In recent months, public and private sectors have been humming with news of the proposed changes to the U.S. Securities and Exchange Commission (SEC). The changes strike a vein that isn’t new to business leaders or investors, and one that marks an important cultural shift: environmental, social, and governance (ESG) programs. According to The Morning Consult, the majority of “frequent investors” are actively evaluating how companies respond to environmental concerns, treat people, and set ethical standards. Companies have taken note by increasing the amount they disclose about their ESG programs. As Dede Ferry, Portfolio Advisor for CBIZ Investment Advisory Services, puts it: “It is expected that there will be continued demand for ESG” among investors.
A Challenge But Also An Opportunity
The SEC’s proposed changes involve three “scopes,” and the third is perhaps both the most hotly contested and the most consequential. Under Scope 1, public companies would be required to report their direct greenhouse gas emissions. Under Scope 2, the SEC mandates disclosure of indirect emissions, as in from purchased sources of energy. Finally, under Scope 3, companies would need to report emissions both upand downstream. That means suppliers and customers, both public and private, will be responsible for their impacts on the environment. Proponents argue this is vital to getting a full picture of a company’s impact. Scope 3 represents, by far, the greatest percentage of a company’s total emissions—and, therefore, the biggest opportunity to reduce environmental impact.
Finding the CFO in ESG
So, where does the CFO land in all of this? Many argue front and center. In a study, CFOs report much higher alignment between ESG programs and financial and strategic objectives when they are personally, directly involved in those initiatives. This is just another way the modern CFO has had to stretch out of their traditional, more narrowly fiscal roles. Because ESG touches every part of company practice—from hiring to management to supply chains and more—collaboration among leadership is at its heart.
What’s more: data and measurement will be key to any company’s success in addressing ESG. It’s metrics and programs can be hard to wrangle and come with a steep learning curve. Defining and assessing programs that include social and cultural measures isn’t as straightforward as disclosing financial performance. Many companies are not yet reporting climate-related impacts, and "4 in 5 frequent investors said it’s difficult” to gather reliable information about what companies are doing to meet the moment. This will be especially challenging for Scope 3, since that part of the new regulations would require a way to quantify external data and performance.
The Importance of Now
The public comment period on proposed SEC changes ended in June, and final action is expected in October. But, more big companies, including United Airlines and Etsy, are getting ahead of the ball by voluntarily disclosing Scope 3 emissions. The anticipated timeline puts Scopes 1 and 2 into effect in less than two years for large, accelerated files, with Scope 3 coming into play for them just a year later. Savvy companies will develop a plan to address Scope 3 emissions. This could include establishing a team with appropriate executive leadership support; reviewing current disclosures and future required disclosures; assessing sources of data; evaluating changes to systems, processes, and people to capture future required data; and, identifying internal controls to ensure completeness and accuracy of the data. Companies may need to secure resources like professional support and the right software to make sure they’re well prepared to institute changes. And, of course, suppliers and vendors need to be prepared to meet disclosure requirements, too.
ESG and Scope 3 are about more than reporting standards. This weathervane tells the story of a shift in the wind: the public, investors, and companies are looking to the future and asking what we’re doing—and what we can do better—to be thoughtful about our place on the planet.
Published on July 26, 2022