The SEC’s proposed rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors, is just one entry in a growing trend toward international regulations, frameworks, and best practices in sustainability. Global expectations are clearly shifting from voluntary to required reporting as we approach 2030—one of the first major thresholds in public corporate sustainability goals—and we expect this will only accelerate over the next two decades.
Unfortunately, all those proposals, taxonomies, and guidance documents are missing one crucial thing: a roadmap for implementing and managing the enterprise changes they will require. Companies around the world that are or will be subject to new sustainability disclosure requirements have been left to figure out how to redesign processes, restructure systems, and retrain people in a short period of time so they can comply with the regulations. This already challenging prospect is made more complex by the fact that many of the regulations are still in the proposal stage, adding a layer of ambiguity to any change management plan. There are four key action areas companies should explore as they consider how the SEC’s proposed ruling and other regulations will change how they approach their ESG and sustainability programs: Prepare the organization, Prepare people, Create ownership, and Embed the change.
To begin preparing your organization for the SEC’s changes, ask yourself:
• What are our company’s current ESG disclosure processes?
• Who should be responsible for those processes? Will new roles be needed if regulations continue to shift?
• How can we identify what barriers exist in our disclosure process? How can we devise a plan to remove those barriers?
• What controls do we have in place for our disclosures given the increased scrutiny regulations bring? How can we improve these?
• Does our company historically embrace and support change? How have other process changes been successful in the past?
Prepare the Organization
We’ve written previously about the details of the SEC’s proposed ruling that changes how companies report their Scope 1, 2, and 3 Greenhouse Gas (GHG) emissions, the type and quality of ESG data companies will need to provide, and how companies can incorporate climate risk to increase resilience. If your company hasn’t completed a GHG inventory or undergone a climate risk assessment, compliance might seem like the top priority under this new ruling. However, focusing only on compliance is a quick way to let your company’s ESG strategy or program become reactive, and you may find yourself in an endless cycle of catching up as adjustments to regulations and frameworks are made. Instead, companies will benefit from being proactive and reducing the burden of constantly updating their processes and procedures.
New regulations often shift attention to the enterprise level, but the focus on reshaping company-wide processes can make it easy to miss the role individual employees and teams play in enabling change. Whether your company culture prioritizes removing barriers, improving retention through training, or guiding employees and teams through the emotional process of change, every change management approach needs to incorporate a substantive engagement component. Your company can and will embrace change and successfully meet the new SEC requirement if you know how each team will be impacted. To begin, ask yourself:
- Which employees and teams will be impacted by the new regulations, and to what degree?
- Which employees and/or teams can be empowered to drive the change?
- Have we communicated our vision for the change to the impacted employees? How will we articulate if and how the regulations will impact their roles and responsibilities?
- Do we know where and how wide the skills gaps are for the impacted employees? How will we address them?
- What trainings or learning sessions would be helpful in explaining this change and obtaining buy-in? Do we have an existing learning and development system or process that can be used to deploy these, or do we need new education structures in place?
Adapting to these new governance requirements in a way that aligns with your company’s mission and objectives will enable you to take ownership of how this change impacts your reputation and keep you on your front foot with corporate transparency expectations
Climate and corporate transparency are trending national topics in the business community, and that will only increase with the SEC’s new guidance. In other words, what companies do (or don’t do) is on full display. What customers, employees, investors, and other stakeholders see or perceive in your reporting is important for your company’s reputation. Therefore, the highest levels of your organization should be aware and have oversight of these. The SEC proposed ruling outlines Board and management responsibilities that should spur meaningful discussions on ESG and sustainability governance, Board and management engagement, and oversight on setting and achieving your climate goals.
At the Board level, ask yourself:
- How might our existing committees naturally align with ESG oversight?
- What ambitions do we have to create a specific sustainability committee that will directly address the elements of this SEC ruling and absorb broader ESG oversight?
- How can the Board demonstrate oversight of, and expertise in, climate-related targets and goals that are set? What will be their role in monitoring progress and achievement against those targets and goals?
At the management level, ask yourself:
- What leadership positions already exist within my company that have ESG-related responsibilities? Is that position and or team empowered with management-level oversight on key metrics like climate-related risks?
- Who is responsible for the flow of information from ESG practitioners to management, and from management to the Board? How frequent is the reporting and how robust is it?
“[i]nvestors need information about climate-related risks . . . because climate-related risks have present financial consequences that investors in public companies consider in making investment and voting decisions.” – SEC draft ruling, pg. 9
Embed the Change
It’s possible the details of the final SEC requirements will include changes from the draft ruling but zeroing in on the purpose of the ruling—to provide a new decision-support tool to investors and business strategists—can provide broader value to your organization. For example, using the SEC proposal as a driver to make climate-related risks and opportunities visible and central to your risk management processes makes financial sense. Regardless of potential modifications between the draft and final ruling, climate will remain at the forefront of future business planning, and it will be important for companies to integrate it into their strategy and decision-making processes. To take a step back from the SEC details and begin thinking about how to embed ESG disclosures, employee engagement, and governance into your regular strategic planning process, ask yourself:
- What scale of impact do we think the ruling will have on our company, based on the questions above in the Prepare the Organization, Prepare People, and Create Ownership sections?
- Which elements from the proposed rule has our company already integrated into our strategy?
- What are the fundamental changes we need to make to our strategic planning process to accommodate growing climate considerations?
- What does successful adoption look like, both in our first SEC filing year under the new ruling and in future years?
- What short-, medium-, or long-term resources does our company need to keep it proactive instead of reactive to regulatory change on ESG/sustainability topics?
- How might we change the way we engage with our stakeholders regarding these climate-related risks and opportunities?
Managing any kind of organizational change is challenging. With the right preparation, communication, and strategy, companies can rise to the challenge and meet their new compliance obligations under the SEC proposed ruling while also advancing their approach to ESG and further integrating sustainability into their business strategy.
How we can help
Anthesis Group offers a suite of integrated sustainability services to support companies on their sustainability journey. Should you wish to learn more about these topics, please reach out to the contacts below.