We had a chance to ask Chris McClure, Partner, ESG Services Leader at Crowe, a few questions about Environmental, Social, and Governance (ESG) regulations, strategies, and processes. He recommended taking a proactive approach to collecting data and creating cross-functional teams.
The U.S. Securities and Exchange Commission (SEC) proposed a new rule that would govern U.S. companies’ public disclosures related to climate change and sustainability. The final climate disclosure rule has been delayed – due to the number of public comments. What does this delay mean for manufacturers?
The delay of the final SEC climate disclosure rule offers manufacturers additional time to prepare for the new requirements. The proposed rule would require public companies to disclose information about their climate change risks and impacts, including their greenhouse gas emissions, climate-related business strategies, and risk management practices. The SEC received thousands of comment letters on the proposed rule and many aspects of the proposal are controversial, so the timing and specifics of the final rule are unclear. We assume the final rule may also be litigated, possibly all the way to the Supreme Court as we saw with the Conflict Minerals Rule.
While we await the final rule, it’s prudent for manufacturers to continue to monitor the situation and make progress in mapping out their approach to disclosure. The process for identifying emissions data sources can be time consuming and involve a variety of different departments – EHS, Legal, Operations, IT, Financial Reporting, Internal Audit, etc. Form the appropriate team now and establish the requisite controls.
It’s also important to note that the SEC proposal is not the only reason a manufacturer may need to report GHG emissions data. Customer and investor requests along with emerging state and federal regulations may also create obligations, some with an even shorter timeframe for implementation.
What role can technology and innovation play in improving ESG performance for manufacturers, and what are some emerging trends in that area?
Technology and innovation can play very crucial roles in improving ESG performance and meetings goals for manufacturers. A few examples include:
- Reporting Technology: As the demands for ESG-related information increase, technology offers many solutions to help automate and enhance data collection, analysis, and disclosures. Technology can improve calculation accuracy, create many efficiencies in manual efforts, and help identify potential cost savings.
- Energy Efficiency: The use of energy-efficient technologies, such as renewable energy sources and energy-efficient equipment, can reduce energy consumption and greenhouse gas emissions. By adopting innovative energy solutions, manufacturers can not only improve their ESG performance but also save on energy costs. This will help manufacturers meet their ESG commitments.
- Circular Economy: The circular economy model is gaining traction in manufacturing, which focuses on designing products with the end of their life in mind, ensuring that they can be recycled, reused or repurposed. Technology plays a crucial role in enabling a circular economy by facilitating the reuse and recycling of materials.
- Digital Transformation: Digital transformation is a broader trend that can also impact ESG performance. By digitizing manufacturing processes, manufacturers can improve their efficiency, reduce waste, and reduce their environmental impact. For example, by using machine learning and artificial intelligence, manufacturers can optimize their supply chains, reduce energy consumption, and improve their product quality.
- Social Responsibility: Technology can also be used to promote social responsibility in manufacturing. For example, blockchain and other product tracing technologies can help manufacturers create sourcing transparency and reduce the risks of labor violations in their supply chains.
How can manufacturers ensure that their supply chains are aligned with ESG principles, and what strategies can they use to encourage responsible practices among their suppliers?
To ensure that their supply chains are aligned with ESG principles, manufacturers can take several steps:
- Identify Risks: The first step is to conduct a risk assessment to understand the key characteristics of your supply chain and identify the variety of risk levels present. This process may include mapping and ranking your suppliers by location, size, commodity, etc. against key risks such as anti-human trafficking, fraud and bribery, product sourcing sanctions, and other ESG considerations. A “heat map” can help you prioritize steps in your compliance and regulatory programs.
- Establish and Communicate Standards: Manufacturers should set ESG standards and communicate them to their suppliers. Your Code of Conduct for suppliers should clearly explain supplier obligations, be disseminated at onboarding and regular intervals, and be accompanied by training as needed. Consider consulting well-established frameworks and aligning with recognized standards such as the OECD, United Nations Global Compact, etc.
