ANALYSIS: Companies Rely on ESG Frameworks Amid Uncertainty

As ESG becomes a political hot button and regulatory change is afoot, what’s next for ESG is anyone’s guess, making this a time unlike any other for companies seeking to disclose their environmental, social, and governance practices.

With so much uncertainty looming, are companies looking to voluntary disclosure frameworks for guidance, or are companies shying away from disclosing ESG information until they’re on sturdier regulatory ground? And are companies changing how and where they disclose ESG information as a result of the unpredictable legal landscape?

Companies Increase Reliance on Frameworks

To answer the first question, I conducted a keyword search of Bloomberg Law’s EDGAR tool for Form 10-Ks mentioning each of the following frameworks, as each is likely to have a substantial impact on domestic ESG disclosures:

• Task Force on Climate-Related Disclosures (TCFD)
• Sustainability Accounting Standards Board (SASB)
• Global Reporting Initiative (GRI)
• Science Based Targets Initiative (SBTi)
• Carbon Disclosure Project (CDP)
• United Nations Sustainable Development Goals (UN SDG)

The results of my research suggest that companies are relying on voluntary frameworks in their annual filings more than ever.

In 2022, companies mentioned all six frameworks in more 10-Ks than five years ago. And just four months into 2023, five of the six frameworks have already been mentioned in more 10-K filings than last year.

The one framework that hasn’t yet surpassed last year’s mentions, SASB, was mentioned in 157 Form 10-Ks in 2022, and 154 year-to-date, meaning that 2023’s counts will surpass 2022’s very soon.

Beginning in 2020, companies began to ramp up their references to voluntary ESG frameworks, and the number of 10-K filings mentioning the frameworks saw a marked jump from 2020 to 2021. This rapid growth could coincide with the change in administration.

Based on 2023’s preliminary numbers, the domestic uncertainty in the ESG space hasn’t deterred companies from looking to these voluntary frameworks when preparing disclosures.

If companies are still looking to voluntary frameworks for their ESG disclosures, are they changing the way that they leverage ESG frameworks?

Frameworks Play Role in Risk, Financial Assessments

To answer the second question, I conducted a keyword search of Form 10-Ks for all six frameworks, and looked to see whether companies are changing the way that they mention the frameworks in their 10-Ks.

The top three sections where these frameworks are mentioned are Item 1: Business, Item 1A: Risk Factors, and Item 7: Management Discussion and Analysis of Financial Condition and Results of Operations. For each of these items, the number of 10-Ks that have included at least one reference to the voluntary frameworks has grown over the last five years.

While references to the voluntary frameworks in the business section of companies’ Form 10-K filings saw the most growth during this time frame, companies are also beginning to more consistently disclose the voluntary frameworks as part of their risk and financial condition disclosures. This is an indication that as the ESG conversation evolves and becomes more complex, the issues addressed by the voluntary frameworks can have broad impacts on a company’s business, including its financial health.

It remains to be seen whether SEC action on climate-related disclosures (if the agency’s proposed rule is finalized) will cause some of these voluntary frameworks to be mentioned less in the coming years. The Task Force on Climate-Related Disclosures, which the proposed rule is partially modeled after, will be a key framework to watch going forward.

Bloomberg Law subscribers can find related content on our ESG Practice page, as well as our Practical Guidance: Stakeholders, Frameworks & Regulation page.

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