3 sustainability reporting challenges, and how ESG guidelines can help
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Reporting on sustainability efforts comes with new challenges for organizations today. Recent regulations are requiring businesses to disclose their environmental impact not only for the benefit of investors, but also to pinpoint a real need for change. In light of the recent Supreme Court ruling on the EPA, finding a framework that is consistent and usable seems even more daunting. From evolving metrics to lack of insight, it’s no surprise that many company leaders are at a loss.
However, by breaking down the challenges and taking necessary steps to fill the gaps, businesses can benefit from the SEC’s ESG (Environmental, Social, Governance) reporting requirements to help guide them in the right direction.
It’s been noted across the industry that businesses that track carbon emissions and climate metrics are performing better with both investors and consumers. In fact, 80%-90% of emissions are created within corporate supply chains and consumer use. With the SEC aiming to include Scope 3 emissions in reporting requirements, supply chains may soon be under the microscope for many large companies. Increasing reporting needs may be even more of a challenge as suppliers, transportation and many other key business services would be included in the company’s emissions. Companies’ success at reporting sustainability initiatives rests on communication and education for not just their businesses, but those from which they choose to source goods and services.
ESG reporting challenges
There are three major reporting challenges companies face in sustainability reporting.
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Broad definitions for sustainability cause confusion
It’s no secret that “sustainability” is the latest buzzword across industries. Sustainability typically refers to the relationship between a company and the environment. More specifically, the SEC’s ESG disclosures are a new industry standard of reporting for investors and stakeholders. Another way to look at these terms is to consider sustainability as internal and ESG reporting as external. But because these terms can seem interchangeable, they confuse leaders, and the metrics can be even more confounding.
For companies looking to make a start on more environmentally friendly initiatives, it’s necessary to choose a reporting framework and stick to it. ESG reporting discloses not only environmental data but social and corporate governance data. These reports can give investors better insight into a company. Following a framework such as ESG will also significantly reduce frustrations during the development of internal initiatives.
Communication and education are key for those companies required to do Scope 3 emissions reporting. Ensuring that suppliers and other service providers are ready and able to document their emissions, as well as pass on reports to their client companies, will be vital to successful reporting. The stretch to Scope 3 emissions means large companies have the potential to effect real change in overall carbon emissions.
Uncertainty of necessary frameworks
For many companies, it is not the need for sustainability reporting that is the issue but the uncertainty of which metrics to use. Metrics are constantly changing as information about environmental impacts changes. With reporting standards still in flux, it is difficult for organizations to keep up with data management and meaningful reporting.
Many forthcoming regulations should standardize and improve compliance and clarity. The new reporting standards have already impacted the largest companies. For example, Mars, Inc. reports that nearly 95% of emissions are outside of its immediate control as it incorporates the goods and services from nearly 20,000 suppliers. Through diligence in its sustainability initiatives, Mars reported that “80 of Mars’s top-tier suppliers, accounting for 25% of its footprint, are now on the path to setting science-based targets as a result.” Addressing emissions at the supply chain level will be difficult but is doable and demanded by consumers and investors alike.
For the foreseeable future, companies will be in a good place for reporting if they not only choose a framework but also look to a specific regulating entity. Most will review the SEC guidelines when deciding to report on ESG efforts as these are publicly-reported metrics and are increasingly more regulated.
According to Kirkland & Ellis, the SEC proposes additional required disclosures regarding:
- Corporate board and management diversity
- Climate-related risks and the impact on business
- Processes for identifying climate risks
- Scope 1 and 2 greenhouse gas (GHG) emissions
- Scope 3 GHG emissions, or reduction targets and goals to include Scope 3 emissions
- 6. Publicly disclosed climate targets or goals, plans to act on those goals and analysis methods
Evolving industry regulations and industry expectations
The reporting requirements related to environmental metrics are in flux. While this can be a time of uncertainty, it is vital to stay flexible and adaptable as a company. Developing specific goals in line with company objectives will serve your business well. Track risk areas and document the metrics carefully in your plan. Following a structure such as SEC’s ESG reporting guidelines gives specific guidance to otherwise unclear processes.
Set up an ESG committee to keep communication open and consistent. Members of this committee can represent each area and strive to fulfill a specific framework, such as the SEC guidelines, with support from leadership. Start with communication to educate and align entities with a solid process for documentation.
Experts across the waste industry as well as financial institutions state that modifying behavior according to ESG guidelines can communicate a company’s risk and impacts more effectively. As regulations fluctuate, having a standard in-house process for documenting environmental impact will be crucial to staying adaptable. These SEC requirements seek to re-establish the need for consistency, quality and comparability of climate-related disclosures. Transparency into these types of data will not only be beneficial for investors who want to choose solid partners for a greener future but also for consumers to wisely assess which products they would like to bring into their daily lives.
Graham Rihn is founder and CEO of RoadRunner Recycling
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