to materially affect the financial condition or operating performance of a company are of particular interest to investors, and when financially material or present a material risk factor, may be required to be disclosed. To the extent ESG metrics are key performance indicators in an SEC filing, it is critical that audit committees consider and understand:
- Data quality and controls
- Disclosure processes and controls
- Consistency in disclosures and communications across the company’s various external reporting outlets (e.g., SEC filings, earnings releases, annual report and shareholder letter, and sustainability report)
- The role of internal and external audit
As companies carefully navigate evolving expectations for ESG performance and reporting, audit committees and boards should continue to monitor the ESG reporting landscape and assess the implications to the company. The implications could include the need to understand the source of data, how the company will consider disclosure processes and controls, and how they will communicate with stakeholders broadly.