Environment, Social, and Governance (ESG) reporting has emerged in recent years as an area of attention and progress in the public disclosure landscape.
ESG is a hot topic, with subjects like international reporting requirements, sustainability reporting, and even cybersecurity in play. Four ESG issues that we’ve identified in 2023 include: climate change; diversity, equity, and inclusion; regulatory expansion; and greenwashing — and the drive to eliminate it.
#1: Climate Change and Sustainability
Climate change issues remain top of mind for the public and pervade corporate operations, from the sustainability of production choices and mining of raw materials to companies’ investments and greenhouse gas (GHG) emissions. Climate change and sustainability is one of the biggest concerns for consumers, especially Gen Z. And the SEC is concerned as well – when the U.S. Securities and Exchange Commission solicited public input early in 2022, 75% of 550 individual responses supported mandatory climate disclosures in financial reporting.
Sustainability audits are often separate from ESG audits, but they overlap significantly – the main difference is that sustainability audits are internal and organizations are left to create their own definitions, while ESG frameworks are more specific and standardized. Climate-change-driven weather events have posed a special problem for companies, with travel, air quality, and supply chains affected.
#2: Diversity, Equity, and Inclusion
DEI initiatives have gained momentum in recent years, along with an increasing consumer focus on the social responsibility of the companies they support. Companies are increasingly held accountable for their actions to attract, recruit, and retain employees from diverse backgrounds.
There have also been imperatives for transparency in pay structures to expose pay gaps, and a push for human resources and internal communications specialists to explicitly address how systemic inequality impacts hiring decisions and the employment history of industries. With the pandemic slowed down and return-to-office mandates issued, the labor landscape has changed, posing new challenges to DEI initiatives.
#3: International Regulations Expand
EU and UK ESG regulations and standards have already taken flight, with reporting requirements affecting companies very soon. The US SEC declared increased focus on ESG matters in 2022, and the trend towards standardized ESG reporting requirements hasn’t stopped there. Around the world, governments are proposing regulations and legislation for ESG issues, and the wave of standards seems imminently ready to land.
Organizations that have not yet issued ESG reports, especially public companies, may want to consider beginning an ESG disclosure program or committee; existing ESG programs should be ready to support their assurances with ESG audits or attestations.
#4: Combating Greenwashing through Litigation and Regulation
A major driver of governments’ efforts to regulate ESG disclosures is due to a pattern of “greenwashing,” that is, making your ESG performance look better than it is. Since investors and other external stakeholders are making big decisions based on ESG reports, greenwashing or “fluffing” the numbers pose a threat to their decision-making and general trust in the market.
To combat the practice of greenwashing, experts predict that agencies and governments will use the tools at their disposal — litigation and legislation — to crack down on this fraudulent activity. ESG audits play a special role in preventing greenwashing, as they can flag inaccurate data or incomplete information as part of the audit process.
Examples (from 2022) of Enforcement Actions Related to ESG Issues or Statements
More information concerning types of ESG-related enforcement actions filed:
- Adviser charged for failing to follow its policies and procedures involving ESG investments
Goldman Sachs Asset Management (2022)
- International mining company charged with misleading investors
Compass Minerals International (2022)
- Health insurance distributor and former CEO charged with making false statements to investors
Health Insurance Innovations (2022)
- Investment adviser charged for misstatements and omissions concerning ESG considerations
BNY Mellon (2022)
- Brazilian mining company charged with misleading investors
Vale S.A. (2022)
- Robo-adviser charged with misleading clients
Wahed Advisers (2022)
Next blog: What is an ESG Audit Checklist?
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