As the material impacts of environmental, social and governance issues have come into sharper focus, regulators and policymakers in markets around the world have enacted or proposed disclosure requirements that focus on a range of key issues such as climate change, greenhouse gas emissions, the workforce, and a company’s impact on the communities where it operates.
Companies that set out to tackle this reporting challenge can be overwhelmed by a veritable alphabet soup of regulations and reporting frameworks (CSRD, SEC, ISSB, CA) that vary by country and region and impact some sectors more than others. It’s imperative that companies are able to gain clarity from the regulatory clutter.
PwC is here to help you understand how these global ESG regulations will impact your business and begin the process for compliance now. Regardless of the regulation, companies can use these three steps to begin the process of meeting this challenge head on:
All companies are at different points in their sustainability journey, and enacted or proposed ESG disclosure rules such as the CSRD requirements should ignite a new sense of urgency across the enterprise. Companies will need to quickly transition to investor-grade reporting by developing an effective controls environment and accelerating their ability to collect, manage and measure ESG data.
Here are three things to consider:
Financial services firms need to transition to investor-grade ESG reporting and upgrade current processes and controls that fall short.
Particularly thorny is the question of how to measure financed emissions. If Scope 3 emissions are deemed “material” by the firm, or if the company has already set an emissions reduction target that includes Scope 3 emissions, financed emissions will likely need to be included in regulatory filings. Other Scope 3 challenges are that institutions are taking different approaches to measure financed emissions and existing standards don’t cover all asset classes.
Financial firms should expect to have little comparable reporting data from their counter-parties about climate risks and emissions. Some private market clients will not be subject to some global reporting requirements presenting an additional data collection challenge. This is an evolving area and standardization will take time.
Medium-size banks that may have sidestepped climate reporting now find themselves in the same regulatory bucket as GSIBs. They face a daunting challenge of quickly ramping up the collection, verification and reporting of climate data—plus any methodology used in their simulations—within a limited window of time.
Consumer markets companies function within a value chain ecosystem that may include thousands of suppliers. That supply chain adds complexity to reporting on Scope 3 emissions, and companies subject to the new rules will need to use a combination of estimation approaches and actual data collection. This could be especially challenging because many private sector companies in the supply chain won’t be subject to the disclosure rules and may not be as prepared to respond to customer requests.
PwC research finds that a compelling sustainability story can be a competitive advantage. Consumers have told us they make purchasing decisions based on a company’s sustainability metrics.
The industry continually invests in its infrastructure to improve asset resilience and operational reliability. It’s unclear how companies should delineate between routine costs associated with reliably supplying energy to customers or recovering from typical weather events versus the climate-related disclosures required under many global disclosure rules.
Global proposed or enacted regulations typically require companies to disclose emissions from upstream and downstream activities indirectly connected to their assets (Scope 3), if material, or if its greenhouse gas targets or goals include Scope 3 emissions. Scope 3 will likely be material for energy and utilities regardless of decarbonization commitments in industry-specific, high-emitting categories such as “fuel and energy-related activities” and “use of sold products.” Other Scope 3 categories could also be material for these companies.
The need for accurate and reliable data may provide unique challenges for companies with assets like pipelines, transmission lines, drilling rigs or offshore wind turbines. The expanded global disclosure rules beyond the industry’s already extensive reporting requirements, as well as an accelerated timeline for sustainability reporting, will likely require increased investments and enhancements of existing processes and systems
Recent studies indicate that the US healthcare system is responsible for about a quarter of all global healthcare greenhouse gas emissions. Enacted and proposed global disclosure requirements will increase pressure on both public and private healthcare organizations to address the effects of climate change. Executives will need to consider where they’re focusing. For example, has their organization adjusted its clinical service line, growth and population health strategies to incorporate the specific climate health effects on the communities it serves? Once an organization has reprioritized its healthcare services accordingly, how does that impact capital plans, clinician recruitment plans and the research portfolio?
Patients, communities, regulators and other stakeholders expect healthcare organizations to not only help individuals recover from the health effects of climate change, but to help solve this urgent problem and not add to it. While addressing regulatory requirements is important, the ability to differentiate as a healthcare organization through decarbonization strategies to transform health facilities, supporting operations and the healthcare supply chain can engender trust among all stakeholders and create a sustainable competitive advantage.
