A Complete Guide to ESG Reporting in the US

ESG reporting is a process of generating reports that define a company’s environmental, social, and governance activities. While it is not mandated in the US yet, an increasing number of companies report their information voluntarily. This is due to the importance of ESG in communicating business strategy. Companies can no longer ignore ESG reporting, given the growing significance that stakeholders place on it.

On March 6, 2024, the US Securities and Exchange Commission (SEC) adopted the final rules requiring registrants to provide climate-related disclosures in their registration statements and annual reports. These rules were set to be effective from May 28, 2024, with implementation beginning in the fiscal year 2025. However, pending judicial review has delayed the effective date of the final rule.

According to Gary Gensler, SEC Chair, “The final rule will provide investors with consistent, comparable, decision-useful information, and issuers with clear reporting requirements.”

Also read : New Rules by SEC for Standardizing Climate-Related Disclosures

Financial Statements Disclosures – ESG Reporting

The ESG Regulation S-X, Article 14, requires all registrants, including smaller reporting companies, emerging growth companies, and foreign private issuers, to disclose specific information in the footnotes of the financial statements.

The disclosures should be prepared using financial information compatible with the consolidated financial statements and the same accounting principles. These disclosures include:

Effects of severe weather and other natural conditions (hurricanes, tornadoes, wildfires, etc.)
Certain carbon offset (emission reduction, removal, or avoidance of CHGs calculated and traced to offset a company’s emissions) and renewable energy credits (a credit or certificate for each megawatt-hour of renewable electricity supplied to a power grid)
Material impacts on financial estimates and assumptions (a qualitative explanation of severe weather events or climate-related targets on the estimates and assumptions used in financial statements)

Existing audit requirements for financial statements will apply to these disclosures.

Disclosures Outside Financial Statements

Certain requirements impact annual reports and registration statements in ESG reporting. These disclosures are as follows:

Greenhouse Gas (GHG) Emissions

Accelerated filers and large accelerated filers are required to file their Scope 1 and Scope 2 GHG emissions if they are material.

Scope 1 emissions are GHG emissions from operations owned or controlled by a registrant.
Scope 2 emissions are indirect GHG emissions that result from the generation of acquired or purchased heat, electricity, steam, or cooling consumed by operations owned or controlled by a registrant.

Governance

According to the final rule of ESG reporting or climate disclosure, the registrant must disclose information about how the board of directors monitor the assessment and management of climate-related risks. This includes the following:

Identifying the specific board committee or subcommittee responsible for overseeing these risks
Description of the processes used to inform these committees of the climate-related risks
Explanation of whether and how the committees monitor progress towards any disclosed climate-related target, goal, or transition plan

Strategy

As per the final rule, registrants must disclose any climate-related risks that have affected or are expected to affect their business strategy, financial condition, or results of operation.

This includes specifying whether the risks are expected to arise in the short term (within the next 12 months) or the long term (beyond the next 12 months). These include both acute physical risks (like floods and hurricanes) and chronic physical risks (like sustained higher temperatures).

Climate Risk Management

Registrants must disclose their policies for “identifying, assessing, and managing” significant climate risks. This includes outlining how the registrant:

Assesses whether a risk has occurred or is likely to occur
Decides its course of action (mitigate, adapt, or accept) in response to identified risks
Determines the priority of addressing a material climate-related risk

Target and Goals

Registrants must reveal information about their internal climate-related or publicly announced targets or goals if they materially affect the business, financial condition, or results of operation. The required disclosures are given below:

The scope of activities
The process of measuring the targets
Timeframe for target achievement
Baseline for tracking progress and assessment methods
Strategies for target achievement
Annual updates on progress towards targets, including actions taken

ESG Reporting Standards in the US

In the absence of a single, unified federal ESG reporting standard, various frameworks and guidelines have emerged to assist companies in their ESG disclosures. These standards aim to provide a common language and set of metrics for reporting on ESG issues, enhancing comparability and consistency across different companies and industries.

Sustainability Accounting Standards Board (SASB)

Industry-Specific Standards

The Sustainability Accounting Standards Board (SASB), established in 2011, offers industry-specific standards that help companies identify and report on the most relevant ESG issues for their operations.

Integration with Financial Reporting

SASB standards are designed to align with existing financial reporting frameworks, making it easier for companies to incorporate ESG reporting into their overall disclosure practices seamlessly.

Enhancing Comparability

By providing a standardized set of metrics, SASB facilitates comparability and consistency in ESG reporting across different companies and industries, aiding investors and stakeholders in their assessments.

