ESG regulations are still in limbo, but companies are already preparing for them

And earlier this month, California Gov. Gavin Newsom proposed delaying two laws that would require larger businesses to report their greenhouse gas emissions and financial risks to climate change. The bills, which together track closely to what the SEC was considering, now won’t be implemented until 2028.

Both were setbacks to climate advocates who believe more disclosure requirements could pressure companies to move further along in their energy transition journey.

And yet, even with uncertainty on when and what government-mandated climate disclosures will look like, experts say companies are still moving forward by measuring their environmental, social, and governance (ESG) risks and opportunities. And many businesses are already proactively tracking that data and sharing it publicly in anticipation of the rules changing.

“The timeline for what companies will have to report and where they’ll report is somewhat in question,” said Kristina Wyatt, deputy general counsel and chief sustainability officer at climate data disclosure software company Persefoni. She was speaking at a virtual discussion hosted by Fortune and Diligent for their “The Modern Board” roundtable series. 

The level of frustration about the regulatory paralysis is “not as significant as you might think,” she added. By and large, companies know that they will need to share more ESG disclosures in the near future and many are even relieved that the fractured regulatory landscape is becoming more harmonized. 

“The real question is, how much of that information will need to go into their regulatory reports?” Wyatt asked.

The ESG debate

ESG has become a politically charged term that’s led to a slew of anti-ESG legislation in Republican-led states and to some companies either delaying their environmental commitments or ditching them entirely. A few recent examples include retailer Tractor Supply, which dropped most of its climate advocacy efforts, and consumer products giant Unilever’s softer sustainability and diversity pledges.

“I know that we’ve all been reading a lot about the ESG backlash,” said Nithya Das, chief legal and administrative officer at Diligent. “But interestingly, only three percent of companies have actually changed their ESG strategy or priorities as a result of the backlash.”

Das cited further data from a recent Diligent report showing that an overwhelming 96% of directors expect a “continued or stronger” focus on ESG in the next five years. The survey, conducted with executive search firm Spencer Stuart, represented the views of 800-plus board members in the U.S., U.K., and European Union.

And while nearly all companies remain firmly committed to ESG, 17% say they’re evolving how they’re communicating their sustainability strategies. Wyatt asserted that companies have a significant opportunity to improve their communications on how ESG factors translate into risks and opportunities for the overall business. 

The debate about ESG issues is also putting pressure on boards. Wyatt said it’s a board’s job to have sufficient knowledge about ESG to ask the right questions, hold management accountable, and bring in outside experts when necessary. But, “it is not the board’s job to manage the disclosures and manage the climate risk and opportunity,” she said. That’s ultimately up to the CEO and the rest of the executive leadership team.

Meet the ESG Controller

The Diligent report also highlighted that the biggest obstacle to ESG strategy development and integration is internal competition. Nearly one out of every four board members believe that to be true at their companies.

Wyatt said one way companies can get a better handle on the material business risks to ESG gaps is by getting a better handle on good data. To that end, she’s seen the emergence of a new job title, the ESG Controller, who is responsible for collecting data from different business functions to assess better governance. Frequently, this role reports to the chief financial officer and is in the finance department. 

“That’s a step in the [right] direction of integrating ESG and ESG data into the core business functions of the company,” Wyatt said. 

Das said Diligent’s survey data also shows the push to integrate ESG into business strategies in a few interesting ways. Ninety-four percent of board directors have integrated ESG into either their compensation plans or their strategic goals. And more than four in 10 directors say they want more clarity about how ESG connects back to the business strategy. 

“We’re seeing from the board level that directors are asking for tighter alignment between the ESG strategy and business strategy,” Das said.