With sustainability becoming a hot topic in every industry, companies are now under increasing pressure to disclose their environmental, social and governance (ESG) practices. 

But how do you ensure that your company is prepared for these regulations? 

In this article, we’ll walk you through five key steps to help you get ahead of the game and prepare for ESG disclosures — from identifying material risks to implementing effective reporting tools.

Let’s dive into what it takes to stay compliant and demonstrate your commitment towards sustainable practices.

TL;DR:

• As the world increasingly focuses on environmental, social, and governance (ESG) issues, companies are under pressure to disclose their ESG performance. 
• Regulators are increasingly requiring companies to disclose ESG information in their filings, and investors look for it in order to make informed investment decisions. 
• Until regulations become mandatory worldwide, companies that disclose ESG information in a transparent and meaningful way will be better positioned to attract and retain investors.
• While some companies are ahead of the curve, others are scrambling to catch up. Luckily, there are things you can do, from allocating resources to measure and report on ESG to building key partnerships.

New ESG Disclosure Regulations in the US and the EU: An Overview

As the issue of sustainability comes to the forefront of global consciousness, more attention is being paid to corporate disclosure of ESG information. In order to provide stakeholders with greater insight into a company's long-term prospects, both the U.S. and the EU have introduced new ESG disclosure regulations.

In the U.S., the Securities and Exchange Commission (SEC) published its interpretive guidance on climate-related risks in 2010, and regulations requiring publicly traded companies to disclose their human capital management practices in 2020.

New rule changes followed in 2022 requiring companies to make climate-related disclosures, including information on climate-related risks, relevant risk management processes, and the impact of climate-related events and transition activities on their strategy, business model, and financial statements and estimates.

Companies would also be required to disclose information on their direct greenhouse gas (GHG) emissions, indirect emissions from purchased electricity or other forms of energy, and GHG emissions from other activities in their value chain.

Meanwhile, in Europe, the EU's Non-Financial Reporting Directive (NFRD) came into effect in 2018, requiring large companies to report on a range of environmental and social issues. In addition, the EU Taxonomy Regulation, published in 2019, provides a framework for classifying economic activities as environmentally sustainable. 

These developments indicate that there is growing regulatory pressure for improved ESG disclosure across both the U.S. and Europe. As such, companies should be aware of these new requirements and take steps to ensure they are compliant.

5 Steps to Prepare for ESG Disclosure Regulation in Your Organization

ESG data disclosure regulations are constantly evolving, and it can be difficult to keep up with the latest developments. However, there are some important steps companies can take to prepare for ESG disclosure requirements.

Allocate Resources to Measure and Report on ESG

The first step should always be to evaluate your organization's current disclosure practices:

• Do you already collect and report some ESG-related information? If not, what processes and systems will need to be put in place to do so? 
• What additional information will need to be collected and reported? How can this be done efficiently and accurately?
• When will the additional information be collected and reported? Who will be responsible for doing so? How will compliance with the regulation be monitored?

Allocating resources to measure and report on ESG includes identifying which metrics to track and disclosing performance on those metrics. It also requires creating a system to collect data and communicate results internally and externally. 

While this may seem like a daunting task, there are many resources available to help companies get started, including the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the International Integrated Reporting Council (IIRC). 

With the right planning and preparation, measuring and reporting on ESG can help companies improve their performance, build investor confidence, and create shareholder value.

Make ESG the Whole Organization’s Effort

The next step will be to implement the plan and begin collecting and reporting required information.

This may require training staff, updating internal processes and systems, and even working with external consultants — for example,  to conduct an ESG gap analysis, look at your current ESG efforts, and compare them to your ESG goals.

Don’t forget to monitor compliance with the regulation on an ongoing basis. This may involve regular review of disclosures, communication with regulators, or updates to internal processes and procedures.

When reporting, try to follow a few simple rules: 

• Keep it simple: ESG disclosures can be complex, but they don’t have to be. Use plain language and avoid jargon. Focus on the most important information and present it in a way that is easy to understand.
• Be transparent: Disclosure should be honest and accurate. Do not omit negative information or cherry-pick the data you include. Be clear about any limitations on the data you are disclosing.
• Tell a story: Use disclosures to tell a story about your company’s commitment to sustainability and how it is making a positive impact on society and the environment. This will engage investors and build trust.

Gauge Major ESG Topics to Prepare for Future Regulations

To prepare for future ESG disclosure regulations, companies should first gauge which major ESG topics will be most relevant to them. 

They can look at existing disclosure requirements in other jurisdictions, consult with experts, and review recent media coverage of ESG issues.

Once they have a good understanding of the major ESG topics that are likely to be regulated, companies can start preparing their disclosures. 

This may involve collecting data on their performance in key, developing metrics to track progress, and putting in place systems and processes to ensure accurate and timely reporting.

