How has the ESG regulatory environment changed?

The ESG regulatory environment continues to tighten within and outside of the U.S. This change is driven by investor demand for consistent and comparable information regarding an issuer’s climate-related risks. The number of ESG-related enforcement actions filed to date continues to grow with this demand. The SEC indicated a goal of October 2023 for the adoption of the proposed rule 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors. Learn more about the proposed rule in the alert SEC proposes rules to require climate-related disclosures.

Why is an ESG governance program important?

An ESG governance program ensures that the ESG function can achieve its organizational goals. Establishing governance structures is necessary for: Credibility and Accountability. Governance structures ensure that the information disclosed in ESG reports is complete and accurate. Regulatory Compliance. Governance structures can help organizations comply with domestic and global regulatory requirements so as to avoid penalties. Investor and Stakeholder Confidence. Governance structures assures stakeholders that the organization is transparent about its impact and committed to sustainable and ethical practices. Risk Management. Governance structures over ESG reporting help organizations identify, assess, and manage ESG-related risks. Standardization. Organizations usually report on ESG factors differently; this makes cross company comparisons challenging. A standard governance structure can ensure consistency, comparability, and quality in reporting. Long-Term Value Creation. ESG performance is tied to long-term value creation. Governance ensures that organizations embed ESG into their corporate mission and culture. Employee Engagement and Retention. Employees seek purpose-driven work environments. A commitment to ESG values can improve employee engagement, job satisfaction, and retention rates. Adaptability and Competitive Advantage. An ESG governance program enhances a company's ability to adapt to changing circumstances (e.g., climate change impacts and evolving societal expectations) - this innovation enhances an organization’s competitive edge in the market. Supply Chain Management. ESG considerations extend beyond a company's operations to its supply chain. An ESG governance program helps identify risks within the supply chain, promote responsible sourcing, and foster positive relationships with suppliers. An ESG governance policy must be accompanied by ESG-related internal controls to maintain its effectiveness.

How do you establish effective governance over ESG-related internal controls?

Establishing governance over ESG-related internal control involves creating roles and responsibilities, risk management and regulator auditing. Organizations need to create a governance structure that delineates roles and responsibilities across organizations, from the board to management to employees. Governance over ESG-related internal controls requires training for all staff. Periodic monitoring of these controls ensures that everyone understands their role in the internal control system.

Who should be involved with ESG governance?

Cross-functional teams provide a holistic viewpoint across an organization to create stronger control environments and governance structures. Assembling and educating a cross-functional should be done early. Cross-functional teams provide diverse perspectives and subject matter expertise in assessing sustainability-related issues, metrics, and controls. Organizations should draw from multiple departments, including human resources, risk, internal audit, finance, legal, and compliance to support and lead the ESG function.

Article

Establishing governance and internal controls over ESG reporting

Sept. 18, 2023 · Authored by Madison Poitras, Daniela Lundin, Spencer Roundy

On March 6, 2024, the SEC issued a final rule requiring registrants to disclose climate-related information in their registration statements and annual reports. See additional details in the alert, SEC finalizes climate disclosure rule, published March 12, 2024.

Environmental, social, and governance (ESG) reporting is becoming a top priority as organizations understand the benefits related to ESG strategies ranging from long-term value creation to lowered compliance costs.

Management boards increasingly demand strong governance structures and internal controls over ESG data. Organizations are designing and implementing controls over the collection, review, and reporting of sustainability and ESG information.

Establishing effective governance over internal controls isn’t a one-time task but a continuous process that requires commitment.

This article covers:

What is ESG?
How has the ESG regulatory environment changed?
Why is an ESG governance program important?
How do you establish effective governance over internal controls?
Who should be involved with ESG governance?

What is ESG?

The categories that comprise ESG — environmental, social, and governance — provide an opportunity for organizations to evaluate their impact on, and position in, a society that wants sustainability. ESG is a set of factors that American businesses use to capture and communicate decision-useful information to investors, lenders, shareholders, and stakeholders.

Establishing governance and internal controls over ESG reporting

What is ESG?

How has the ESG regulatory environment changed?

Why is an ESG governance program important?

How do you establish effective governance over ESG-related internal controls?

Design and implement ESG-related internal controls

Areas of ESG internal controls

Lessons learned from the Sarbanes-Oxley Act (SOX)

Who should be involved with ESG governance?

Internal audit team

Chief financial officer

Controller

IT team

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