The New Corporate Finance Frontier

Is ESG the new EBITDA? It’s starting to feel that way in corporate finance and tax departments, as growing global interest and increased uncertainty surrounding sustainability measures begin to demand more attention.

Whether it’s the Corporate Sustainability Due Diligence Directive, the EU Deforestation Regulation, the global sustainability reporting standards introduced by the International Financial Reporting Standards’ International Sustainability Standards Board, or any number of state and local regulations, multinational businesses are staring down a litany of new reporting requirements addressing all aspects of environmental, climate, and human rights-related issues.

The common bond in all of them: a direct link from sustainability-related activities to balance sheet risk. That means ESG is no longer just the domain of just the Chief Sustainability Officer or compliance department – it is a multidisciplinary issue that will affect bottom line financial results. However, because of the volatile political climate surrounding all things ESG, uncertainty around how the U.S. election results will affect future and pending legislation, and continued delays and moving deadlines for new rule implementation, the specific requirements companies will face are still a little foggy.

Understanding the ISSB

To get a handle on just what corporates are grappling with, a brief history lesson is needed. The clearest place to start is with the ISSB, which has emerged as a sort of bellwether for the future of corporate sustainability reporting. Launched in November 2021 at the COP26 climate conference, the ISSB issued its first two reporting standards, IFRS S1 and S2, in June of 2023.

The S1 standard lays out the basic requirements for sustainability disclosures, such as outlining critical sustainability information in their financial statements. The S2 standard has been developed to capture climate-specific requirements, such as climate-related plans, metrics, and targets.

More than 30 major jurisdictions around the world have now agreed to adopt the ISSB standards by integrating them into their own rulemaking and, beginning in January 2025, companies operating in those countries will need to comply.

More Moving Parts

One notable ISSB outlier, however, has been the U.S. which has yet to formally adopt the standards. That’s because the U.S. Securities and Exchange Commission (SEC) developed its own climate disclosure standard, which is very much in line with the ISSB. The final SEC rules require U.S. domestic companies and foreign private issuers to disclose climate-related information in alignment with internationally accepted disclosure frameworks, including the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol.

However, in March, shortly after the rules were finalized, the U.S. Court of Appeals for the Fifth Circuit granted a motion subjecting the SEC climate rules to an administrative stay pending further review. The standard also has pending litigation against it in the Sixth, Eighth, and 11^th Circuit Courts. Whether these rules get out of purgatory is unknown, particularly as Paul Atkins, President elect Donald Trump’s new appointee to lead the SEC, takes the reins from Gary Gensler. It was Gensler who was driving an ambitious regulatory agenda, one the President elect would likely prefer to be scaled back.

If that wasn’t enough ambiguity in the regulatory landscape, the EU is also grappling with its own delays to the CSRD and the Deforestation Regulation. In the case of the CSRD, technicalities regarding the speed and completeness of Member States’ transposition of the directive have caused a two-month administrative delay. In the case of the Deforestation Regulation, delays could be upwards of a year to allow Member States more time to establish the due diligence systems required to enforce the mandate.

For corporate leaders, the on-again/off-again nature of these regulations presents quite a conundrum. Vigilant tax and finance departments would have great interest in those transposition plans so that they could begin to prepare to comply. Now, just weeks away from the implementation, many companies know they’re going to have to comply with something, they just don’t know when and exactly what compliance will look like.

And those are just two examples among many more that are keeping corporate tax and finance professionals up at night.

Keeping Track of it All

It’s just gotten really complicated out there. The phenomenon has forced a serious rethink of conventional, siloed approach to business operations where the tax team focused on quarterly tax compliance, the legal team focused on M&A and legal compliance and the risk and compliance team oversaw a handful of regulatory requirements. Today everyone’s chasing everything everywhere all at once, and the stakes just keep getting higher.

The key for companies managing through this period of historic change is getting a handle on the information they will need today to meet the various regulatory reporting and compliance obligations that are coming at some point in the future. Accessing all of the information they will need – from emissions data to supply chain relationships to climate risks – is a big job, and the sooner this data can be harnessed, organized, and accessed, the higher the likelihood companies will be able to navigate these uncharted waters successfully.