New ESG reporting requirements? How companies can prepare now for new rules

After a long run of seeming ESG ascendance, recently it feels like there’s been noticeable backsliding in the name of shareholder primacy and political divisions. A new survey released by HSBC found that rising anti-ESG sentiment is starting to affect how managers think about integrating such considerations into their funds. The survey found that 44% of North American respondents said their reasons for having an ESG strategy have become weaker over the past 12 months.

This is a noticeable shift in sentiment from the more than $100 trillion in ESG funds raised in 2022 and is persuading some Wall Street firms to change their messaging to avoid controversy. BlackRock Chief Executive Larry Fink said last month that he had stopped using the term “ESG” because it has become too politicized.

That is a real shame because beneath the noise and political rhetoric lies a simple truth: ESG practices are not just buzzwords or greenwashing; they hold the key to a sustainable and equitable future for investors, companies, and consumers. It’s the old adage you can’t manage what you can’t measure. In particular, increased transparency requirements related to the “Social” criteria making up the “S” in ESG have been overlooked as especially tricky to quantify. But in a world where a company’s assets are increasingly human, the S is more important than ever.

This is why it is exciting that — despite the recent pushback and rhetoric from some corners — the SEC appears to be moving forward with S-related rule making specifically around human capital disclosures. They recognize that the workforce demands it, customers expect it, society depends on it, and many executives now have their compensation tied to it. Therefore, there is every reason to apply the same standards of disclosure rules and assurance requirements around the data related to human capital as we do to data related to physical capital.

The SEC, which could (and should) forge ahead with formal rulemaking related to human capital disclosures, is expected to announce Climate Related Human Capital Disclosure requirements in October. And while we don’t know exactly what it will say, it is expected to cover: governance of human capital related risks and opportunities, DEI metrics and policies, labor practices, recruitment and retention, and rewards and benefits. Knowing that these categories are most likely to be included, below are some recommendations for what companies can do to prepare:

• Start now: While there will likely be a glide path for implementing new rules, we expect that public companies will need to publish historical comparison data when the requirements kick in, which suggests companies need to prepare well ahead of time to meet any compliance deadline.
•  Poll your employees: The most important thing companies should be doing to begin is self-identification campaigns among their employees while simultaneously ensuring they have the infrastructure for responsible data collection that maintains privacy. The more specificity companies ask for, the greater the participation in the employee survey.
• Be prepared to over report: SEC-mandated data disclosures may not enable companies to tell their whole story. Due to that, organizations should be prepared to publish a supplemental human capital transparency report that provides context behind their numbers.
• Invest in technology and process: It cannot be overstated the degree to which the data quality is essential, and processes to collect all of it – from policies to people data – need to be reliable, repeatable and transparent. It is expected that whatever information is disclosed will have to have assurance (i.e., an audit like for financial data) so it’s time to move away from manual analysis and ad hoc spreadsheets.

Related: ESG investing: House Republicans outline policy goals in new interim report

ESG reporting is not just a matter of checking boxes; it’s about acknowledging what the critical levers are that drive long-term business performance and making them visible. Years ago, getting the depreciation schedule nailed down for that new factory equipment was essential to give investors a fair representation of the businesses’ future prospects.

In today’s service and tech-dominated economy, if we don’t disclose similar levels of detail about the health and value of our company’s human capital we are withholding critical, material information from shareholders. And when we report on the health of our human capital, we will reveal the levers at our disposal to make those workforces more vibrant, diverse, engaged and resilient. Solutions like caregiving benefits, advanced people analytics tools, and paid leave insurance for starters. When we invest in and report on the health of our human capital it benefits all of us – shareholders and workers alike.

Courtney Leimkuhler is co-founder and general partner at Springbank.