How Boards Should Prepare for Updated ESG Standards under New SEC Leadership

by Maria Moats

SEC Chair Gensler is expected to continue to advance recent SEC initiatives relating to climate change and human capital management.

© ThitareeSarmkasat/iStock/Getty Images Plus

Organizations and boards are gearing up for new policy making and regulation changes as Gary Gensler steps into his role as Chair of the Securities and Exchange Commission (SEC). Companies can use this time as an opportunity to get ahead of expected policy changes around environmental, social and governance (ESG) issues and prepare for potential new regulations before they are implemented.

Next chapter for the SEC

Chair Gensler is expected to continue to advance recent SEC initiatives relating to climate change and human capital management. We can also expect continued emphasis on reporting that illustrates how a company’s workforce creates value and how diversity and inclusion (D&I) connects directly to corporate strategy. Responsibility will likely fall to management and the board. And directors need to confirm the right steps are taken to guide their organizations’ ESG efforts. 

Under new SEC leadership, more clear and specific reporting guidance for environmental initiatives and human capital may be on the horizon. But companies don’t need to wait for new rules. They can, and should, be taking steps on ESG reporting and oversight now.

Integrating ESG into strategy

ESG is continuing to gain momentum in the boardroom. According to PwC’s 2020 Annual Corporate Directors Survey, almost half of directors who responded (45%) say ESG issues were regularly part of their board’s agenda, compared to just 34% the year before. We expect that number will grow again this year.

A company’s ESG efforts should align with their business purpose, strategy and long-term goals. These efforts should be measured for transparency and accountability. And the company should be transparent with stakeholders about their ESG efforts and programs.

Close oversight from the board is essential in every step of this process. When reporting on ESG, standardization, accuracy and consistency are paramount. Board members can help confirm that management makes ESG reporting a priority, with the right focus on proper processes and controls.

Not only does growing an organization’s ESG efforts benefit its communities, stakeholders and the environment, it is also good for the bottom line. Many areas within ESG, if not addressed, can expose a company to potential risks across the environmental, social and governance spectrum as well as risks to brand and reputation. Proactively addressing and reporting ESG-related issues can help companies avoid potential financial fall out. And with more and more companies already offering enhanced disclosure and implementing new programs and levels of oversight, those who are not risk falling behind their peers.

Stepping Up Sustainability Commitments

In recent months, numerous companies have made stronger commitments to sustainability, with the goal of achieving net-zero emissions at the top of the list. The Biden administration also announced goals to cut emissions in half by 2030, setting the path to eventually achieving net-zero by 2050. According to PwC data, 67% of surveyed directors think climate change should have a role in strategy formation. Stakeholders should monitor sustainability-based commitments made by organizations and their boards, helping inform their own views.

How Boards can Prioritize Transparency

As the SEC, investors and other stakeholders demand more transparency and ask that companies provide high quality data on results, the following are key areas of focus for all board members to further integrate ESG into the core of their organizations:

  • Strategy: ESG risks and opportunities should be integrated into the company’s long-term strategy. Boards and their companies should measure and monitor progress against milestones and goals set as part of the strategy.
  • Messaging: ESG messaging and activities should align with the company’s purpose along with stakeholder interests.
  • Risk assessment: Material ESG risks should be identified and incorporated into the ERM. Boards should allocate the oversight of these risks to either the full board or individual committees.
  • Reporting: Boards should strategically identify the right communication platform to use for the company’s ESG disclosures.

Looking Ahead

While the pace of change may be accelerating, a company's path should remain steadfast. Your company’s approach to ESG issues should not simply be to tick a regulatory box. The focus should be on creating sustainable advantage and value. So why wait for the regulations to change? Companies and boards don’t need to hold out for further guidance from the SEC to begin evaluating the process and accuracy of their organizations’ ESG efforts and reporting. They should continue their holistic approach and strong overall strategy to proactively get ahead of any new policies.

Maria Moats is a Governance Insights Center Leader at PwC US.