Industrial products companies will need to consider physical risks posed by climate change to their infrastructure, especially those at risk for flooding, wildfires and hurricanes, and ensure these are managed with the same rigor as other enterprise risks. The quantitative impacts of climate-related risks will soon need to be disclosed in the financials, making scenario-based risk analysis an invaluable tool.
Industrial products companies should begin (or accelerate) efforts to track GHG emissions not only for their operations (Scope 1 and 2) but also for the upstream raw materials and intermediary finished goods they source, and the downstream impact from their products (Scope 3).
Reporting Scope 3 emissions may prove to be the most challenging task for manufacturers that source from vast networks of suppliers, as many private sector suppliers won’t be subject to the disclosure rules and may not be as prepared to respond to customer requests.
For some industrial sectors, such as engineering and construction, net-zero-as-service may open new revenue streams as customer demand for GHG emissions reduction heats up.
Insurers, as with all sectors, may need to enhance climate reporting to investor-grade climate reporting, which likely means upgrades to current processes and controls.
Of specific relevance to insurers is how to measure financed greenhouse gas emissions. Further challenges include differing approaches to measuring financed emissions and the fact that existing standards don’t cover all asset classes.
Global reporting requirements likely mean that any insurer that has set a net-zero target which includes its underwriting portfolio will need to report insurance-associated Scope 3 emissions. The Partnership for Carbon Accounting Financials has developed a standard methodology and carriers should keep abreast of developments.
Given the prevalence of climate action commitments in the pharmaceutical and life sciences sector, many companies will be subject to global reporting requirements of plans and progress for meeting those commitments, including for Scope 3 emissions.
Reporting Scope 3 emissions may prove to be the most challenging task for pharma companies that source from a complex, international network of suppliers. That will likely mean rethinking suppliers based on the size of their carbon footprints.
Providers also need to consider the physical risks posed by climate change to their infrastructure as well as their operations (for example, pharmaceutical production is a water-intensive process, greatly contributing to a company’s carbon footprint). The quantitative impacts of climate-related risks will soon need to be disclosed in financials, making scenario-based risk analysis an invaluable tool.
The first step for portcos and funds is to determine the applicability of guidance (filing requirements, exit plans and strategies in the public market, etc.), and focus on those where applicable.
Many portcos that are (or may be) subject to the global disclosure requirements are likely in the process of collecting data that would satisfy Scope 1 and 2 requirements. Fewer, though, are working on assessing their Scope 3 emissions requirements. They may find their banks and larger investors (who would be subject to the global requirements) requesting this data from them.
For many funds, Scope 3 is a relatively new concept as few have tried to calculate downstream emissions. Leaders in this space are coordinating their efforts across their portfolio companies by baselining Scope 1 and 2. We would expect the change in the disclosure rules to accelerate this process.
We encourage both funds and portcos to determine which data the company can consistently receive and from there conduct a diagnostic to target priority issues.
Given the prevalence of climate action commitments in the technology, media and telecommunications sector, many companies will be subject to global reporting requirements requiring disclosure of supporting plans and progress for meeting those commitments, including for Scope 3 emissions.
Telecommunications providers will need to consider physical risks posed by climate change to their infrastructure, especially those at risk for flooding, wildfires and hurricanes, and ensure these are managed with the same rigor as other enterprise risks. The quantitative impacts of climate-related risks will soon need to be disclosed, making scenario-based risk analysis an invaluable tool.
Many technology companies are leading the way in the transition to a low carbon future. From smart buildings to smart grids, the path to decarbonization is digital. However, the growing demand for cloud computing and cloud services also places a burden on tech companies to manage their data centers’ energy efficiency and power their operations with renewable energy.
Technology providers have a critical role to play in the climate transition, from carbon accounting solutions to enabling smarter supply chains, factories, cities and energy grids. The global requirements represent an opportunity for providers to double-down on developing these technologies to support ESG reporting requirements.
What will you report? How does it relate to your company narrative? How will you resource it?
What’s the current guidance? How will you disclose?
How will you collect the data? How will you optimize processes?
How will you handle risk assessments, controls and data quality? What information governance will you put in place?
How will you tech-enable reporting to streamline and get insights faster? How will you use a digital platform?
How will you confirm your reporting can stand up to regulatory scrutiny?
