In March, the Securities and Exchange Commission (SEC) proposed its long-awaited climate change disclosure rules. As businesses adjust to meet stakeholder demands and deliver new, high-quality reporting, they need someone with the right experience to lead the way. We see this important emerging role as an ESG controller.
The rules are beneficial for market participants—investors, lenders, creditors and more—as well as regulators, our broader society and businesses—which will now have direction on disclosure frameworks and materiality. But implementing the teams, internal controls and technology to gather and disclose investor-grade data can pose challenges to some companies without highly-developed ESG reporting already in place.
Regardless of where an organization is on its ESG journey, there are steps business leaders can take in the coming months to better prepare for the new climate change disclosure requirements—and establishing an ESG controller should be at the top of the list.
What does an ESG controller do?
- Implements ESG capabilities – pulls it all together. Scans the landscape, understands what’s happening and well-orchestrates various stakeholders and expectations.
- Establishes business requirements aligned with expectations
- Develops ESG measurement and reporting policies
- Performs risk assessments for the design of internal control and governance
- Prepares a forecast to inform whether the plan is on track
- Has familiarity with operational and financial data – with ability to connect different domains
- Understands internal and external controls and processes to help deliver on the company’s ESG objectives
- Runs through the center of the organization – through the central reporting function
- Differs from sustainability officers in that they can bring the experience and diligence that the company has developed around financial information to non-financial disclosures
Why it matters
The market is demanding this information, and companies need to respond. However, climate reporting is data intensive and judgment oriented, and there are expectations for a higher degree of reliability. Pulling data from a number of different sources inside and outside of the company requires judgment around reporting boundaries and definitions. Thankfully, the SEC provided a transition period to allow companies time to understand where they are and what will be needed once the rule is finalized. Establishing an ESG controller to lead efforts during this time can be critical for companies as they look to establish internal controls and reporting structures to set benchmarks and goals and develop the necessary processes to provide investor-grade reporting to the SEC.
It’s important to remember that these efforts are not just good for regulatory, investors and stakeholders—they’re also beneficial for companies and their bottom line. Independently verified, investor-grade information increases confidence in the data quality, and when there is increased trust and confidence, more investors are likely willing to participate and the cost of capital declines. Since the proposed rule raises the bar on disclosure quality, it can help distinguish between companies doing the right things around their business model—the quality of their processes, technology and transformation—from companies that are “greenwashing” and making commitments without investing in the business transformation to meet their goals. Investors don’t want to place their capital in a company that has painted a potentially misleading picture of its value proposition, so by providing accurate, comparable information that clearly demonstrates the business’s commitment to climate change and other ESG efforts, companies are more likely to attract investors who now better understand the climate risks associated with the business.
What companies can do next
Having a leader who understands both the operational and financial aspects of these reporting efforts—including internal controls, processes, reporting guidelines and stakeholder expectations—is critical for success. While there’s time for businesses to make the necessary adjustments, they shouldn’t wait to move forward with developing an ESG team, understanding where they are, connecting ESG strategies and reporting to the overall business strategy, and including or upskilling team members and directors.
Here are some practical considerations for companies as they think about their next steps:
Operating Model
-Controllership should drive regulatory ESG reporting and associated processes and controls
-Sustainability office should continue to own reporting strategy around voluntary disclosures and support data needs
-Create Centers of Excellence (COEs) that centralize key skillsets (e.g., GHG, DEI, etc.)
-Consider appropriate in-source/out-source model
Policy
-Controllership should help confirm adequate, standardized policies with regard to ESG reporting (e.g., disclosure controls and procedures, estimation approach)
ESG training
-Train key employee groups on reporting processes, controls, need/value of reporting
Integrate into Financial Close
-Integrate ESG reporting process within the existing financial close calendar
Audit & Controls
-Define SOX-level controls across the end-to-end business processes from ESG data sources through disclosures
-Conduct mock audit of ESG disclosures
Accelerate critical path data collection process
-Document and identify improvement opportunities around the collection of disparate ESG metric sources (some of which is manual)
Establish reporting prioritization
-Define ESG reporting rollout strategy – global vs. regional, country vs. line of business, environmental – Scope 1, 2 and 3 design and deployment
Ultimately, to meet the proposed new requirements, many businesses may need to transition to investor-grade and tech-enabled reporting to dramatically accelerate their climate change reporting processes, while implementing effective governance and internal controls. But these efforts and investments are well worth it. Trust in the quality of material information is necessary for a complex society to function, and markets operate most efficiently when there’s reliable, quality data stakeholders can use to make decisions. The proposed climate change disclosure rules—and the leaders who will help meet the new requirements—play a vital role in building trust in our capital markets and institutions.
(Courtesy PwC)
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