Nasdaq’s Board Diversity Requirements

Diversity Disclosure Mandate

Nasdaq has introduced requirements for companies listed on its exchange to disclose the diversity composition of their boards. This mandate aims to promote transparency regarding board diversity.

Two Diverse Directors Requirement

Listed companies are expected to have at least two diverse directors or provide an explanation for non-compliance. This requirement emphasizes the importance of diversity in corporate governance.

Litigation and Compliance

These requirements are currently subject to ongoing litigation, reflecting the evolving nature of ESG governance standards. Nonetheless, they signify a broader trend towards greater diversity and inclusion in corporate leadership.

Governance and ESG Considerations

Nasdaq’s board diversity requirements underscore the critical role of governance in ESG considerations, highlighting the need for inclusive leadership practices within the corporate sector.

ESG Disclosure Regulation in the US

The regulatory framework for ESG disclosures in the United States is rapidly evolving, with the Securities and Exchange Commission (SEC) playing a pivotal role in shaping the future of ESG reporting. Historically, the SEC has required public companies to disclose material information to investors, which increasingly includes ESG-related risks and opportunities.

SEC’s Guidelines for ESG Disclosures

Guidance on Key Performance Indicators

In January 2020, the SEC issued guidance emphasizing the importance of disclosing key performance indicators related to ESG matters. This guidance encourages companies to consider whether ESG issues—such as climate change impacts, labor practices, or board diversity—could be material to investors and, therefore, require disclosure.

Significance of ESG Issues

The SEC’s guidelines represent a significant step towards formalizing ESG disclosures, pushing companies to integrate ESG considerations into their reporting processes. However, it stops short of mandating specific ESG reporting standards, allowing companies some flexibility in how they disclose this information.

Materiality in ESG Reporting

Companies are urged to assess the materiality of various ESG factors and their potential impact on business performance. This assessment helps ensure that investors receive relevant and comprehensive information about the ESG risks and opportunities that might affect their investment decisions.

The Department of Labor’s (DOL) Stance on ESG Factors

ESG in Investment Decisions

The Department of Labor (DOL) has provided guidance on the consideration of ESG factors in investment decisions under the Employee Retirement Income Security Act (ERISA). The DOL clarifies that ERISA fiduciaries can, and sometimes should, consider ESG factors when they are material to an investment’s risk and return profile.

Impact on Pension Plans

This guidance has significant implications for the pension plan industry, opening the door for more ESG-focused investment strategies. Fiduciaries are encouraged to incorporate ESG considerations into their investment processes, aligning with broader trends towards responsible and sustainable investment practices.

Balancing Risk and Return

By recognizing the materiality of ESG factors, the DOL supports a more holistic approach to investment management. This approach ensures that ESG risks and opportunities are appropriately evaluated alongside traditional financial metrics, enhancing the overall decision-making process.

The Evolution of Voluntary ESG Reporting in US

Historically, the US has relied on voluntary ESG reporting, driven by competition and corporate engagement. This strategy has proven effective, with approximately 81% of S&P 500 companies issuing sustainability reports in 2015, up from less than 20% in 2011 (source: Governance and Accountability Institute).

The Shift Towards Mandatory ESG Reporting

With the Biden administration, there is an increased focus on mandatory sustainability reporting. This shift aims to standardize ESG reporting practices, ensuring that all companies adhere to consistent and comprehensive reporting standards, thus enhancing transparency and accountability.

Current State of ESG Reporting in the US

Currently, there is no stand-alone mandatory sustainability reporting requirement in the US. The United States Securities and Exchange Commission (SEC) mandates companies to report information that may be material to investors, which includes ESG-related risks. This approach ensures that critical ESG factors are considered without imposing specific reporting standards.

The Critical Components of ESG Reporting

ESG reporting centers around three fundamental pillars: Environmental, Social, and Governance. These components collectively define a company’s impact on the world and its commitment to sustainable and ethical practices.

Environmental: Stewardship of Nature

The environmental aspect of ESG reporting focuses on a company’s impact on the natural world. Key areas include:

Climate Change –Addressing the essential challenge of reducing greenhouse gas (GHG) emissions to mitigate climate change effectively.
Pollution and Waste Reduction- Implementing strategies to minimize pollution and waste, emphasizing a commitment to ecological sustainability.
Resource Management- Ensuring the judicious use of natural resources, addressing concerns around scarcity and the sustainability of supply chains.
Biodiversity and Conservation –Prioritizing the preservation of natural habitats and species, reflecting a broader commitment to environmental stewardship.
Animal Welfare –Considering the treatment of animals in business practices, underscoring respect for all living beings and their ecological roles.

