As sustainability rules come into focus, middle market companies take action

Middle market businesses in the United States and Canada are making strides to adapt to recent or forthcoming sustainability regulations, even while some final rules have yet to be determined, new survey research from RSM finds. Moreover, these companies acknowledge that meeting sustainability requirements in an evolving regulatory landscape requires outside help.

A large majority (75%) of respondents report their organization has already taken steps to prepare for compliance with at least one of the sustainability regulations listed in the survey. The sample—provided by Big Village Insights—consisted of 412 employees of middle market companies and nonprofits in the United States (303 responses) and Canada (109 responses), surveyed from Aug. 27 through Sept. 3, 2024.

“This is a big shift,” says Tu Nguyen, RSM Canada economist. “Ten years ago, sustainability was seen as something that a few niche businesses would participate in, and others may not have paid much attention. Today, that’s no longer the case.”

The report—the full version of which will be published in mid-November—follows some debate in recent years around the rising importance of sustainability and other environmental, social and governance issues for businesses. Now, numerous regulations coming into effect are making sustainability a larger compliance issue. In the RSM survey, “regulations” referred to one or more of the following:

• The U.S. Securities and Exchange Commission’s Enhancement and Standardization of Climate-Related Disclosures for Investors rule (referred to in the survey as the greenhouse gas reporting rule)
• California’s Climate Corporate Data Accountability Act (SB 253)
• Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act
• The European Union’s Corporate Sustainability Reporting Directive
• The European Union’s Corporate Sustainability Due Diligence Directive

To qualify for participation in the survey, respondents were required to have at least some influence on decisions related to sustainability/corporate social responsibility at their organization. Additionally, the survey targeted organizations with an annual revenue of $40 million to $10 billion (not applicable to nonprofits).

When asked what considerations motivated their organization to embrace sustainability initiatives, the most popular survey responses were reducing environmental impact (38%), complying with government or regulatory requirements (35%) and being consistent with the organization’s commitment to sustainability (32%). Following those top three, 31% said supporting their local community or communities was a motivating factor, and 31% also said that supporting sustainability initiatives was the right thing to do as an organization.

Twenty-eight percent of respondents said attracting or retaining customers or clients was a consideration that motivated the organization to embrace sustainability. A notable divergence between the two countries emerged on this issue: U.S. respondents were significantly more likely (32%) to cite business retention as a consideration compared to Canadian respondents (18%).

“If it were not for regulations, this would have to be largely board- or C-suite-driven,” says Anthony DeCandido, a partner and co-leader of the sustainability service solutions practice at RSM US. Alongside new rules, he adds, “There are other stakeholder forces; key customers, suppliers, investors and employees particularly care about this."

Especially in the middle market, companies are using these regulations as an anchor for their sustainability programs more broadly, says Alex Kotsopoulos, a partner with RSM Canada and co-leader of the sustainability solutions practice.

“The middle market has certainly woken up to this reality that they need to get their house in order to address these requirements, but companies are taking a prudent approach and are considering the political environment,” he says.

As we await final rulings on some sustainability regulations, it's unsurprising that 84% of respondents agree they are monitoring developments before acting on them. Additionally, 56% agree their organization is waiting until after the U.S. presidential election before taking further action in this area.

Providing training for staff is the most common action taken (58%) followed by updating organizational policies (52%) and investing in new technology (51%).

Training and education—the most common action taken toward compliance—is also seen as the greatest hurdle, with a plurality (39%) of respondents citing it as a top challenge. Understanding requirements and managing supply chain compliance come next, at 34% and 32%, respectively.

Moreover, 71% of respondents say their organization has a senior executive whose primary responsibilities include establishing and achieving a vision for sustainability.

Tax implications and opportunities

The increasing importance of sustainability was especially clear in respondents’ answers to questions about clean energy tax credits and investments.

Awareness of federal clean energy tax credits is high, the survey found. More than three-quarters (78%) of respondents are aware their organization can purchase federal clean energy tax credits to reduce its taxable income. Further, 38% of these respondents have already purchased credits (26% already purchased credits; 12% have already purchased and are actively looking to purchase more).

“From a tax perspective on the survey findings, the middle market is very actively engaged in clean energy projects,” says Debbie Gordon, a Washington National Tax principal and leader of the clean energy and sustainability tax practice at RSM US. “One big takeaway is that the Inflation Reduction Act is working as intended to incentivize this activity.”

The availability of tax credits appears to have considerable influence on clean energy investments. Over half of respondents report their organization has already invested in clean energy projects (54%). Among those who purchased clean energy tax credits, 93% say the availability of these credits was influential in their organization’s decision to invest (62% very influential; 31% somewhat influential).

Given the activity related to clean energy projects and investments, Gordon says it’s critical that companies work with a tax advisor to navigate the complex compliance rules for the incentives. Integration of the tax function throughout other parts of the business is also paramount.

“The tax function really needs to be in constant contact with the operations side and others focused on sustainability,” she says.

The tax incentives are one part of companies’ broader decarbonization efforts, some of which are more formalized than others. Just over half of survey respondents (54%) said they have a written decarbonization plan in place; carbon-neutral plans are most common.

Technology’s role

When it comes to the most widely used tools for tracking and reporting on sustainability initiatives, the top three responses include artificial intelligence and machine learning (45%), data analytics platforms (39%) and supply chain management systems (38%). Another 77% say their organization has a dedicated project manager/project management team to support sustainability reporting.

Although most respondents agree they have the appropriate controls, technology, processes and people in place to meet regulatory requirements, a surprising proportion (69%) believe they will need outside help to meet the requirements of new regulations.

“Just like there’s a patchwork quilt of sustainability regulations, there’s a patchwork quilt of sustainability data across the organization,” says Jon Caforio, a principal and sustainability consulting leader at RSM US.

It can be a Herculean effort to pull all that data together, and technologies designed to consolidate and synthesize that information can be critical tools in simplifying the process.

"Similar to regularly closing your books from an accounting perspective, these technologies make it easier to have a repeatable reporting process for closing your books on nonfinancial, sustainability-related data,” he says.

To learn more about the survey findings and their implications for middle market businesses, sign up to receive the full RSM report when it is published in November.