With a myriad of climate disclosure rules on the horizon, companies are grappling with how to structure their compliance strategies and report on their carbon footprint. Though the Securities and Exchange Commission halted implementation of its climate regulation in the face of legal challenges last month, companies that fall under California’s climate disclosure laws and the European Union’s Corporate Sustainability Reporting Directive may still need to strengthen their capacity to report on climate-related risks.
Tim Mohin, a partner and director at Boston Consulting Group who oversees climate, sustainability and social impact, spoke with ESG Dive on how companies can prepare to meet the coming wave of climate-related reporting obligations. Mohin has been at BCG since early 2023, previously serving as CEO of the Global Reporting Initiative and a senior sustainability leader at Intel, Apple and AMD.
Editor’s note: This interview has been edited for brevity and clarity.
ESG DIVE: With the SEC staying its climate disclosure rule, where does that leave companies, especially as they prepare to comply with climate disclosure mandates from other jurisdictions?
Tim Mohin is a partner and director at Boston Consulting Group who oversees climate, sustainability and social impact.
Courtesy of BCG
TIM MOHIN: Companies have been reporting on sustainability issues for a very long time. What’s new is the fact that some of that information is getting pulled into regulatory mandates and integrated into financial statements.
Generally speaking, there are a lot of companies [that are] confused. I’ve seen a lot of them introduce a position of ESG controller just to manage all of the quality of the information. Some companies put in management systems to understand which requirements are relevant to them, in which geographies, and when.
Would you say companies are preparing to voluntarily report to the extent they can?
If you hold up a company’s voluntary disclosures against what they believe will be a mandatory integrated disclosure in the relatively near future, you see gaps, which can come in many different forms: either in what is actually disclosed, when it is disclosed, and the assurance around disclosure.
They’re going through internal transformation. A lot of the previous reporting was done by the sustainability group, and that creates a certain culture, if you will: It’s about telling the world about the good things we do and how we’re progressing against our goals.
Now, the CFO is typically responsible for financial disclosure, and there’s a whole set of other issues and processes they go through — the controls, the assurance, the schedule is different. So that integration and that transformation is what our clients are going through right now.
Now that sustainability reporting is more likely to include input from other teams, what role does the CFO have in regulatory reporting processes and why do they need to be engaged?
The CFO’s office is the one that is most responsible for a company’s financial statements. In the future, a company’s 10-K and 10-Q will include climate information at a minimum, but in some jurisdictions, much more than that. Given that the vehicle we’re talking about is the financial statement, the CFO owns that process. As it is a compliance document … [there are] substantial penalties for material misstatements. It just raises the whole level of the disclosure from a voluntary report to something that is mandated by the government.
What are the biggest gaps between companies’ voluntary reports and disclosures mandated by laws and regulations?
With a lot of our clients who are more mature on the sustainability topic, the gap is the other way. In their voluntary disclosures, they may have been reporting a lot more than is required by these regulatory disclosures. They’re having to go through a process of “What do we cut out?”
For other clients who are maybe less mature, who have done less voluntary reporting … they are seeing gaps across the board, primarily in the social space. Then there’s others like biodiversity, circular economy, that have typically come up as gaps.
Then there’s this issue of veracity. What may have been reported in a sustainability report now has to be assured in order to go into a financial statement. Therefore, you have to go all the way back to where that data came from. Will it stand up to an assurance process?
Does this mean companies need to hire more ESG experts to beef up their compliance capacity?
We’re definitely seeing that. We call it the ESG transformation. This is a cross-departmental, cross-corporation exercise. You’re pulling information from HR, from operations, from procurement, from many different departments. You really need to have somebody who is responsible for this function within each department, and then they have to work cross-functionally. That’s a big challenge and a big change from what has happened before. Looking at the human part of it, do those people have the right capabilities, are they incentivized correctly?
Are there differences in how various industries are approaching compliance?
The sector-specific guidance for CSRD has not come out yet. There is a massive difference in what would be considered material information for an oil and gas company versus a consulting firm like BCG. There are often benchmarking studies that we do to look at what others within that sector have reported as material and that’s a starting point for any of our clients to determine what they consider as material.
With oil and gas, climate change is going to be top of the list. It’s going to be a lot of scope 1 and scope 2, because they’re actually manufacturing the petroleum products. There is a huge scope 3 in terms of the use of those products as well.
When you go to financial services, it’s going to just be all about scope 3 in that their financing operations, lending or investment or any other asset class, are really where the action is when it comes to climate. Each company and each sector will have something that will rise to the top in terms of the kind of 80-20 rule [where] 20% of your company’s activities are responsible for 80% of the impact.
When you talk about financial services, are you talking about their exposure to carbon intensive sectors and physical climate risks, due to the complexity of their business or what they’re doing? Is it more of an indirect impact?
Yes, exactly. There’s been a lot written in terms of how we align finance to solving the climate crisis. There’s no singularity of opinion on this. There are companies that espouse a low-carbon economy that, of course, have investments in oil and gas companies. And the solution there is … we engage with those companies to decarbonize over time. So the mere fact that companies are or financial institutions are invested in oil and gas companies doesn’t mean they’re against a low-carbon economy. It just means they’re taking a different approach.
Are there particular challenges for smaller companies to comply with the new regulations, given the resource constraints they might have?
It was one of the key arguments that led the SEC to pull back the regulation. Some of the arguments being made are that with scope 3, smaller companies that may not have been directly subject to the regulation will get pulled in to report to their customers. They don’t necessarily have the resources to do so, and that could be viewed as an unnecessary burden.
Technology has come a long way to help these smaller companies understand where their greenhouse gas footprint is and how they can manage it. Hopefully, that issue is starting to be worked out, but it is a very sensitive issue. With scope 3, if it’s included, the company that will have to report [on it] has to go up through its value chain, and there’s no limit to where they will require reporting from their value chain.
What are some top strategies or internal changes that you recommend to clients on how to decarbonize and better report under these regulations?
Many of our clients are really concerned about the compliance cycle, but I often remind them it’s the “so what” that matters. Compliance is a milestone, not an outcome; the outcome is what do you do with this information? How do you drive value out of it?
Do we have the appropriate governance mechanisms, from the board, to the executive team and on down, to understand the risks and opportunities presented by the information? When we advise clients on this…we have lots of different tools to look at where to decarbonize. One of the tools we love to use is the marginal abatement cost curve where you’re looking at a corporation and its value chain from a carbon perspective, and evaluating that from a return on investment lens.
How are you helping clients navigate their confusion around compliance?
The bottom line is no one has a crystal ball about what’s going to happen. The best we can do is to have an actual function that monitors and evaluates the emerging regulatory requirements that the company will be subject to.
There’s no substitute to having people that understand … [a company’s] footprint and importantly, its roadmap and comparing that against not only what is required now, but what will be required in the future. That is an ongoing function, and we often advise companies to set up a management system, with the right people and processes to keep track of all of that.
What are your thoughts on interoperability between the various requirements and how companies might approach this?
It’s a lot more efficient to have that global view than it is to do it jurisdiction by jurisdiction. You’re seeing a lot of commonalities between the jurisdictions. For example, a lot of the climate required disclosures are fundamentally based on the Task Force on Climate-Related Financial Disclosures which has 11 basic disclosures in it. I often advise clients, “If you really want to cut through all the noise, go to the TCFD disclosures, start there, and then do a gap analysis against the various jurisdictions that you’re in. You’ll be 80% of the way there.”