With the Build Back Better bill all but dead, the Biden administration must find new ways to finance the climate change and other goals it’s set for itself. One pathway with broad appeal is to leverage the private sector, whose financial resources comprise a sizable portion of the more than $2.5 trillion in additional capital investment needed this decade to achieve net-zero emissions by 2050.

Private capital is ready and waiting. Before it’s coaxed into action, however, the majority of investors want the federal government to take steps to de-risk the practice of sustainable finance. Among other actions, investors want the government to improve the availability, quality and usefulness of companies’ environmental, social and governance (ESG) performance data — particularly regarding climate risks — so they can compare sustainable investment opportunities with confidence.

The Securities and Exchange Commission (SEC) is moving to address these concerns with a proposal for companies to include ESG performance in their reporting. Should the proposal take effect, companies will need to act quickly.

To avoid the ire of the SEC and attract ESG investment, business leaders will need to close the gaps in their organizations’ skills and technological capabilities to establish ESG performance measurement, management and reporting systems. And these systems will need to produce evidence of their companies’ performance against climate and environmental issues especially. CFOs can also expect the SEC to require companies to incorporate their ESG performance data with regular financial filings and report them in a standardized format that, beyond improving comparability of disclosures, will help investors satisfy their own climate risk and sustainability reporting obligations.

Further, while the SEC is focused on climate-related disclosures, companies must nevertheless be prepared to disclose investment-grade ESG data describing their performance against “S” issues, as well as the ESG risks and impacts of their supply chains.

Existing frameworks

Charting a course of adaptation to the SEC’s rules will require business leaders to take stock of what the SEC already has in place for ESG. Moreover, they will need to keep tabs on the corporate sustainability rules being advanced by state and local governments, particularly those of California and New York, which may influence the SEC’s rulemaking.

On corporate disclosures of climate-related and other ESG risks and impacts, the SEC’s objective is simple enough. Broadly, the commission has signaled it wants to mandate more prescriptive ESG disclosures, replete with more granular data, rather than simply encouraging these disclosures through guidance. In other words, the SEC aims to minimize the level of discretion corporate management exercises in determining which ESG issues are material to their investors.

Similar to the framework developed by the Task Force on Climate-related Financial Disclosures (TCFD), which the SEC is reportedly using to inform its rulemaking, the SEC will likely specify line-item ESG issues for companies to disclose — regardless of their perceived materiality to reporting entities — that are focused on climate-related matters. Further, the SEC, along with other federal agencies, is working on rules to bring transparency and credibility to investors’ climate risks and impacts, intensifying the urgency for companies seeking investment to disclose high-quality ESG performance data.

Fulfilling these obligations to both the SEC and investors will require business leaders to first conduct a holistic materiality assessment. In practice, this means using the input of investors and other stakeholders to determine not only which ESG issues are material to their organizations, but how to measure and report the effects of their management of those issues. With a comprehensive accounting system in place, companies can at least adhere to the SEC’s existing disclosure guidance and better ensure that their ESG performance data is appropriately reflected in their financial disclosures.

Admittedly, even if the introduction of SEC rules is delayed by internal debate over their coverage and legality, this approach may ultimately be a stopgap solution. Looking ahead, business leaders should not rule out the obligation to report their risks and responses to climate and environmental challenges across their full value chain, nor should they rule out an obligation to do the same for social and governance issues. And they should adapt their ESG programs accordingly by, if nothing else, looking to voluntary disclosure frameworks for guidance. Some 67% of investors make “significant use” of TCFD-aligned ESG disclosures, and the “global baseline” of corporate sustainability disclosure standards under development by the International Sustainability Standards Board (ISSB) at least has the potential to shape the SEC’s rules.

Indeed, the SEC’s stated consideration of these matters notwithstanding, CFOs mustn’t overlook the potential for recent developments in California and New York to influence the scope of the SEC’s forthcoming rules.

While policymakers in California, home to a large and growing number of ESG investor darlings, have already implemented or introduced rules regarding workforce diversity and corporate climate risk disclosures, it’s the Climate Corporate Accountability Act that warrants the most attention.

Recently passed by the California State Senate, the bill would require any company with more than $1 billion in annual revenue that does business in the state to disclose verifiable data describing not only their owned or controlled emissions, but the emissions attributable to both their supply chains and consumption of their products. Moreover, the bill requires that the California Air Resources Board (CARB) develop regulations to standardize the emissions disclosure process and, ambitiously, make formal recommendations for companies to align their emissions abatement performance with state climate goals.

In New York, policymakers are taking a more incremental, industry-specific approach to mandating corporate emissions and sustainability disclosures. Most notable of these efforts is the Fashion Sustainability and Social Accountability Act. Under consideration in the New York State Senate, the Act would require any footwear or apparel company with more than $100 million in annual revenue doing business in the state to measure the environmental and social impacts across a minimum 50% of their supply chains, disclose their plans to manage them and, eventually, report the outcomes of those management efforts.

While it remains to be seen whether these bills become law, their relevance to Washington’s ESG governance, and the companies that seek to comply with its forthcoming disclosure rules, cannot be overstated. The Biden administration is under pressure to ratchet up spending towards climate action. And bringing rigor to companies’ ESG performance data is widely seen as a catalyst for mobilizing this capital with broad political appeal.

Considering these circumstances, business leaders must not only keep tabs on the administration’s efforts through the SEC and other capital markets regulators, but its own embrace of sustainable investment standards. Further, companies cannot afford to ignore related developments in California and New York, both of which have a history of setting an example for federal climate policy.

Ultimately, compliance will be determined as much by awareness and responsiveness as it will adaptability. To that end, companies need to implement ESG programs that can be modified to not only satisfy the regular and ad hoc disclosure requests of their stakeholders, but capable of accommodating regulatory requirements as they come.