First Take on the SEC’s Climate Disclosure Proposal

Posted 2 hours ago

Proposed by Workiva

By Steve Soter

The U.S. Securities and Exchange Commission has finally released its proposed climate disclosure rule with some long-awaited details and some surprises too.

While the US regulator is finally releasing proposed requirements that would begin to align with its global counterparts, the proposed rule itself is over 500 pages long. Fortunately, the SEC has released a fact sheet with a neat summary. Jonathan Gregory of The Hershey Co. and I shared some of our early thoughts on the proposal in a LinkedIn Live event (watch the replay). One of my key takeaways relates to the conversations companies should be having now to comply with changing global regulations, including the new SEC proposal.

Yes now.

Granted, the proposal is open for public comment for 60 days, and details could change before the SEC adopts the final rule. Even then, the rule would be phased in beginning with fiscal year 2023 reporting for large expedited filers. But Jonathan said Hershey’s SEC reporting team, legal team, internal and external auditors and ESG (environmental, social, governance) team are already defining reporting and internal control processes. to be ready for what’s next. You might consider doing the same.

“It’s not done in a vacuum,” Jonathan said. It really needs to be a cross-functional initiative covering all core functions. »

So let’s quickly recap the salient points of the proposal before moving on to what I would suggest companies do to prepare for the new ESG regulations.

A few surprises

The SEC was quick to come up with a few things I thought they might be waiting for, from iXBRLTM requirements to including climate metrics in audited financial statements, not just the MD&A (management discussion and analysis) part d a 10-K.

A few months ago, I wasn’t sure the SEC would require disclosure of Scope 3 greenhouse gas emissions, which are upstream and downstream emissions along a company’s value chain. business, such as employee travel. But any public company with a Scope 3 emissions target, or for whom Scope 3 is significant, will have to disclose it. There will, however, be a safe harbor exemption.

Large public companies will also need to find a qualified independent party to ensure they provide certification of Scope 1 and 2 emissions under the proposed rule.

As expected, the SEC modeled its disclosure framework in part on recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), supported by more than 2,600 organizations worldwide.

Key points of the proposed rule

If the SEC adopts the rule as proposed, a public company would have to disclose:

  • How the board and management manage climate-related risks
  • Climate-related impacts, goals, targets and transition plans
  • Scope 1 and 2 greenhouse gas emissions, with audit assurance and attestation for Accelerated Filers and Accelerated Large Filers (Scope 1 refers to a company’s direct emissions from operations, and Scope 2 refers to indirect emissions from energy purchases)
  • Scope 3 emissions, if material or a company has set a target for all other emissions up and down the supply chain, with a safe harbor
  • In a footnote to the financial statements, climate-related financial impacts, such as additional expenses due to a severe forest fire or flood, for example

Companies should add XBRL® label this new information and present it in iXBRL format, just as they do for quality financial data, so that it can be read by both machines and humans.

Consistency between ESG and SEC reports is going to be absolutely essential. ESG teams accustomed to publishing sustainability reports in the summer will likely have to significantly speed up some internal ESG data compilation timelines now that the SEC is offering 10-K climate disclosures, often filed in February or March.

A note on what the SEC wants in disclosures

In September 2021, the SEC released a model comment letter regarding climate change disclosures and has since issued comment letters to a few companies requesting more information about their disclosures. These letters offer helpful guidance on what the SEC is looking for under existing guidance.

In its proposal, the SEC requests material climate information. From the SEC’s perspective, materiality is determined by shareholders. By contrast, ESG materiality typically includes a much broader group of stakeholders, including customers, employees, and members of the communities where a company operates. Navigating this nuance is likely to become increasingly difficult, and public companies will need to be careful in how they assess materiality from both an ESG perspective and financial reporting. Workiva has created an ESG materiality assessment guide that you can use to help you determine what is material to ESG stakeholders.

Truth and Consequences

The proposed rule is expected to shed more light on companies’ environmental impacts and potentially reward companies that disclose measurable ESG results and progress. Some of these forward-thinking companies have been voluntarily disclosing their ESG performance for years.

While awaiting public comment on the proposed rules, one cannot help but wonder how these rules might affect the converging landscape of financial and non-financial reporting. Would these rules discourage public companies from setting a Scope 3 target so they don’t have to include it in their SEC filings — a possibility that the SEC would recognize his proposal? Would SEC registrants be tempted to “bury” some operating expenses by associating them with the weather in order to improve the appearance of their operating results?

While these questions are interesting to consider, the SEC has made it clear that companies that play fast and loose with their disclosures won’t find much patience from the commission. I expect the SEC to apply these proposed disclosures in the same manner.

What businesses can do to prepare

For those of you who have been involved in SEC reporting for a while now, this proposed rule may revive the feeling that Sarbanes-Oxley has become a thing.

For ESG practitioners and SEC reporting teams, I think the proposed climate rule boils down to this:

  1. Adding these new disclosures and audits to SEC filings will significantly speed up timelines for ESG reporting teams, as 10-K due dates are non-negotiable and will significantly raise the stakes for reporting reliability. .
  2. Adding climate-related measures to financial statements is no joke and will be subject to internal controls over financial reporting (ICFR), which will be audited by both management and external auditors.
  3. Accordingly, companies will need to engage their internal audit teams to implement robust controls that govern data related to climate metrics, models, and assumptions that will affect financial statements and other reporting to the SEC.
  4. They will also need visibility into how these metrics are obtained, prepared and reported to ensure consistency between the different places where climate metrics will now be disclosed, both for SEC reporting and for other ESG reporting stakeholders. .
  5. The SEC wants to know how management and the board are controlling ESG risks, so it makes perfect sense for finance and ESG teams as well as internal and external reporting teams to stay in sync.

For CEOs and CFOs, especially of large corporations, I think a key question has to be: do I have the right technology and the right teams in place to be ready for an SEC final rule in the next 18 about month?

At a minimum, teams would benefit from a connected hub bringing together financial and non-financial reporting where SEC, ESG, legal, board reporting and audit teams can work together to hold the executive ESG working group or the members of the committee of the board of directors informed. I’m talking about a place where they can all use the same source data, with full visibility and control over the myriad reporting processes, all with auditability and assurance. Call it a digital headquarters if you will.

Workiva could be a natural choice for your team, not only because Workiva is a leader in SEC reporting software, iXBRL support, and services, but also because organizations have used our platform for investment-grade ESG reporting, board reports, SOX compliance and internal reports. managing audits for years.

Through our world-class network, Workiva is happy to share resources and best practices we’ve seen work for other companies. Organizations have a lot to do to prepare for compliance with a final SEC climate rule, so start now to ensure you have strong people, processes, and technology.

Find out how you can use Workiva for ESG reporting and more. Request a demo.

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