Environmental, Social, and Governance (ESG) issues are not just the latest corporate buzzwords that can be dismissed as another fad—they are essential metrics that are the key to value creation for businesses of any size. Every business owner needs to be able to make informed decisions to effectively address how they impact their physical and social environment—both externally and internally.
Since companies have an effect on their surrounding environments and vice versa, it’s important for businesses of all sizes to consider ESG risk factors and reporting requirements. While larger public companies have traditionally been the target of ESG regulations, private businesses should also pay attention to the latest ESG guidelines as new SEC regulations emerge.
ESG Disclosures Are Not Required for Private Companies—Yet
Just because ESG disclosures are not required for private companies yet does not mean those entities are absolved of other reporting requirements. If a business wants to stay relevant—and competitive—they should aim to maintain their image as a progressive company that supports ESG goals. Even if government standards do not require certain reporting standards—the court of public opinion demands it.
In fact, given the size of private companies and the resources at their disposal, they are uniquely positioned to drive the ESG movement toward mass adoption. There are 27 million companies in the United States alone that are nearly all privately held, accounting for 48% of American jobs.
There are SEC requirements in the pipeline that may soon impact what information gets reported by public companies for their disclosures. This in turn will affect smaller privately held businesses that are part of a value chain for public entities. In other words, some companies may not be required to report as an individual company, but the other businesses they work with along the supply chain may have different standards they still have to cooperate with.
Private businesses that are unprepared to measure and share exactly how much they contribute to metrics like emissions could have a costly time intensive effort when reporting requirements come through. Private companies should look to update their practices so they can future-proof their business relationships with public companies that are required to report. These proactive efforts will also help private companies with plans to go public in the near future since arranging reporting compliance is a complicated process that takes time.
Investors are Looking to Understand ESG Metrics
The sustainable investment movement has grown to represent a value of $30 trillion assets worldwide with another $100 trillion in climate pledges over the next few decades as governments begin to take climate change seriously. Investor interest with strong numbers like this makes sense, but stakeholders, employees and consumers are all united in driving the push for companies to adopt ESG as sustainability becomes a deciding factor in where people choose to work or shop.
However, the largest companies will only be able to meet their climate pledges if their suppliers and vendors comply as well. It does not make sense to wait for compliance mandates to compel adoption of a sustainable ethos. Private companies do not have the same governance requirements of public companies and could be quicker to implement new scalable actions. This will result in reduced compliance costs in the future and increased value creation.
How a Positive ESG Reputation Could Lead to Value Creation for Your Company
There is value in being able to attract and assure investors and consumers alike that your company is actively managing its risks. Socially conscious companies are not just appealing to consumers, but also to employees which can help improve productivity and retention despite the ongoing labor shortage.
ESG programs that promote resource efficiency can also create value through waste reduction.
According to McKinsey, the overwhelming consensus of industry research shows that companies do not sacrifice value creation when they emphasize ESG in their company culture. Strong ESG programs ultimately correlate with higher equity returns and lower downside risk—value that private companies should not ignore.
International Considerations
There are also ESG reporting requirements in the EU that you should be aware of. Even if your company is not based in the EU, you might still be required to abide by these ESG considerations if you meet certain EU-presence thresholds, or have subsidiaries based in the EU. The new EU rules outlined in the Corporate Sustainability Reporting Directive (CSRD) are more in-depth than the SEC rules and will require US issuers to report on additional ESG topics.
Continue the Conversation
ESG reporting is important for companies small and large. As ESG reporting requirements constantly evolve, it’s in your best interest to stay ahead of the curve. If you’d like to learn about the latest ESG guidelines and how they impact your business, please reach out.
