November 16, 2023
More companies are voluntarily publishing reports to provide information about their operations and performance that goes beyond what is traditionally provided or required in financial statements and annual reports, namely environmental, social, and governance (ESG) matters. There is no one-size-fits all to these reports; they vary from company to company in length, range of disclosures, and level of detail. They go by different names — ESG Report, Sustainability Report, Corporate Social Responsibility Report, Impact Report, to name a few — but the trend is clear: companies are responding to demand from investors and other stakeholders to supply meaningful information regarding ESG initiatives and performance. This trend is not without its complications, however, as ESG has become a hot button topic of discussion across the political spectrum, as well as an area of heightened scrutiny from regulators. With this spotlight on ESG, it is important for companies to adopt a thoughtful approach to navigating this area and related disclosures. Regardless of whether your company is considering publishing its first ESG report or has been doing this for years, here is a list of considerations when preparing your report:
- Specify the period covered. Be clear about the period covered by the report. Further, particularly to communicate the date as of which the information is accurate, it is helpful to indicate the date the report is published. Although there is no “deadline” for voluntary reports, developing a regular cadence and reporting timeline can improve the preparation process.
- Include appropriate cautionary language. Reports are likely to include forward-looking statements and other information that is not standard and could change. Provide appropriate explanatory context for the information included in the report and consider enhancing disclaimers regarding forward-looking statements and potential limitations to data quality.
- Identify your third-party reporting frameworks. If reporting against one or more third-party disclosure frameworks — such as SASB, GRI, TCFD, UN SDGs — be clear about what reporting framework(s) you use and which version. If applicable, adhere to any terms of use requirements for the chosen framework (for example, GRI requires companies to provide it with notice).
- Provide context for goals and informative quantitative data. To the extent you have established goals, provide context and sufficient details for clarity about those goals, and consider describing plans for achieving those goals and progress to date. Carefully address challenges and expectations, while avoiding overly broad statements or pithy catchphrases without context. For comparability, provide multiple years of data if possible.
- Formalize and systematize report preparation, review, and publication process. Particularly as reports become a regular expectation and attract scrutiny, a rigorous process to ensure that the reported information and data is accurate and reliable becomes key. Develop a calendar and process checklist, document and follow internal controls and systems, and prepare and retain supporting work papers to ensure that data is verified and substantiated.
- Highlight board oversight of ESG. Discuss the governance systems and processes in place regarding ESG. This can include the board’s role in oversight of material risks and opportunities and related strategy, as well as the context and frequency of board or committee reviews of ESG-related initiatives.
- Refresh and re-think “materiality.” Continue to refresh the company’s materiality analysis in light of ESG developments, including how ESG-related risks are incorporated into the company’s overall risk management process. Many third-party frameworks refer to ESG disclosure items as “material” and encourage “materiality assessments” and “materiality mapping.” If you plan to disclose information in your ESG report that you deem not to be material under the securities laws, consider using different terminology (both internally and in public-facing materials) to describe the importance of ESG information and why it’s disclosed in the report.
- Ensure consistency. Make sure that statements in the report align with, and don’t contradict, confuse, or create ambiguity when read together with, other public disclosures, such as those in annual reports, proxy statements, corporate websites, and submissions to third parties (including regulators).
- Involve legal counsel. To ensure a rigorous disclosure process, legal counsel can assist with items such as benchmarking peer companies’ disclosures, identifying potentially ambiguous or inconsistent statements, and addressing overlaps with Securities and Exchange Commission (SEC) reporting considerations.
In addition to the considerations provided above, be prepared for recent and upcoming changes from various regulatory entities. The SEC is in the process of preparing new climate-related disclosure rules that would require companies to report on, among other things, greenhouse gas emissions and environmental impact, and is also planning to release proposed rules requiring enhanced human capital management disclosure, all before the end of this year. Additionally, the Federal Trade Commission is currently reviewing its Green Guides, which are anticipated to be revised to include more robust content regarding misleading consumers (and therefore more potential pitfalls for non-compliance). And for companies that operate in Europe, the Corporate Sustainability Reporting Directive will soon impact ESG reporting requirements, with the Corporate Sustainability Due Diligence Directive, which will impose new diligence obligations in relation to a company’s own operations and those of its supply chain, following close behind. As such, the time, consideration and resources invested into your ESG report now may serve you well as new rules are implemented.
The article in its original form can be found here.
Elizabeth K. Lange (LAW ‘09) is a partner at Faegre Drinker representing clients in mergers and acquisitions, governance, and other corporate and securities matters.
Elizabeth A. Diffley is a partner at Faegre Drinker and co-leads Faegre Drinker’s full service ESG practice. More information on Faegre Drinker’s ESG practice can be found here.
Sheremy R. Anderson is an associate at Faegre Drinker representing public and private clients.