With the United States, the U.K. and European Union set to enforce stricter rules on reporting environmental, social and governance (ESG) data that will go into effect next year, boards of directors of multinationals will be challenged to sort through many different disclosure rules in different jurisdictions to make sure they are compliant, consistent, and truthful. Skadden, Arps, Slate, Meagher & Flom warns that some of the new ESG disclosure rules may conflict with each other, which could open companies up to additional scrutiny from regulators or lawsuits from shareholders and others.
Since the ESG category is quite broad, corporate board members should consider placing the topic of ESG disclosure risk on their board agenda for 2024. Companies should review how they are currently reporting on climate change, cybersecurity incidents, board diversity and risk management processes, then see if they comply with new SEC disclosure rules that were proposed in 2022 and 2023. Corporate boards will then need to determine if their ESG disclosures are also aligned with U.K. and European Union disclosure requirements. Less than meticulous checking and cross-checking of these disclosure rules could lead to the company being accused of making misleading statements about ESG compliance that could be costly.
Unfortunately, a recent KPMG study suggests that most companies may not be ready to have their ESG disclosure data audited by an external source. Of 750 global companies KPMG surveyed, only 25 percent felt that they were prepared to have ESG data audited externally. European Union rules require disclosures be audited and International Sustainability Standards Board rules can also request external auditing.
Reuters reports that Mike Shannon, Global Head of ESG Assurance at KPMG, says “There will be regulatory and assurance requirements to report accurate information, which raises the bar on the controls and processes as well as qualitative statements that will need to be made around the data.”
Can your corporate board make sure that any ESG data reported is accurate and consistent, and in compliance with each jurisdiction that requires a report on that data? Is there a current process in place to make sure that all ESG reporting is compliant, consistent, and truthful?
Corporate board members may want to create a separate committee to determine what the board’s approach to ESG disclosures should be going forward. Boards may also consider enlisting consulting firms to help them mitigate any potential challenges related to filing ESG disclosures in multiple jurisdictions. Skadden Arps warns that the European Union’s Corporate Sustainability Reporting Directive (CSRD) has disclosure requirements that go beyond SEC mandates, and that could:
• Make company disclosures subject to anti-fraud provisions of U.S. securities laws which could open companies up to lawsuits.
• Create disagreements over whether data submitted in the U.S. meets requirements in the U.K. or E.U.
• Cause disputes over which type of data is considered material in each of the different jurisdictions a company reports in.
Corporate boards will need to prepare strategies and responses to these potential situations and more in order to avoid lawsuits, regulatory scrutiny and fines.