In recent times, there have been proposed regulations by both the United States' Securities and Exchange Commission (SEC) and the Canadian Securities Administrators (CSA) aimed at strengthening corporate climate reporting. Within this, the rules about measuring and reporting Scope 3 emissions are very important.
Further to the above, the EU is implementing stricter transparency rules for larger companies from January 1st 2023. These rules, known as the Corporate Sustainability Reporting Directive (CSRD), require these companies to report on their impact on people and the environment using a specific framework in their annual ESG reports and will affect over 3000 US companies.
The proposed SEC and new CSRD directives are significant for US companies for two major reasons. First, for SEC, it can mean getting ahead of future expectations, while for CSRD, it will be imperative if they operate within the EU. And second, it could affect future financial prospects, as investors are set to become increasingly interested in the environmental impact of their investments.
According to an article from PWC, US companies with EU subsidiaries will be expected to report on CSRD if it is the parent of a group that exceeds certain asset, revenue, and workforce size thresholds in two consecutive years. The Landmark Information Group explains this expectation means they must “collect and report on a wide range of ESG metrics, including climate change, social and employee matters, human rights, and anti-corruption and bribery.”
The environmental part of corporate ESG focuses on a company's environmental impact and sustainability practices. It encompasses a wide range of factors related to how a company interacts with the natural environment and its efforts to minimize negative environmental effects while promoting positive ones.
Depending on the organization, it can include:
Social and societal aspects have to do with how the company treats people. Is everyone equal, and are there equal opportunities? How does the company deal with privacy issues and data protection? Do people work safely, and to what extent are human rights at stake anywhere in the business chain? Customer satisfaction and limiting customer dependency on the company also play a role.
Concerning the governance aspect, this involves how companies prevent bribery and corruption, for example. Is there diversity in the daily board of directors? And does the remuneration of executives take place fairly and in line with actual performance?
The CSRD explains the rules for disclosing information regarding ESG reports. It provides standards for ESG reporting on people, the environment, and related governance. The primary purpose of the guideline is to ensure more transparent reporting and better quality of the data provided. CSRD also promotes the comparability of information regarding company sustainability practices in a broad sense.
Among other things, the directive aims to enable investors to focus on making sustainable and social investments. It expects to make high-quality and comparable sustainability information publicly available to create more sustainable investment policies, which will move companies to keep improving in these areas.
An ESG report, in line with CSRD's guidelines, contains qualitative and quantitative data under the three themes mentioned above, including numbers and intended plans.
Environmental: What CO2 emissions a company realizes, along with the relevant targets for the coming periods, and how the company combats climate change and reduces its emissions
Social: How satisfied employees are with their working environment, how the company tries to maintain and improve safety in that environment, and what measures it takes regarding gender inclusiveness. The company is also responsible for what happens further down the supply chain.
Governance: How are a company's internal emission and inclusion controls designed? What is the procedure by which executive compensation is determined? And is there a whistle-blowing procedure?
The CSRD is designed to create optimal transparency regarding ESG performance. It intended to make the various factors between companies much more comparable and stop companies from concealing poor performance.
Timeliness is crucial in this process since stakeholders want access to the most up-to-date ESG information during and after the fiscal year-end. Business leaders should have access to ESG information and reporting per unit of time, preferably monthly. That way, they can observe trends quickly and anticipate any adjustments to their sustainability policy.
(h2) What does ESG mean for companies?
Most companies are required to report under ESG by 1st of January 2024. And many organizations have already started to prepare for this, with the finance team playing a major role.
Typically, finance mainly focuses on accurate financial reporting and maximizing profits. However, in the future, it will also be imperative for finance to help measure each activity and investment on the three ESG pillars, the operating result, and the supplier chain.
The finance team will need to find the right balance and technology quickly.
Employee corporate spending is one of the most critical data sources concerning ESG reporting. The financial transactions carried out by employees on behalf of the company provide a lot of information on attitudes toward sustainability in the workplace.
Do they buy their goods from suppliers who also score well on the sustainability ladder? Do they make sustainable purchasing decisions? Can they develop their knowledge and skills by booking and attending external courses? Do they make unnecessary flight hours or travel by energy-neutral transport?
If companies want to answer these questions, they need to consider ESG when tracking corporate spending.
The problem? Corporate spending is already difficult to track. Who is spending, where, and on what is often not very transparent, so steering on ESG is a big challenge?
With the introduction of CSRD, companies are preparing to put ESG and sustainability tracking measures in place. This will not only help them meet the directives and new obligations but can also give them a competitive advantage when it comes to investment, recruitment, and even customers.
At Payhawk, our spend management solution, including corporate cards, expense management software, subscriptions, and more, lets you track, control, and group spending so that you can set limits on and categorize any spend that affects your ESG impact.
Learn more in a no-obligation demo. And read the customer story from leading corporate decarbonization and ESG optimization solutions provider Plan A to see why they chose Payhawk to support their lean finance team.
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