In 2023, the EU implemented a set of directives known as ESG requirements, focusing on environmental, social, and governance factors. These directives have a direct impact on U.S. businesses, particularly in the area of social responsibility, which encompasses diversity, equity, and inclusion (DEI) data, programs, and initiatives.
While these directives originated in the EU, U.S. companies with a presence in the EU and meeting certain criteria must comply. Furthermore, the Securities and Exchange Commission (SEC) in the United States is also working on tightening its reporting requirements, which are likely to align with the EU directives. Therefore, it is essential for companies to pay attention and prepare for potential changes.
One key aspect of compliance is expanding reporting efforts beyond internal operations to include activities related to the value chain, supply chain, operating partners, and other areas of business impact. This means that organizations must consider subcontractors, vendors, key business partners, as well as community, nonprofit, and academic institutions that they collaborate with or provide funding to.
To prepare for reporting, companies can take several steps:
1. Define DEI vision and outcomes: Clearly articulate how DEI aligns with the organization's values, mission, and value chain, extending into the communities where it operates.
2. Establish goals and metrics: Develop measurable goals and metrics to track and communicate progress in DEI-related areas. This will help demonstrate the company's commitment to social responsibility.
3. Implement supplier diversity programs: Create programs that attract, recruit, onboard, and support business partners from historically marginalized communities. Certification councils that validate diversity-owned businesses can be valuable resources for sourcing diverse suppliers.
4. Identify community impact partners: Determine the desired impact on communities and identify partners such as academic institutions, nonprofits, and Chambers of Commerce who can help achieve those goals.
Reporting should cover various aspects related to social responsibility, including pay equity, professional development, unionization, board participation, incidents of discrimination, and more. The data should be reported for all demographics mandated by each country of operation.
In addition to DEI-related reporting, organizations should disclose their policies on human rights, working conditions, equal opportunities, nondiscrimination, diversity and inclusion, collective bargaining, and other areas that impact people and human health.
To begin the reporting process, start with an audit to assess the current status of policies and data collection. Develop an analytics hub that enables efficient data collection, cleansing, and analysis. Use the analytics to create reports for department or division leaders, enabling them to understand their organization's performance and develop improvement plans.
Benchmarking against relevant industry standards will help understand how the organization performs compared to peers. If necessary, revisit the DEI vision and strategy to address any gaps and create a progress tracker or dashboard to communicate the organization's standing and improvement efforts.
Finally, analyze all the data and findings to understand the overall story it tells. Assess whether this aligns with the desired narrative and make any necessary changes to reach the desired goals.
It's crucial to note that all of this information must be disclosed as part of ESG reporting by 2025, validated by a third party. Therefore, it's essential to start the audit process early to ensure compliance.
While the process may seem overwhelming, conducting an audit provides clarity on the areas where the organization excels and where improvements are needed. By implementing robust policies and practices, companies can not only meet their governance responsibilities but also cultivate a fair, equitable, and inclusive working environment for their employees.
In conclusion, staying ahead of emerging ESG reporting requirements is crucial for U.S. businesses, especially those with a presence in the EU. By proactively preparing, organizations can rise to the challenges of social responsibility, promote diversity and inclusion, and contribute positively to society and the environment.
