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

RSM Middle Market Sustainability Survey 2024: U.S. and Canada

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 professionals at 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 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

Disclosures required by these regulations—some of which are already in effect and some of which are pending or not yet passed—include greenhouse gas emissions, information about climate-related risks, and human rights and environmental impacts in companies’ operations and value chains.

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 annual revenue of $40 million to $10 billion (not applicable to nonprofits).

“This is a much broader topic than just environmental concerns or just social concerns or just governance concerns,” says Jon Caforio, a principal and sustainability consulting leader at RSM US LLP. “Sustainability is becoming more about whether you are a good business to do business with.”

A clear and cross-functional approach to navigating sustainability rule compliance might be a learning curve for some organizations, says Anthony DeCandido, a partner and co-leader of the sustainability service solutions practice at RSM US. Teams within the business that have never worked together before will need to collaborate.

"The alignment and the trust that's needed to do something of this magnitude, when you roll out a new global reporting framework, is not easy,” he says.

The fact that addressing sustainability disclosure requirements will likely be layered into employees’ existing jobs might add another challenge in the training realm, says Kotsopoulos. Indeed, 22% of respondents identified limited time and conflicting priorities as a challenge. 

Some companies are bringing in third parties to help balance the new priorities; of those whose organization has taken steps to prepare for compliance, 34% said they have hired external consultants for this purpose.

Companies are already allocating resources to navigate compliance; 69% of respondents report their organization has a budget dedicated to fulfilling the requirements of the sustainability regulations mentioned in the survey. Of those who report having this budget, 79% expect it will increase in the next fiscal year (21% anticipate it will increase substantially; 58% think it will increase somewhat).

When asked for the reason(s) they expect the budget will increase, the following themes emerged from respondents’ open-ended feedback:

• Ensuring their ability to meet regulatory requirements
• Supporting business growth/expansion
• Responding to inflation/rising costs
• Supporting strategic sustainability initiatives/investments as factors

With businesses already dealing with higher costs of capital and labor in the current interest rate environment, the fact that a majority of executives have a dedicated budget for fulfilling regulatory requirements makes their priorities clear.

“So many corporate leaders are tightening budgets for other reasons right now,” says DeCandido, “so this further validates how real this issue of sustainability compliance is.”

Middle market businesses will likely face more resource challenges than their larger counterparts, which can make working with a third party to use technology solutions even more imperative, says Nguyen.

“Adding sustainability on top of all these other cost pressures might make it challenging for some businesses to operate if they had thin margins already,” she says. 

A handful of key technologies can make a significant difference in the quality of a company’s sustainability disclosures and streamline the reporting process.

When it comes to tracking and reporting on sustainability initiatives, most respondents (45%) rely on artificial intelligence and machine learning, followed by data analytics platforms (39%), and supply chain management systems (38%). Additionally, 77% say their organization has a dedicated project manager/project management team to support sustainability reporting.

For those tools to work most effectively, though, businesses need a solid data governance foundation with clear controls, processes and standards in place. This is imperative from an assurance perspective and for enabling broader sustainability integration later.

“Companies reporting on this data need to have confidence in what they are reporting,” says Brandon Rubin, a director in the finance automation practice at RSM US. “Leveraging technology to help automate data collection will be pivotal in reducing the burden of new reporting standards.”

Some technology solutions can help with the Herculean effort of pulling together disparate data from across the organization, for instance, saving the business valuable time and effort.

"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,” says Caforio.

Although most respondents agree they have the appropriate controls (85%), technology (83%), processes (83%), and people (82%) in place to meet regulatory requirements, a surprising proportion (69%) believe they will need outside help to meet the requirements of new regulations.

Especially for middle market companies that may have tighter budgets than their larger counterparts, working with a third-party advisor can help with the daunting task of assessing risk throughout all the layers of their broader supply chain.

“The link between ESG and supply chains is increasingly evident as stakeholders demand higher corporate responsibility standards,” says Kotsopoulos. “Middle market organizations need enhanced supply chain transparency to preempt disruptions and comply with regulations."

Regulations represent the “third wave” of sustainability reporting as it has evolved for businesses in recent years, says Kotsopoulos, with the first wave being corporate social responsibility and the second being the rise of ESG and its connection to fiduciary responsibility.

“Earlier, it was more about being a good corporate citizen without much structure,” he says. “But investors and stakeholders need much better quality in ESG disclosures. So, this third wave requires companies to disclose data about how they are integrating sustainability into their operations, risk management and business strategy.”

Thirty-one percent of executives who responded to RSM’s survey said integrating new operations with existing ones is a challenge, and 30% identified integrating new technologies with existing ones as a hurdle as well.

Companies also find themselves navigating a global Venn diagram of sorts for these sustainability rules; aspects of some rules might apply in one country but not another, while some rules may overlap in many parts of the world.

The impact of that regulatory patchwork also showed up in RSM’s survey: More than half (54%) of respondents said they are unsure if the regulations apply to their organization.

"With the complexity of global business structures, there's also so much that goes into evaluating whether you must comply, and if so, under which jurisdiction,” says DeCandido. “It’s not always as simple as ‘this regulation applies, and this one doesn’t.’ It could be a combination of the two or it could be none at all.”

Working with a third-party advisor to conduct an applicability assessment can be a pivotal step in determining which rules a business is subject to, and which deadlines it must meet.

When it comes to sustainability, though, organizations may benefit from a view that goes beyond compliance, which is where a broader ESG assessment can also play a role.