Over the past several years, many large U.S. companies have taken cues from their international counterparts and prioritized environmental, social, and governance (ESG) initiatives. Companies looking to establish transparency, trust, and accountability in human capital and sustainability reporting may have started out voluntarily—but that may not be the case much longer. The SEC announced its climate-related disclosure rules in March 2024, and California has passed several laws that will require more emissions and climate disclosures.

As challenges to the SEC ruling work their way through the courts, it remains clear that companies up and down the value chain will need to get their houses in order when it comes to climate-related data.

THE SEC RULING’S TRICKLE-DOWN EFFECT

While small and medium-sized companies aren’t directly in the SEC’s line of sight, they’re still integral to the ESG equation.

Scrutiny on ESG data is intensifying. In 2023, 99% of the Fortune 500 had published some form of ESG data, but only 65% had obtained third-party assurance on at least some of their ESG disclosures. The rise of greenwashing has thrown a spotlight on the lack of supporting evidence available to substantiate many of their claims—with the new wave of regulations, there is increased emphasis on improving ESG data quality. The largest companies in the world have all begun investing in people, processes, and technology to up-level their ESG data governance and reporting rigor. These large companies require data from their value chain for compliance, and they expect the information to be “audit-ready” and free from inconsistencies and errors.

Smaller companies that collect their own sustainability data will have a competitive advantage in this space. Indeed, many large companies are already requiring decarbonization commitments from their vendors as a prerequisite for doing business. Without making the necessary investments early, smaller organizations face a real risk of losing their biggest customers.

7 ESG BEST PRACTICES FOR COMPANIES IN THE VALUE CHAIN

As ESG data collection is quickly moving from optional to mandatory, businesses should begin building more robust ESG data governance to meet the growing demands of their largest customers. Lacking infinite resources, companies will need to be strategic about the investments they make to improve ESG data collection. We’ve identified seven best practices for companies just getting started.

1. Identify ownership. It’s critical that businesses begin by identifying the person or team who will ultimately be responsible for ESG data collection and reporting. When starting out, many companies turn to their existing internal audit, risk, compliance, or financial reporting teams to build out the program and plan for a dedicated budget and headcount to own ESG management going forward.

One trend we’re noticing is the rise of the ESG Controller, a role that would take responsibility for ESG reporting much like the CFO does for financial reporting. ESG data comes from disparate sources, and companies are turning to an ESG Controller to own the collection and reporting of consistent, accurate, audit-ready ESG data.

2. Implement a reporting framework. Consider starting with one of the industry-recognized voluntary reporting frameworks (such as SASB, GRI, or TCFD), which serve as the foundation for most of the coming regulations and offer extensive implementation resources to help companies that are just getting started.

3. Be proactive. Reach out to your largest customers early—for instance, before they make decarbonization commitments a requirement for their value chain. Ask if they prefer a particular reporting framework when you’re selecting your own in step 2.

4. Invest in technology. When you’re being asked to do more with less, investing early in purpose-built ESG data collection technology can amplify the impact of your small team compared to time-consuming manual data collection. There are a lot of different tools in the market; do your due diligence and invest in the right platform for your stage of maturity.

5. Up-level education and build out your team with new skill sets. Consider hiring practitioners with environmental science, ESG reporting, or corporate social responsibility backgrounds, as well as professionals with an assurance and/or internal control background, to help establish audit-ready processes. ESG is a team sport, and there is ample opportunity for cross-functional training that will provide professional development opportunities for your employees while adding new skill sets to your organization.

6. Remember lessons learned from Sarbanes-Oxley. Today’s ESG growing pains are very similar to those felt by companies in 2002 when the Sarbanes-Oxley Act (SOX) was signed. In a relatively short period, companies were required to stand up internal controls over financial reporting, implement new processes, and begin collecting data from departments that had never provided supporting documentation before.

As you might expect, in those early years it took multiple rounds of reporting to identify and ultimately remediate issues that emerged. It’s no different with ESG—companies that set up robust processes to ensure ESG data quality will be better able to identify and remediate any issues before there are downstream consequences.

7. Benchmark. Look at similar companies in your industry who might be further ahead in their ESG reporting maturity and evaluate if the disclosures and investments they’re making are appropriate for your organization.

GOOD ESG DATA GOVERNANCE IS A DIFFERENTIATOR

ESG reporting isn’t going away, and there are very real implications for small and medium-sized businesses. Companies that lean into improving their ESG data governance will be best positioned to stand out against their peers as customer requests transition from voluntary to mandatory. Leveraging the lessons learned from SOX and making the necessary investments in people, processes, and technology now will help ensure your organization isn’t playing catch up. Forward-thinking businesses will view providing high-quality ESG data as an opportunity to stay aligned with their key stakeholder’s expectations while carving out a competitive advantage against their peers.