- Monitor Compliance: Manufacturers should monitor their suppliers' compliance by conducting regular audits and assessments. Depending on the risk profile of the suppliers, you may prioritize those that receive more extensive engagement and verification efforts.
- Provide Support: Manufacturers can provide support to their suppliers to help them improve their ESG performance. This can include training, technical assistance, and financial incentives.
- Engage with Suppliers: Manufacturers can engage with their suppliers and build long-term relationships to encourage them to prioritize compliance practices. Manufacturers can work with their suppliers to share best practices and develop new solutions to meet collective ESG challenges.
How should manufacturers effectively communicate their ESG performance to stakeholders? How can companies build trust and credibility with these stakeholders?
Effectively communicating ESG performance is becoming increasingly critical for manufacturers to build trust and credibility with key stakeholders. The demands of regulators, investors, customers, rating agencies, and others play a critical role in an ESG strategy. A few important steps manufacturers should consider:
- Develop a Cross-Functional Team: ESG demands, goals, and obligations are increasingly multi-faceted and meeting them requires diverse representation from across the organization. Sustainability, legal, EHS, IT, operations, financial reporting, and internal audit can all play important roles in identifying, monitoring, and meeting stakeholder demands.
- Conduct a Materiality Assessment / Stakeholder Engagement Process: Your ESG team should formally assess the topics of interest to your stakeholders and develop a roadmap for reporting and disclosures. The materiality process can be enhanced with peer research, frameworks, and data gathering through interviews and surveys to help you make well-informed decisions. Document the process for continuity and improvements in the future.
- ESG Reporting: While sustainability reports are often the focus of ESG reporting, it’s important to note that ESG information can appear on your website, in your financial statements, other regulatory filings, in your advertisements, and even in your product labels. It’s very important to take a comprehensive view of where you will disclose ESG information and make sure that it is accurate, defensible, and consistent across all outlets.
- Use Clear and Accessible Language: ESG reporting can often be technical and complex. To ensure that stakeholders can easily understand the information, manufacturers should use clear and accessible language, avoid jargon, and explain technical terms.
- Highlight Key Performance Indicators (KPIs): Manufacturers should identify and highlight KPIs that align with stakeholder expectations, are accurate, and demonstrate progress on ESG goals. These can include metrics related to energy consumption, waste reduction, greenhouse gas emissions, and social impact.
- Plan for Improvement: There is a lot of emphasis currently on identifying data and preparing for new measurements and disclosures. As measurements become more common and transparent, the focus will likely soon shift to showing improvement in the KPIs. Having a cross-functional team with input from operations and engineering as well as data and reporting will help you identify and capitalize on opportunities for improvement in energy consumption and other key metrics.
Manufacturers can build credibility with their stakeholders through transparent reporting that is clearly explained and well supported by accurate data.
What online resources do you recommend?
ESG impacts all manufacturers, but the timing of that impact and the response required is unique to each company based on its characteristics. It’s beneficial for all to establish a process to stay current on expanding regulations and increasing demands from stakeholders.
There are many resources available to assist you along your ESG journey – industry and trade group publications, government websites, and established frameworks and standards. We’ve listed some helpful ones:
- Crowe: Resources for your ESG strategy
- What’s new with the SASB Standards?
- GRI Standards
- CDP Global Disclosure System
- Task Force on Climate-related Financial Disclosures
- Greenhouse Gas Protocol
- Committee of Sponsoring Organizations of the Treadway Commission
- U.S. Securities and Exchange Commission Enforcement Task Force Examples of Enforcement Actions
Want more on this topic? Chris presented at the ESG in Manufacturing Conference, and you can watch the presentation on demand.
Chris McClure, CPA, CFE
Partner, ESG Services Leader, Crowe
Christopher McClure is a partner in the advisory services group at Crowe and is the leader of the firm’s environmental, social, and governance (ESG) services team. He has more than 25 years of experience in regulatory and compliance matters, including:
- Developing strategies for compliance and management
- Conducting fraud investigations and control assessments for SEC registrants and private enterprises across a wide variety of industries, domestically and globally
- Implementing and managing regulatory programs for conflict minerals, anti-human trafficking, and other responsible sourcing measures