ESG

ESG Controller: The Position You Didn't Know You Needed


by Wes Bricker

The proposed climate change disclosure rules—and the leaders who will help meet the new requirements—play a vital role in building trust in our capital markets and institutions.

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In March, the Securities and Exchange Commission (SEC) proposed its long-awaited climate change disclosure rules, which will require publicly-traded companies to share investor-grade data around climate risks, including greenhouse gas emissions. Specifically, the rules are designed to provide data on a companies’ impact on the climate and connections to the business—including business prospects, performance results over time, and continued resource needs. As businesses adjust to meet stakeholder demands and deliver new, high-quality reporting, they need someone with the right experience to lead the way—an ESG controller.

The rule, while not final, raises the bar for public companies around climate change reporting to help ensure that there is high-quality, comparable information in the capital markets that investors, regulators and other stakeholders can use to make decisions. Currently, many companies have made net zero commitments and voluntarily release ESG information on their websites or in corporate sustainability reports. However, there is less consistency or comparability in this data, and voluntary reporting lacks the safeguards and protections for investors and others who use the information.

The rules are beneficial for all market participants—investors, lenders, creditors and more—as well as regulators, our broader society and businesses—which will now have direction on disclosure frameworks and materiality. But implementing the teams, internal controls and technology to gather and disclose investor-grade data can pose challenges to some companies without highly-developed ESG reporting already in place. Regardless of where an organization is on its ESG journey, there are steps business leaders can take in the coming months to better prepare for the new climate change disclosure requirements—and establishing an ESG controller should be at the top of the list.

What is an ESG Controller?

It’s important that companies have the right team in place to manage climate change and other ESG reporting. Businesses already have internal controls and experts who manage financial reporting, so neither of those are new. But there is a need for an ESG team, and a good step is to create a position for an ESG Controller.

ESG controllers are given the authority to implement ESG capabilities. They establish business requirements aligned with expectations, develop measurement and reporting policies, perform risk assessments for the design of internal control and governance, and prepare a forecast to inform whether the plan is on track in relation to objectives and incentives. This should be someone who is familiar with operational and financial data, can connect different domains, and understands the internal and external controls and processes to help deliver on ESG objectives. This will increasingly allow companies to identify relevant sources of scope 1, 2 and 3 emissions and gather and report that information in a meaningful way.

Why it matters

Investors and other stakeholders have been demanding increased transparency from companies around climate change and other ESG issues, and the SEC’s proposed disclosure rule will help meet stakeholder needs and expectations. The market is demanding this information, and companies need to respond.

However, climate reporting is data intensive and judgment oriented, and there are expectations for a higher degree of reliability. Pulling data from a number of different sources inside and outside of the company requires judgment around reporting boundaries and definitions. Thankfully, the SEC provided a transition period to allow companies time to understand where they are and what will be needed once the rule is finalized. Establishing an ESG controller to lead efforts during this time can be critical for companies as they look to establish internal controls and reporting structures to set benchmarks and goals and develop the necessary processes to provide investor-grade reporting to the SEC.

It’s important to remember that these efforts are not just good for regulatory, investors and stakeholders—they’re also beneficial for companies and their bottom line. Independently verified, investor-grade information increases confidence in the data quality, and when there is increased trust and confidence, more investors are willing to participate and the cost of capital declines. Since the proposed rule raises the bar on disclosure quality, it can help distinguish between companies doing the right things around their business model—the quality of their processes, technology and transformation—from companies that are “greenwashing” and making commitments without investing in the business transformation to meet their goals. Investors don’t want to place their capital in a company that has painted a potentially misleading picture of its value proposition, so by providing accurate, comparable information that clearly demonstrates the business’s commitment to climate change and other ESG efforts, companies are more likely to attract investors who now better understand the climate risks associated with the business.

What companies can do next

With the stakes higher than ever, businesses should invest the time and resources to best prepare for the pending climate change disclosures—and to meet investors and stakeholder needs. Having a leader who understands both the operational and financial aspects of these reporting efforts—including internal controls, processes, reporting guidelines and stakeholder expectations—is critical for success. While there are many steps companies can (and should) take over the coming months, establishing an ESG controller first will help every step of the way.

There is no time to waste. Following the SEC’s proposed rule announcement, the regulator entered a 60-day comment period where organizations and stakeholders can provide feedback. The SEC will then review that input and reach a final decision about the rule and what it should contain, which will likely happen later this year. In the current ruling, companies are expected to gather 2023 data to include in their 2024 reporting. While there’s time for businesses to make the necessary adjustments, they shouldn’t wait to move forward with developing an ESG team, understanding where they are, connecting ESG strategies and reporting to the overall business strategy, and including or upskilling team members and directors.

Ultimately, to meet the proposed new requirements, many businesses will need to transition to investor-grade and tech-enabled reporting to dramatically accelerate their climate change reporting processes, while implementing effective governance and internal controls. But these efforts and investments are well worth it. Trust in the quality of material information is necessary for a complex society to function, and markets operate most efficiently when there’s reliable, quality data stakeholders can use to make decisions. The proposed climate change disclosure rules—and the leaders who will help meet the new requirements—play a vital role in building trust in our capital markets and institutions.

Wes Bricker is Vice Chair - US Trust Solutions Co-Leader at PwC US.