The future of ESG reporting in the US

Thomas Jefferson once said:

Honesty is the first chapter in the book of wisdom.

Transparency is therefore the necessary starting point in the management of any aspect. Such seems to be the thinking of the US government, which is following the global trend in sustainability by preparing to create legislation for ESG reporting.

In this article we will review the most relevant aspects of the bill based on the fourth draft version (and last one currently available), referred in senate on June 17th 2021. It should be noted that the law is currently under review by the House and Senate, so it could undergo important modifications. Let's take a look.

WHAT DOES IT AIM TO BE?

It is a bill whose focus is to facilitate investor access to ESG information, improving transparency and making it easier for the company to meet its obligation to put investor interests first.

WHO DOES IT APPLY TO?

For the time being, any listed company required to file audited financial statements would be affected by this new legislation.

CONCERNING THE CONTENT

Not defined. The proposed law includes the creation of a "Sustainable Finance Advisory Committee", which will be the body that will prepare recommendations on the ESG metrics to be requested. However, it does establish some aspects that will have to be developed in the form of metrics. We shall now take a look at the most relevant ones:

1. Transparency on political campaign financing.

In the US, it is legal for corporations to finance political campaigns through PACs (Political Action Committees). The FEC closely scrutinises who gets what and where this money comes from.

However, while corporate funds are used to finance political campaigns for the benefit of the company, this is not necessarily aligned with the interests of the investor, who often cannot even easily keep himself adequately informed. The law aims to establish quarterly reporting mechanisms to inform investors about expenditures for political activities of the organisation.

2. Climate change.

The company should include in its annual reports an assessment of the potential financial impact associated with the physical and transitional risks of climate change, as well as any climate change risk management strategy the company has developed. The governance structure defined by the organisation to manage these climate-related risks should also be explained.

In drafting this section, the legislator seems to have been inspired, among other elements, by the recommendations of the TCFD and those aspects of climate change management that the CDP (former Carbon Disclosure Project) considers most relevant.

3. Tax Havens and Offshoring Act.

The United States has been known for its low level of tax transparency, to the point of being classified by some as a tax haven. However, in the last year, great progress has been made in this regard, with the drafting of the Corporate Transparency Act.

The draft ESG law follows this trend of tax transparency that has been observed in other countries, taking influences specifically from the European sustainability reporting law. In this sense, it is proposed to report annually metrics such as: Revenues generated from transactions with other constituent entities, Profit or loss before income tax, total income tax paid on a cash basis to all tax jurisdictions and total accumulated earnings.

4. Workforce.

The bill establishes a series of indicators related to the composition and management of the workforce, in order to facilitate transparency regarding structure, job stability, salary conditions, health and safety management and the presence of other incentives (such as resources dedicated to training). These metrics are very common in sustainability reporting since the early stages of voluntary standards such as the GRI. For the rest, you can consult the details in the proposed law itself, title IV, here .

WHEN WILL IT APPLY?

Considering that it is in the approval phase, and taking into account the periods it sets for internal organisation and the development of an implementation standard, it is highly unlikely that companies will have to implement this legislation within the next three years.

MY PROFESSIONAL OPINION

The content of the bill

The legislator is following the path set by the European Union in its Corporate Reporting Directive, being especially similar in the requirements related to tax transparency and workforce management. Those who want to anticipate the legal requirements that may be established in the United States would do well to review this directive (you can read more about it here ).?

The context, however, is too different to apply the same level of stringency or to adopt similar requirements for climate change management or transparency in funding to politicians, where the legislator might take a different approach. It is particularly interesting to see how reporting will develop in the latter case, considering the particularities of the US campaign finance system and the detail that the legislator has put into this aspect, where it proposes to report quarterly.

The risk for companies

Even if the proposed law does not succeed, what is relevant is the global trend towards making voluntary transparency on sustainability issues a legal requirement that is increasingly broadening its scope in terms of companies obliged to report and information that must be submitted. ESG management is now considered an integral part of business and will be positioned at the same level as financial reporting.

The US Securities and Exchange Commission (SEC) recently announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The Climate and ESG Task Force will develop initiatives to proactively identify ESG-related misconduct. In this process, the SEC could be ahead of the legislative process and bring these requirements to listed companies in a shorter period of time.

Those companies that have not traditionally reported this type of information may be surprised by the difficulty of managing these aspects and detailing their performance publicly, and should start preparing for this (you can read about how to do so here ). ESG transparency and the obligation to audit this information will reach listed and unlisted companies in the medium term.

And that's all for this time. Here are some useful links:

• You can follow the development of the bill by clicking here .
• To understand the SEC's position on this issue, you can read this article written by SEC Commissioner Allison Herren on ESG materiality for investors and the need for disclosure.
• If you have any questions about how to integrate and manage sustainability in your business, you can book a free consultation session with me by clicking?here .
• And if you would like to receive my upcoming publications directly in your email, you can sign up for my newsletter by clicking?here .