The ESG reporting domain saw significant regulatory shifts over the last several years, and the 2022 calendar year was no exception. We witnessed a proposed climate-related disclosure rule from the Securities and Exchange Commission (SEC) in the US as well as other significant regulatory developments in Europe and other jurisdictions. The adoption of voluntary ESG reporting also soared, with 96% of S&P 500 companies and 81% of Russell 1000 organizations voluntarily publishing ESG reports.1
In 2023, we expect to see more proposed regulations get finalized and adopted as voluntary standard setters continue to consolidate and keep pace with evolving industry needs. As the regulatory environment continues to shift, it’s important to be aware of all the developments that took place in 2022 and understand what to anticipate in 2023.
1. The vision for ESG reporting
The SEC’s proposal on climate-related disclosures
- In March 2022, the SEC issued a proposal on climate-related financial disclosures. Our To the Point publication, SEC proposes enhancing and standardizing climate-related disclosures, discusses the proposed new rules to enhance and standardize disclosures that registrants make about climate-related risks, their climate-related targets and goals, their greenhouse gas (GHG) emissions, and how the board of directors and management oversee climate-related risks.
- Panelists on the EY webcast ESG Reporting: what the SEC proposal on climate change disclosures means for business discussed these proposed requirements, how the requirements intersect with other regulatory and voluntary frameworks and standards, and how corporate boards and executives could start preparing their organizations for the proposed changes.
- In June 2022, the comment period closed. EY professionals hosted a webcast on What the proposed SEC ESG disclosure rules could mean for public companies, boards and investors that dove into reactions from industry associations, standard setters, preparers and investors on their views of the proposal, and what is top of mind for companies and boards as they begin to work through the proposed requirements.
Exposure drafts from the ISSB
The adoption of the CSRD
- In April 2022, the European Union issued the Corporate Sustainability Reporting Directive (CSRD) to support the European Green Deal, which was a proposal that amended the Non-financial Reporting Directive (NFRD). This was adopted in October 2022. The EY publication How the EU’s new sustainability directive is becoming a game changer dives into the scope of the proposed directive, as well as timing and potential impact on companies. The European Financial Reporting Advisory Group (EFRAG), the body appointed by the European Council to draft these standards, released exposure drafts on the first set of European Sustainability Reporting Standards (ESRS) that is expected to be adopted by June 2023.
- In the September 2022 EY webcast Think ESG: Navigating the next phase of ESG reporting, Andrew Hobbs, EY EMEIA Public Policy Leader, discussed the regulatory activities in the EU and implications for non-EU companies.
2. ESG investor use cases are growing
- In addition to new regulations in 2022, the EY investor survey showed investor demand for companies to report ESG information increased significantly. To help companies meet that demand, the Sustainability Accounting Standards Board (SASB) worked on an ongoing project aimed at understanding why and how diversity, equity and inclusion (DEI) might impact enterprise value on an industry-by-industry basis. The EY article Diversity, equity and inclusion (DEI): the industry perspective dives into the details of that project.
- In the May 2022 EY webcast Think ESG: Meeting the ESG data needs of institutional investors, panelists shared their perceptions on the level of depth and context in ESG reported data and the priorities for company disclosures, among other related matters. Ultimately, investors would like to see prioritization of focused ESG disclosures linked to a company strategy.
- Some key takeaways from the 2022 proxy season highlighted that investors are evaluating environmental and social shareholder proposals against the specific company’s progress in addressing and reporting on related matters, which is also measured through direct investor engagement with the company during and outside the proxy season. ESG oversight, particularly of climate risk, was an important factor.
- The EY organization also released the Global Corporate Reporting and Institutional Investor survey in November 2022, which highlighted the disconnect between the expectations and goals of companies and their investors when it comes to corporate and sustainability reporting, particularly ESG disclosures.
3. Shaping the future of the finance function
- In the March 2022 Think ESG: How ESG reporting is accelerating corporate sustainability efforts webcast, ESG and finance leaders from the public company, private company and private equity space shared their perspectives on how to best incorporate ESG into a company’s overall business strategy, in addition to their experiences working cross-functionally and with external stakeholders to execute on this.
- In May 2022, the EY organization and the Financial Education & Research Foundation (FERF) issued a joint report based on survey responses from chief accounting officers and controllers from US-headquartered publicly traded companies that demonstrated how finance professionals are helping to advance ESG reporting. Responses to the survey revealed the need for alignment in three key areas of governance, processes and controls, and data and technology.
- The article How to approach the SEC’s proposal on climate-related disclosures discusses actions that companies can take now to prepare for final regulation as adopting these rules is likely to be a large undertaking for most organizations in terms of scoping, data collection, controls, risk management, and determining roles and responsibilities in a governance structure.
- In the September 2022 EY webcast Think ESG: Navigating the next phase of ESG reporting, the panel included a finance director who shared her view as a financial statement preparer on how to get started and prioritize the proposed regulation, and mobilize across functions within the organization.
- In December 2022, EY professionals hosted the final Think ESG webcast of the year, Think ESG: insights from an audit committee chair, a CFO and an ESG controller on the current landscape of corporate reporting. This webcast provided insight into how potential ESG regulation is impacting the entire chain of the organization from the audit committee to financial statement preparers, and how the role of finance continues to evolve as ESG matters are a board and C-suite priority.
Outlook for 2023
As companies with US operations actively await the SEC’s final rule on climate-related disclosures, many companies are already taking significant action to prepare. Some are undergoing materiality assessments and asking finance teams to review or implement new processes and controls, while others with European operations are actively preparing to comply with the CSRD.
As voluntary standard setters continue to consolidate and work toward establishing globally consistent sustainability reporting standards, we may continue to see an emergence of newer reporting frameworks such as the Taskforce on Nature-Related Financial Disclosures (TNFD)2, as well as more countries requiring reporting under the Task Force on Climate-Related Financial Disclosures (TCFD) . As ESG reporting continues to be a cross-functional effort, it’s also expected that resourcing and skills development will be top of mind as companies continue to navigate a rapidly evolving reporting landscape.
One significant takeaway from the EY 2022 Global Corporate Reporting and Institutional Survey may serve as a guide to help navigate this ever-changing environment. An area where both investors and finance leaders agree is the list of topics that challenge effective corporate reporting:
- The lack of supporting evidence or assurance to provide trust in ESG information
- The disconnect between ESG reporting and mainstream financial information
- The lack of information on how the company creates long-term value
It appears that both investors and finance leaders are in agreement that it is not ideal for financial information and ESG reports to tell different stories, particularly if neither of those narratives help investors understand how the company is planning to achieve long-term value. Throughout 2023, companies will be well-served to focus on the financial and nonfinancial information that is most relevant to them and their progress toward creating long-term value.