Social: Fostering Equitable Communities

The social aspect of ESG reporting focuses on a company’s interactions with its people and communities, underlining the importance of ethical and equitable practices:

Ethical Working Conditions –Addressing critical issues such as slavery and child labor, ensuring safe, respectful, and fair work environments.
Community and Indigenous Relations- Demonstrating respect and support for local and indigenous communities, fostering positive and impactful engagements.
Transparent Values and Ethics – Disclosing company values and ethical practices to stakeholders, ensuring alignment and accountability.
Conflict Region Operations – Assessing and mitigating impacts in areas affected by conflict, emphasizing ethical presence and engagement.
Health, Safety, and Diversity –Upholding stringent health and safety standards while promoting diversity and inclusion within the workforce.
Data Security and Privacy –Safeguarding sensitive information, reflecting the growing importance of data protection in a digital age.
Global Engagement- Understanding and addressing the implications of geopolitical events, reflecting a commitment to responsible global citizenship.

Governance: Leading with Accountability

The governance aspect of ESG reporting evaluates a company’s governance structure and practices, essential for maintaining integrity and fostering investor confidence:

Fair Executive Compensation – Ensuring executive pay is transparent, justified, and aligned with broader corporate goals and ethics.
Equality and Equity- Committing to gender equity and equal opportunities, fostering an inclusive and fair corporate culture.
Anti-Bribery and Anti-Corruption – Upholding high standards to prevent corruption and bribery, ensuring ethical business transactions.
Political Contributions and Lobbying- Disclosing political donations and lobbying activities, promoting transparency and ethical-political engagement.
Diverse Board Leadership – Ensuring board diversity and robust governance structures, reflecting a commitment to comprehensive oversight and strategic guidance.
Responsible Tax Practices- Adopting transparent and fair tax strategies, contributing responsibly to societal resources.

Incorporating ESG Elements into Reporting

By integrating these elements into their ESG reporting, organizations adhere to principles of sustainability and ethics, build trust and credibility with stakeholders, and set a robust foundation for long-term, responsible business growth.

Why ESG Reporting is Crucial for Companies in US?

ESG reporting is vital for companies today, especially since 90% of S&P 500 firms now share ESG data. This trend reflects its importance in modern business strategies. The ESG investment market is projected to reach €31 trillion ($33.9 trillion) by 2026, showing a strong shift towards sustainable business practices.

Meeting Stakeholder Expectations

Consumer Demand: 83% of consumers want companies to support ESG practices (OECD). Transparent ESG reporting builds trust and loyalty among stakeholders, meeting public expectations for responsibility and sustainability.

Building Investor Confidence

Investor Insights: 89% of investors use ESG factors in their decisions (Morgan Stanley). Good ESG reporting helps investors understand a company’s long-term value, building stronger relationships and confidence.

Boosting Brand Reputation

Consumer Loyalty: 88% of consumers are more loyal to firms that support social and environmental issues (Edelman). Commitment to ESG practices improves brand perception and trust, leading to higher customer retention and positive word-of-mouth.

Gaining a Competitive Edge

Market Leadership: ESG-focused investments are expected to hit €31 trillion ($33.9 trillion) by 2026. Companies that excel in ESG can stand out from competitors, attracting both consumers and investors, and driving growth.

Managing Risks

Risk Mitigation: Effective ESG reporting helps identify and address risks. Climate-related events could cost suppliers $1.3 trillion (€1.2 trillion) by 2026 (Carbon Disclosure Project). Proactive ESG strategies help manage these risks, ensuring business continuity.

Securing Capital

Investment Attraction: €16.6 trillion ($18 trillion) is managed under ESG-focused funds (Deloitte). Companies with strong ESG credentials are more likely to attract investment and secure capital on favorable terms.

Ensuring Compliance

Regulatory Alignment: 88% of public companies are setting up ESG initiatives to meet evolving standards (PWC). Staying updated on ESG-related regulations ensures compliance and positions companies well in the regulatory landscape.

Creating Long-term Value

Value Creation: ESG reporting drives growth, cuts costs, reduces legal issues, boosts productivity, and optimizes investments (McKinsey & Company). A strong ESG strategy creates value in many areas, making it essential for modern businesses.