Prioritize Performance

Many companies are wondering how they will need to change their disclosure practices to comply with new regulations. To get ahead of the curve, it's important to start by prioritizing performance in terms of ESG criteria. Here are a few key steps to take:

• Understand which metrics and data points investors are looking for when evaluating ESG performance. This will vary depending on the focus of your company, but some examples include carbon emissions, energy usage, waste reduction, employee satisfaction, supplier diversity, human rights violations, etc.
• Gather data internally from all departments and sources that could provide relevant information about your company's ESG performance. This may require investing in data-gathering software and processes.
• Analyze the data collected to identify areas of improvement and set goals for future reporting periods. Be sure to involve stakeholders from across the company so that everyone is committed to meeting the goals set.
• Implement systems and processes to track progress toward these goals over time. This can range from regular check-ins with employees to automated reporting tools that provide real-time data analytics. For example, YAROOMS offers embedded workplace and employee analytics that measure employee satisfaction and how your teams are using office space.
• Communicate your company's commitment to improving its ESG performance publicly, through both traditional channels like annual reports and investor communications, as well as newer channels like social media.

Build Partnerships to Address Challenges and Foster Innovation

Another important step is building partnerships with stakeholders (e.g., investors, employees, customers, and suppliers who have a vested interest in a company's success) that can help address challenges and drive innovation.

By working together, companies can identify areas where they need to improve their ESG performance and develop solutions that address these issues.

Building and nurturing these key partnerships also helps companies tap into new ideas and perspectives that can drive innovation. In today's rapidly changing world, it's more important than ever for companies to be agile and adaptable if they want to position themselves for long-term success.

The Impact of Non-Compliance With ESG Regulations

Companies that fail to comply with ESG regulations face significant consequences. These can include hefty fines, reputational damage and loss of business. At the same time, the consequences of climate change are becoming more apparent and are happening faster than anyone expected.

To ensure compliance, organizations should prioritize educating their teams about the requirements, reviewing their current practices and policies to identify areas of non-compliance, and developing a plan to address them.

Even if your company is not affected by the new reporting requirements, you should expect that you will feel the impact of these requirements if your company is part of the value chain of a company that is required to report. 

Starting early and putting processes and controls in place to prevent future non-compliance, as well as regularly monitoring compliance and making necessary adjustments, is likely to pay off in the long run. On the other hand, not doing so might only make life more difficult for a company down the road.

The Importance of Integrating ESG Into Your Corporate Culture

As the world progresses, so does the importance of sustainability. 

Policymakers, regulators, and activists are demanding that companies renew and deepen their commitment to community well-being in a variety of ESG-related ways. They're expected not only to address their own active harms to society, but also to take proactive steps to alleviate larger societal ills and injustices.

Consumers are increasingly interested in knowing that the products they buy and the companies they support share their values. In response, more companies are implementing sustainability initiatives and making ESG data part of their disclosures.

Investors are also interested in ESG factors when making decisions about where to put their money. In fact, nearly 80% of investors consider ESG an important factor in their investment decisions, with nearly 50% ready to divest from companies that don't take sufficient action on ESG issues.

But it's not just about the money. 

There are ethical and moral reasons to integrate ESG into your corporate culture as well. After all, climate change is real and is already having an impact on the world around us. 

The same goes for social issues like diversity and inclusion. Business leaders have a responsibility to create workplaces that are welcoming and inclusive for all employees.

ESG Disclosure: FAQs

Let’s take a look at some useful answers to frequently asked questions about environmental, social and governance (ESG) disclosure regulations:

What Is ESG Disclosure?

ESG disclosure is a form of public reporting by an organization's management team on its performance across a variety of environmental, social and governance (ESG) issues.

What Is an Example of ESG Disclosures? 

There is no universal answer to this question, as different companies will have different ESG disclosure requirements depending on their size, industry, and location. 

However, some examples of common ESG disclosures include carbon emissions, water usage, energy consumption, waste generation, and employee diversity.

What’s Included in an ESG Disclosure?

Adopted in August 2020, they ask of companies to disclose information about climate risks and impacts, human capital resources, diversity policies and other ESG-related matters. 

To meet the new disclosure requirements, companies must collect data from across their organization and develop disclosures tailored to their unique business activities and risks.

Who Is Required to Disclose ESG?

SEC ESG disclosure regulations: In the U.S., the SEC has proposed that all publicly traded companies disclose information about the climate risks their companies face and the carbon emissions of their operations.

EU ESG disclosure regulations: In the EU, the NFRD already requires large companies to disclose certain non-financial information on environmental and social matters, anti-corruption measures, human rights and climate issues.

Is ESG Disclosure Mandatory?

ESG disclosure is not currently mandatory everywhere, but that could change in the near future. 

In the U.S., the SEC has been considering whether to require publicly traded companies to disclose their ESG performance for years, and there is growing pressure from investors and other stakeholders to make this information available. 

An increasing number of companies are also voluntarily disclosing their ESG performance.

As the world increasingly focuses on ESG topics, companies are under pressure to provide more information about their ESG performance. Many countries have already implemented regulations requiring companies to disclose their ESG data, and more are expected to follow suit. 

What about your company — do you feel prepared, and if not, what do you need to feel prepared?