By: Mark Mellen, Industry Principal – ESG, Workiva

The pause on the U.S. Securities and Exchange Commission’s (SEC) climate disclosure rule has injected a dose of uncertainty into the world of environmental, social, and governance (ESG) reporting. However, this development should not be misconstrued as a sign of a slowdown in the global movement toward standardized ESG transparency.

Regardless of the pause on the SEC ruling, organizations are still being impacted by global regulation, with July marking the official halfway point of the first year of reporting under the Corporate Sustainability Reporting Directive (CSRD), and many are continuing to actively prepare for compliance.

The CSRD was finalized by the EU in December 2022 and is widely considered the most comprehensive ESG regulation ever, bringing together financial data, ESG information, and assurance for the first time. And they aren’t the only country doing so, the U.K., New Zealand, Japan, China, Brazil, South Korea, Hong Kong, and the European Union (EU) have all proposed or passed similar regulations.

Practitioner sentiment reflects this trend, showcasing the significance of ESG reporting beyond regulatory requirements, with the majority  (81%) of companies not subject to the CSRD still indicating plans to comply, according to an independent survey of global professionals involved in ESG reporting. Companies are continuing to recognize and place emphasis on transparency and accountability, not just to regulators but also to investors and stakeholders worldwide.

The International Sustainability Standards Board (ISSB) also launched ESG standards, marking a new era of sustainability-related disclosures in capital markets. Between the ISSB and CSRD, more than 50,000 European companies are required to disclose climate-related risks, as well as more than 10,000 global companies – and an additional  5,400 U.S. companies will be impacted under the pending SEC ruling. While U.S. companies continue to await the final SEC ruling, California passed the Climate Corporate Data Accountability Act, a first-in-the-nation bill, requiring large companies in the state earning over $1B annually to report their carbon footprints, placing further urgency in the move to ESG reporting.

The landscape overview underscores a key takeaway for global businesses: ESG information is in demand.  In fact, nearly all (88%) institutional investors are more likely to invest in companies that integrate financial and ESG data, according to an independent survey commissioned by Workiva, pointing to the fact that investors, boards, and consumers are demanding more from today’s businesses – more action, more transparency, and more disclosure – than ever before.

Navigating Uncertainty Toward a Sustainable Future

While we don’t know what will come of the final SEC climate ruling, one thing is certain – global climate disclosure regulation is already here, and when it comes to preparation, there’s no time to waste.

The SEC ruling was not created in a vacuum; it was a direct reflection of the rising importance of ESG at large. The message of the SEC ruling is clear: sustainability information now carries equal weight to financial information.

Under the pending ruling, companies will be required to report on various aspects of ESG, including material climate-related risks and their financial impacts, how the board and executives are managing those risks, and climate-related goals that are material to the business’s operational results or financial health.

Those who support the SEC’s climate disclosure rule expect it to help standardize the release of information that investors, rating agencies, regulators in other continents, and some customers and employees are already demanding. Despite the temporary halt of implementation, it would be unwise for companies to adopt a wait-and-see approach, especially considering the growing global trend toward ESG regulation.

There are still gaps compared to global regulation, such as the CSRD in the European Union. For example, the SEC ruling does not require all publicly traded companies to disclose Scope 3 emissions, which are indirect greenhouse gas emissions that occur along a company’s entire value chain, from purchased materials and employee travel to product use and disposal. Scope 3 emissions are often a daunting subject for companies and present a handful of challenges due to the extensive estimations involved. However, most companies will likely have to deal with Scope 3 reporting in some way,  whether through California regulations, the CSRD, or potentially both. The key challenge lies in aligning these additional disclosures with the existing materiality considerations for SEC filings and GHG emissions, especially for companies already reporting Scope 1 and 2 emissions. Going forward, it will be interesting to see how companies navigate incorporating Scope 3 data while maintaining consistency across their sustainability reporting – a challenge that will likely intensify as compliance deadlines approach.

Beyond compliance with regulation, there may be a business advantage for companies that have embedded sustainability factors into their corporate strategy and can implement assured integrated reporting – in other words, integrating sustainability with financial reporting and third-party assurance of the data. An independent survey commissioned by Workiva supports this notion, with more than nine in 10 institutional investors (91%) saying that the SEC ruling will likely help them make more informed investment decisions.

Leveraging Technology for Compliance and Collaboration

This demand for assured integrated reporting of financial and non-financial data is creating a need for tech-enabled, cross-functional teams to share data efficiently and for auditors to quickly verify that data in reports can be trusted.

Whether an organization is building from the ground up or already has an established ESG program, technology is crucial in streamlining processes, automating tasks, and removing manual workarounds. While some may attempt to repurpose existing reporting processes and infrastructures, such as legacy tools or point solutions, to meet regulatory requirements, these methods often prove insufficient. Point solutions, designed for specific aspects of the reporting process, inevitably lead to manual workarounds, introducing the risk of human error and lacking scalability. Shifting to an integrated reporting approach not only ensures regulatory compliance but also aligns with and propels broader business objectives.

The convergence between technology and ESG doesn’t stop with data and reporting; it must also facilitate collaboration. Teams across an organization, from finance and supply chain to human resources, should be actively involved in assessing, managing, and reporting on ESG aspects. As the industry matures, the technology supporting it must evolve, too, with advanced tools like carbon accounting systems. These systems enable companies to automatically calculate carbon emissions across scopes 1, 2, and 3, ensuring more accurate and streamlined processes.

Effective programs rely heavily on reporting technology that facilitates collaboration across teams tasked with gathering, summarizing, analyzing, and reporting sustainability information across various financial and non-financial channels. Assured, integrated reporting ensures consistency and comparability and ultimately plays a pivotal role in driving success.

More Than Compliance: The Power of ESG Reporting

It’s not enough for companies to focus solely on regulatory compliance, a deeper reason must drive them: to make a genuine impact. Leading companies recognize that ESG reporting is much more than just a box-ticking exercise to comply with new and pending regulations. They see it as a powerful tool to demonstrate their commitment to creating a positive impact on the environment and society.

While the status of the SEC ruling may be uncertain, the global trend toward ESG transparency shows no signs of slowing down. Companies that prioritize ESG reporting position themselves for success in this evolving landscape.

About the author:

Mark Mellen is an industry principal focused on ESG (environmental, social, and governance) at Workiva, the world’s only unified platform for financial reporting, ESG, audit, and risk. Mark brings over 15 years of experience advising organizations in managing risk, especially focused on sustainability and ESG matters. Learn more at workiva.com.