The Future of ESG Reporting

The landscape of ESG reporting is undergoing significant transformations driven by digital innovation, regulatory expansion, and evolving market demands. This overview highlights the pivotal changes shaping the future of ESG reporting, focusing on financial reporting automation, XBRL reporting systems, and the challenges of financial reporting.

Embracing Digital Transformation

Technological Integration

Digital technologies are revolutionizing ESG data collection, analysis, and disclosure processes.
Utilizing ESG software reduces the cumbersome aspects of reporting, enabling more dynamic, accurate, and efficient mechanisms.
These innovations streamline financial reporting automation and improve financial reporting applications.

Expanding Mandatory Disclosures

Broader Scope of Requirements

The scope of compulsory ESG disclosures is broadening, affecting an increasingly diverse array of companies.
This global shift promotes enhanced corporate transparency and accountability.
Both large enterprises and SMEs are now included, reflecting a universal commitment to sustainability.

Adapting to Regulatory Changes

Increased Regulatory Pressure

Jurisdictions worldwide are mandating ESG reporting for a broader spectrum of companies, including SMEs.
This highlights the importance of sustainability and accountability in the business sector.
Robust financial reporting solutions and XBRL validation systems are essential to meet these new demands.

Market-Driven Differentiation

Excellence in ESG reporting is becoming a competitive advantage.
Leading companies in transparency and sustainability are setting new benchmarks.
Effective financial data extraction and tools are critical to support comprehensive ESG reporting.

Future Predictions for ESG Reporting

Integrating Sustainability in Finance

Fusing sustainability with financial strategies is becoming paramount.
CFOs are increasingly considering the impact of climate change on economic outcomes.
The creation of ESG controller positions underscores the integration of ESG issues into financial statements and reporting.

Enhanced Scope 3 Reporting

Regulations in California and the EU are pressuring private firms to improve their greenhouse gas accounting methods, especially indirect emissions.
Advanced financial information analysis is needed to meet these new reporting requirements.

Navigating Political Challenges

Companies face the challenge of navigating pro- and anti-ESG legislation amidst a divided political climate.
Strategies may involve stakeholder mapping and focusing on broadly acceptable ESG initiatives.
Adaptable financial reporting solutions are necessary to meet varying regulatory demands.

New Focus Areas in ESG Reporting

Biodiversity as a Key Concern

The focus on biodiversity loss and nature-related financial disclosures is intensifying.
Governments are considering adopting Task Force on Nature-related Financial Disclosures (TNFD) standards.
Robust financial data extraction and analysis tools are needed to address these concerns.

Prioritizing Supply Chain Ethics

New laws and stakeholder expectations are pushing companies to prioritize ethical material sourcing and fair labor standards across supply chains.
The intersection of environmental and social concerns is becoming more prominent, emphasizing the importance of comprehensive XBRL reporting systems.

Combatting Greenwashing

Legal definitions of greenwashing are becoming clearer.
Companies face heightened risks associated with misleading sustainability claims.
Efforts to combat greenwashing are advancing, particularly in the EU, leading to a more accountable ESG reporting environment.

By adopting these changes, companies can ensure they are prepared for the evolving landscape of ESG reporting in 2024 and beyond.

The Future of ESG Reporting in the United Stated (US)

The landscape of ESG reporting in the US is poised for significant changes driven by regulatory developments, digital transformation, and evolving market demands. Here’s an overview of what to expect:

Predictions for ESG Reporting Regulations

Standardization and Potential Mandates

SEC’s Proposed Rules: The SEC’s proposed rules aim to make ESG reporting more standardized and potentially mandatory for public companies. This move is in response to increasing investor demand for transparent and consistent ESG information.
Investor Influence: A survey by Morgan Stanley found that 89% of investors consider ESG factors when making investment decisions, underscoring the need for reliable and standardized ESG disclosures.
Materiality of ESG Factors: Recognizing ESG factors as material to financial performance, companies are expected to integrate these into their regular reporting frameworks. This shift is aimed at providing investors with a clearer picture of the risks and opportunities associated with ESG issues.

The Influence of Global ESG Regulatory Frameworks

Adopting International Standards

Global Trends: The global movement towards standardized ESG reporting frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI), is significantly impacting US regulations.
Cross-Border Consistency: As American companies operate in a global marketplace, they are increasingly influenced by these international standards, which promote consistency in ESG reporting across borders.
Harmonized Approach: The adoption of frameworks like TCFD and GRI by US companies is expected to lead to a more harmonized approach to ESG reporting both domestically and internationally. This harmonization helps companies streamline their reporting processes and ensures they meet the expectations of global investors.

