The heightened focus on ESG legislation in the U.S. and around the world continues to press companies to integrate ESG considerations into their financial and strategic planning. As tax and accounting professionals, staying abreast of these changes is crucial to provide sound advice to businesses and ensure compliance.
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| The latest news on foundational and new ESG laws |
| What does ESG legislation mean for tax considerations? |
| How firms can get started with ESG strategies and planning |
| What is an ESG narrative and why is it important? |
| The future of ESG legislation |
Let’s take a look at the latest ESG legislation and some best practices for tax and accounting professionals to advise businesses in an ever-changing regulatory landscape.
The latest news on foundational and new ESG laws
While navigating the evolving ESG landscape, it’s crucial to be aware of the key laws and regulations shaping ESG reporting and compliance. Here’s a high-level summary of important ESG-related legislation to keep in mind:
The SEC’s new climate disclosure rules
In 2024, the SEC implemented new climate disclosure rules that require companies to disclose information about climate-related risks likely to have a material impact on their business or consolidated financial statements. These rules represent a significant shift in the scope and detail of disclosures that U.S. companies have historically provided regarding the effects of climate change — and will likely result in substantial changes to reporting processes and controls.
Senate Bills 253 and 261
In addition, California’s Senate Bill 253, the Climate Corporate Data Accountability Act, and Senate Bill 261, the Climate-related Financial Risk Act, increase transparency and accountability around how businesses report their emissions and manage climate-related financial risks in the state, reflecting the growing demand for greater transparency on ESG issues.
The CSRD
Outside of the U.S., the Corporate Sustainability Reporting Directive (CSRD) is a European Union (EU) legislative initiative aimed at enhancing and standardizing the sustainability reporting of companies operating within the EU. As such, companies will need to invest in developing robust systems and processes to collect, manage, and report ESG data.
SSB’s IFRS S1 and S2
These international standards aim to create a global baseline for disclosing ESG and sustainability-related risks and opportunities. They require companies to provide sustainability-related information alongside financial statements, focusing on governance, strategy, risk management, and metrics and targets.
EU Taxonomy for Sustainable Activities
This classification tool helps determine whether a company’s activities are environmentally sustainable. It sets minimum standards for sustainability disclosure requirements and is used with CSRD, impacting roughly 50,000 companies within the EU and international companies operating in the EU.
As companies evaluate how these climate disclosure rules and other regulations affect their overall ESG strategy and reporting processes, it’s important to understand the role of tax in meeting these objectives.
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What does ESG legislation mean for tax considerations?
Given the call for greater reporting and transparency, tax considerations must become part of a company’s sustainability objectives going forward, if it isn’t already, to ensure compliance with evolving ESG legislation.
According to the 2024 BDO Tax Strategist Survey, tax transparency is an essential component of ESG strategy, yet the extent of its adoption may not be as widespread as some data suggests. While 96% of tax leaders said their team develops tax transparency reporting as part of organizational ESG efforts, this assertion may not fully align with observed practices, particularly in the U.S., where comprehensive tax transparency reporting is limited to a handful of organizations.
So, while many tax leaders recognize that they have a role in defining and executing sustainability strategies, most are uncertain of how to put plans into action. That’s why tax and accounting professionals must be prepared to offer advisory services that support companies with ESG disclosure requirements. This includes integrating ESG into financial reporting, capitalizing on ESG tax incentives, and aligning operations with ESG principles. But where do you start?
How firms can get started with ESG strategies and planning
As companies evaluate how ESG disclosure rules and evolving regulations will affect tax reporting, there are several key steps tax and accounting professionals can take to get ahead:
- Stay informed on ESG regulatory changes. ESG regulations are rapidly evolving. Tax and accounting professionals should regularly update their knowledge of global and local ESG legislation by harnessing AI-powered tax research, staying connected with industry groups, attending relevant webinars, and subscribing to updates from regulatory bodies.
- Develop ESG reporting expertise. Given the complexity of ESG reporting, developing expertise in this area is essential. This includes understanding the various frameworks, such as GRI, TCFD, and SASB (Sustainability Accounting Standards Board), and how they intersect with financial reporting requirements.
- Collaborate with cross-functional teams. ESG compliance often involves multiple departments within a company, including finance, legal, and sustainability teams. Tax and accounting professionals should work closely with these teams to ensure that ESG considerations are integrated into the company’s overall strategy and reporting processes.
- Leverage technology for ESG reporting. Utilize advanced ESG solutions designed for data collection, analysis, and reporting. This not only enhances accuracy and efficiency but also allows for better tracking of ESG metrics over time, facilitating more informed decision-making.
- Advise on ESG-related tax incentives and risks. Help businesses identify and take advantage of ESG tax incentives related to sustainable practices, such as credits for renewable energy investments or deductions for energy-efficient buildings. Additionally, advise on potential risks, such as carbon taxes or penalties for non-compliance with environmental regulations.
ESG is still an emerging concept that many accounting firm clients are getting their arms around. Some of the most successful firms are finding it beneficial to develop an ESG narrative to help clients understand what it is and how they can manage it.
What is an ESG narrative and why is it important?
Communication about a company’s ESG-related activities is most effective when it tells a story. How are these activities creating value for society? For the economy?
Forming a narrative can be powerful and, in order to meet increased demand for ESG-related strategies, companies would be wise to incorporate ESG into their value creation narrative.
Consulting firm Prophet believes there are five storytelling essentials that companies must consider when developing their ESG narrative:
- Use individual storytelling touchpoints as opportunities to go deeper on one or two intersecting topics at a time.
- Know what your audience wants and expects. For instance, investors’ priorities may revolve around facts and figures; employees and customers may better connect with stories.
- Be candid about the work that has yet to be done and the problems yet to be solved.
- Use language that will excite, inspire, and rally people around those efforts.
- As new events and social causes arise, companies must look for opportunities to authentically tie them back to their story.
The future of ESG legislation
With increased regulatory considerations and heightened investor interest, ESG is here to stay. As companies navigate the complexities and look to ensure compliance, the role of tax professionals will be critical.
For more information on ESG accounting and reporting, read our blog that covers ESG accounting and what it means for auditors.
To stay up to date on ESG and other topics, check out AuditWatch.
