What the SEC proposed climate disclosures may mean for private companies
The U.S. Securities and Exchange Commission recently proposed new climate disclosures for public companies. The proposed rules are responsive to investors’ need for consistent, high-quality climate-related information from public companies to better inform their decision-making. Public companies will need to ensure their disclosures are investor-grade and embrace tech-enabled reporting in their Form 10-Ks, which means developing related governance, processes and internal controls.
Although the SEC’s regulations do not apply to private companies, privately owned businesses need to pay attention.
In addition to information that may be asked of private companies in public company value chains, this announcement is a signal for where we are headed. There are mandatory climate-related disclosures for private companies in the U.K. and Germany. For private companies in the U.S., it may just be a matter of time. Companies that use this time to get ahead of mandated disclosures will deepen trust with stakeholders, be able to further drive the purpose and values upon which their organization was built, and deliver sustained outcomes for their business.
Apart from reading the tea leaves, acting before it’s required is not only good for the planet, but it’s simply good for business.
Stakeholders value transparency. Whether it’s customers, clients, employees/internal stakeholders, investors and insurers, or regulators, one or more of these groups will pose an opportunity or risk for every single business. Deepening trust with these groups is essential.
There’s more access to capital if private companies have a well-articulated ESG plan. Investors take ESG issues seriously. Not only are about half (49 percent) of investors willing to divest from companies that don’t take sufficient action on ESG issues, 50 percent say that the investment profession has been effective in shifting capital to companies that are making progress towards net zero. Investors are seeking change and want to play a part in incentivizing companies to take action but can only do so if they have the information they need to inform their decisions. Without a well-articulated ESG plan, not only could you be missing out on access to more capital, but you also could jeopardize the capital you do have.
You can’t spell IPO without ESG. Private companies planning an initial public offering would be required to include all of the proposed climate-related disclosures in their registration statement if the final rules mirror the current proposal. But even beyond what might be required, private companies should feel empowered to proactively disclose their broader ESG strategies. Initiating this conversation helps build and anchor trust in a company with stakeholders and gives investors the opportunity to better assess and understand the company’s ESG commitments. Telling the company’s ESG story can create advantages in the current environment, especially in the eyes of investors and the public.
Those who don’t prioritize ESG may find themselves behind and trying to catch up.
Consider the public company supply chain implications. While Scope 1 and Scope 2 of the SEC’s proposed disclosures focus solely on a public company’s direct and indirect greenhouse gas (GHG) emissions, when it comes to Scope 3, public companies that have material Scope 3 emissions or that have made net-zero commitments that include Scope 3, will be required to gather and report on GHG emission data from all companies in their value chain — no exceptions. This means the private companies in the upstream or downstream value chain of a public company would be required to provide that company with their emissions data. Private companies may need to develop new systems or processes to provide emissions data, at the individual greenhouse gas level. It’s possible that public companies may begin to favor lower emission companies in their value chain.
It matters for attracting talent. With the world changing at an unprecedented pace, employees’ mindsets about work are shifting with it. Not only are they reconsidering how, when and where they work, but employees are looking for a deep sense of why they work for a particular company. It’s no longer enough to provide ample benefits and pay to keep employees from looking elsewhere, people expect the companies they work for to lead with purpose. Taking steps to become a more sustainable and responsible business through reporting on its ESG story will better position a private company to not only attract and retain good talent, but also to show other stakeholders it is taking steps to change the world for the better.
Developing an ESG plan is complicated, but the good news is your organization is more than likely already doing things that are helping the environment, the communities surrounding your business and your employees. The first step will be an exercise in taking stock of what’s being done today, building out KPIs to measure it and then evaluating where more needs to be done. Leading with transparency is key.
Since the proposed SEC climate disclosures don’t apply to private companies, it can be hard to know where to begin. From assembling the right ESG team, to connecting ESG strategies to milestones, to upskilling your board — if you have one — around pertinent ESG topics, there are steps that any company, no matter where they are on their ESG journey, can take right now. For private companies, a great next step is to look at your competitors to understand where you stack up. The last thing you want to do is lose out on new business because you’re behind.
PwC is a private company, yet we decided to release our inaugural diversity and inclusion transparency report back in 2020, and we’re committed to releasing the same KPIs each year to hold ourselves accountable. In the fall of 2021, we released our Purpose Report, an expansion of what we first reported on, encompassing even more data and KPIs. While we are not yet where we strive to be, we are being transparent about our progress and the actions we are taking to achieve our ESG goals.
We recognize that this is an ongoing process — a living, breathing thing — and we still have the lion’s share of our work ahead of us. By creating a reporting framework, we’re able to shine a light on the great investments we have made in our people and our communities; keep ourselves honest and driven to create the more diverse, equitable and inclusive future we want for our firm and the world at large; and walk the talk as a responsible business leader.
Make no mistake — there is a lot of work to be done in the ESG space, particularly for private companies and family businesses that may just be getting started on their ESG journey or are taking steps to evolve it.
The proposed public company requirements could be a sign for what’s to come. For forward-thinking private companies looking to deepen trust with stakeholders — that are committed to delivering on their purpose — leaning into enhanced ESG disclosure is a logical and supportable next step. Those who don’t prioritize ESG may find themselves behind and trying to catch up.
June 1, 2022 at 03:19PM
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