Bottom Line

ESG reporting has become an important part of sustainable business practices to foster transparency and accountability. With the implementation of ESG regulation in the US, companies are urged to focus on environmental, social, and governance factors.

If you are looking to disclose climate-related information for your company, all you need is a trusted partner like DataTracks! We have prepared ESG reports for more than 28,000 clients in various regions. Our professionals are well-versed in compliance requirements and stay abreast of regulatory changes. So what are you waiting for? Speak with an expert at +1 (646) 904-8324 or email @enquiry@datatracks.com.

FAQs on ESG Reporting for Companies in the US

Why is ESG reporting crucial for companies in the US?

ESG reporting is essential for US companies because it helps build trust and loyalty among stakeholders, align with public expectations for corporate responsibility, and maintain competitiveness. With 90% of S&P 500 firms now publishing ESG data, ESG reporting has become a key part of modern business strategies. The growing ESG investment market, projected to reach €31 trillion ($33.9 trillion) by 2026, highlights a significant shift towards sustainable and responsible business practices.

Is ESG reporting mandatory in the USA?

ESG reporting is not yet mandatory in the USA at the federal level. However, the Securities and Exchange Commission (SEC) has issued guidance encouraging companies to disclose material ESG-related information. Some states, such as California, have implemented their own ESG-related regulations, and certain industries may face specific reporting requirements.

What are the ESG Reporting standards in the US?

In the absence of a unified federal ESG reporting standard, various frameworks guide companies in their ESG disclosures in the US:

Sustainability Accounting Standards Board (SASB): Provides industry-specific standards for identifying and reporting on ESG issues relevant to a company’s operations.
Global Reporting Initiative (GRI): Offers a widely used framework for ESG reporting, helping companies communicate their sustainability impacts.
Task Force on Climate-related Financial Disclosures (TCFD): Recommends disclosures on climate-related risks and opportunities, emphasizing the financial implications of climate change.

Does Nasdaq require ESG reporting?

Nasdaq does not require ESG reporting per se, but it does have specific requirements related to board diversity. Nasdaq’s board diversity disclosure rule mandates that listed companies disclose the diversity composition of their boards and have, or explain why they do not have, at least two diverse directors. This requirement underscores the importance of governance within ESG considerations.

What is the ESG law in the US?

There is no single, comprehensive ESG law at the federal level in the US. Instead, the regulatory framework for ESG reporting is evolving and includes guidance and rules from various agencies and states. Key components include:

SEC Guidance: The Securities and Exchange Commission (SEC) has issued guidance encouraging companies to disclose material ESG-related information, particularly related to climate change, human capital, and board diversity.
State-Specific Regulations: Some states, such as California, have implemented their own ESG-related regulations. For instance, California has laws requiring companies to report on board diversity and greenhouse gas emissions.
Industry-Specific Standards: Certain industries, such as financial services and energy, may have specific ESG reporting requirements driven by industry regulators or best practice standards.

Does the SEC require ESG disclosure?

The SEC does not currently mandate comprehensive ESG disclosure for all companies. However, it has provided guidance and proposed rules that push for greater transparency and consistency in ESG reporting. Key points include:

Climate Change Disclosure: The SEC requires companies to disclose material climate-related risks and opportunities, emphasizing the financial impacts of climate change.
Human Capital Management: The SEC has introduced rules requiring companies to provide disclosures about their human capital resources, including measures and objectives that address workforce development, retention, and safety.
Proposed Rules: The SEC has proposed rules that could standardize ESG reporting, potentially making it mandatory for public companies to disclose certain ESG metrics and information.

What are ESG scores?

ESG scores are ratings given to companies by various organizations, such as Bloomberg and S&P Dow Jones Indices (S&P DJI), which measure the degree to which a company’s economic value is at risk due to ESG factors. These scores help investors determine whether a company is investable based on its environmental, social, and governance practices.

Why are ESG scores important?

ESG scores are important for several reasons:

Investment Decisions: Investors use ESG scores to assess the sustainability and ethical impact of their investments. Higher ESG scores indicate lower risks associated with ESG factors, making companies more attractive to responsible investors.
Reputation and Trust: High ESG scores can enhance a company’s reputation and build trust with stakeholders, including consumers, employees, and partners.
Risk Management: ESG scores help identify and mitigate potential risks related to environmental, social, and governance issues, contributing to long-term business resilience and stability.