Environmental, social, and governance disclosures for private design firms

Although most design firms are privately owned, they, too, are dramatically impacted by the demand for businesses to address and disclose environmental, social, and governance (ESG) concerns. Firms face increasing pressure not only from environmentalists and human rights activists, but also from elected officials, regulators, and even their lenders.

ESG disclosure is becoming necessary because many see it as financially material in a world that must focus on the challenges of climate change and inequality. The idea of ESG began in 2004 with a United Nations initiative to influence investments in non-Western markets. In 2021, legal and political institutions in the US and Europe are insisting those ideas be implemented both comprehensively and quickly.

As is often the case when there is an inflection point demanding that major or decisive change takes place, business has moved faster than government ESG disclosure requirements. Today, there are effectively no ESG disclosure standards — no regulatory guidance for public companies or other businesses in the US — that enables a comprehensive and meaningful assessment. Companies are struggling with what to disclose, how to disclose it, and how disclosure will affect their operations. Knowing what ESG issues might or should have material impacts on their business is difficult. This makes it problematic for a company to identify or respond with effective actions. For instance, one of the issues many design firms face is the incorporation of solar power into projects. As companies look at supply chains for matters of human rights and slavery, it is clear that China is the largest manufacturer of solar panels. It is also equally clear that solar panel manufacturing relies on silicon that is mined and processed in China’s Xinjiang region, where the government’s repression of the Uyghur minority is so well-documented that it amounts to genocide according to the U.S. government.

In June 2020, the European Council and Parliament signed the EU Taxonomy Regulation, which replaced voluntary procedures with a single ESG classification system for the EU. It was a significant move to address the lack of reporting standards. Now, the EU is in the process of adopting standardized processes through its Non-Financial Reporting Directive and Sustainable Finance Disclosure Regulation. These measures are part of a broader set of ESG initiatives designed to avoid greenwashed investments and channel funding to genuinely sustainable projects.

In September 2020, as part of the ongoing concern with global standards to avert the continuing degradation of the climate, four leading climate organizations — The Global Reporting Initiative (known as GRI), the Sustainability Accounting Standards Board, the Climate Disclosure Standards Board, and the International Integrated Reporting Council — announced that they would collaborate to create ESG standards. Also in September 2020, the International Financial Reporting Standards Foundation (IFRSF) announced the development of its own set of ESG standards. The IFRSF standards are used by 120 countries as the foundation for company financial disclosures so it is quite possible that the IFRSF methodology will be used on a large scale.

At least from the securities trading perspective, assistance might be coming soon. The International Organization of Securities Commissions (IOSCO) plans to publish guidance for raters of corporate ESG performance in July. IOSCO is the international body for securities regulators and is the global standard setter when it develops, implements, and promotes adherence to internationally recognized standards for securities regulation. IOSCO is working with the IFRSF on setting up a new body by November to write mandatory global standards for company disclosures on climate change.

In the US, design firms have led the way on addressing climate change, and often are ahead of society and government regulations in promoting equality and diversity through the recognition of talent. The ESG pressures now faced by publicly traded companies could move the disclosures of design firm clients beyond the disclosures of design firms on these important issues. It is critical that design firms — even privately held firms that might seem immune to the regulatory requirements placed on publicly traded companies — understand ESG issues and move forward appropriately.

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