Since the financial crisis of 2008, investors have grown more interested in how companies manage their environmental, social, and governance risks. To meet this increased demand, the U.S. Securities and Exchange Commission (SEC) has created a new set of disclosure standards for public companies called the exchange-standards commended principles (ESC).
In this blog post, we’ll explore how these standards will impact smaller businesses and what you can do to prepare for them as an emerging growth company.
ESG integration is a management practice that integrates environmental, social, and governance (ESG) considerations into the investment process.
Companies can integrate ESG considerations into their investment processes by considering ESG factors in the investment decision-making process.
This includes investing in companies with strong ESG profiles and avoiding those whose activities may harm society, such as tobacco companies or certain weapons manufacturers.
Investment managers generally consider these issues when they evaluate companies’ financial performance and outlook over time.
ESG integration is important because it helps companies to manage risks and opportunities associated with ESG issues. It helps them identify and manage ESG risks, including reputational risks. And it also allows companies to capture possible opportunities that they would otherwise miss, such as increased sales or higher shareholder value.
ESG integration also contributes to better decision-making. When you integrate everything into your strategy, you don’t have to make trade-offs between different parts of your business anymore—so you can focus on performing well across the board instead of just one thing at a time!
The SEC’s ESG integration category is proposing to require companies to disclose the following information:
- ESG integration policies and procedures, including how they identify, manage and mitigate material ESG risks and opportunities
- How they integrate ESG considerations into their strategic planning, investment decisions, and financial reporting (including quantitative disclosures)
In addition, the SEC is proposing that companies disclose whether they follow third-party standards and provide information about those standards. The SEC would also require companies to disclose whether their board of directors or an equivalent oversight body considers ESG issues in its oversight of the company’s risk management processes.
The proposal aims to increase and standardize ESG disclosures, to help create credibility, and give investors a better understanding of ESG-related business prospects.
The SEC’s ESG Integration category is important to the SEC because it’s a way for the Commission to recognize that companies are taking into account the impact of their business decisions on their employees, the environment, and the community. Companies with high ESG scores perform better than those with low scores.
Companies can earn points in this category by submitting annual sustainability reports (or other materials). The Commission will review these reports and assign points based on how well they meet certain criteria. The proposed changes are not yet in effect, but they are expected to eventually be adopted and implemented across all U.S.-listed companies and globally. We will continue to monitor this development as it progresses so that our clients can best understand how these new requirements may impact their portfolio holdings.