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In March 2022, the SEC issued its proposal for more stringent ESG reporting. Although that proposal could see further edits following public comment, the proposal represents a significant change in environmental, social and governance (ESG) reporting. Those public companies expected to be required to report, and others wishing to highlight a sustainable image, should prepare now and put the strategies and process for fully aligned reporting in place. As your company plots the path ahead, consider four actionable steps to make the transition successful.
Assess and scope your required disclosures
Implementation of the SEC proposal would likely vary by company with certain proposed disclosures requiring a qualitative assessment to determine what key climate-related information companies should disclose, and how. Begin by determining the overall current state scope of your organization’s climate-related disclosures, if any, to lay the best foundation for the rest of the implementation effort.
The proposal mandates the explicit disclosure of material climate-related risks. To identify risks, consider both physical and transition risks. Physical risks include acute climate-related disasters like wildfires and hurricanes, as well as chronic climate-related impacts resulting from long-term temperature increases. Transition risks include those expected to be faced during transitioning to a less carbon-intensive economy: climate-related litigation and change in consumer, investor and employee behaviors are illustrative examples. These may differ by company, sector, size, geography and many factors.
Key questions to consider include:
- What climate-related disclosures are currently being provided, including disclosure in SEC filings or elsewhere?
- What types of climate-related information are key stakeholders (e.g., investors and financial institutions) requesting that may impact capital allocation decisions?
- How does company reporting on climate relate to overall strategy, goals and mission?
- Do any industry-specific, jurisdictional or other regulations or business trends related to climate impact the company?
- What are company climate commitments or goals? Can progress be demonstrated easily? Does the company participate in any industry initiatives or organizations?
- Will consumer focus on climate-related impacts affect sales of goods or services or overall supply or value chain?
- Is the company or operations at risk from extreme weather conditions (e.g., hurricanes, floods, fires)?
- How will the company define its time horizons for the short, medium and long term?
Review and upgraded data collection protocols
Once your company has identified climate-related information disclosure requirements, consider organizational boundaries and that you can appropriately collect relevant data within them. This may mean implementing new systems, technology and enablers to improve data collection efficiency. First, consider what information may exist and how it is collected, curated and analyzed. It may be possible to reduce the cost of implementing the proposal by leveraging data already published in your annual sustainability report and other internal and external communications. Regardless, take this opportunity to review different communication mechanisms and harmonize messaging around how your business incorporates climate into overall strategic, governance and risk management decisions.
Key questions to consider include:
- Where does data reside for climate-related disclosures? Is it prepared internally or externally? Is it centrally located, or does it need to be compiled manually?
- How can messaging be consistent across investor relations decks, social media, websites, corporate sustainability reports, Form 10-K and other filings, and proxy statements?
- Is there functionality to gather or report quantitative GHG-related emissions data?
- What data is not currently collected that might be necessary to satisfy disclosure requirements? What are relevant data sources?
Determine reporting involvement and responsibilities
Identifying, collecting and managing the disclosure of climate-related information is a large undertaking that will likely require cross-functional involvement from internal and external parties. For best results, establish dedicated committees devoted to handling climate-related initiatives and include groups within your company expected to provide the climate-related data. Given the depth and breadth of required data for proposal compliance and the potential for assurance over certain disclosures, you may want to consider evolving your operations to sustain an appropriate level of executive engagement, oversight and accountability.
Determining who will be responsible is critical in successful implementation. Doing so also provides an opportunity to involve appropriate corporate functions so that climate-related reporting reflects a comprehensive effort by all departments impacted within the company while also meeting the proposal’s mandate that board oversight and management roles in managing risk be reported.
Key questions to consider include:
- Is there a separate committee established to focus on climate-related risks? Or will an existing committee (e.g., audit committee or risk committee) be responsible for oversight? Should the board establish one?
- How is the board informed about climate-related risks? Do members have expertise on assessing risks?
- If applicable, how are climate-related metrics and targets established? How will they be determined and monitored with KPIs?
- What company functions need to review disclosures from investor relations to IT to risk management and internal audit?
Review current controls and risk management
All disclosures in regulatory filings are subject to disclosure controls and procedures (DCPs) that registrants are required to put in place so that all SEC filing information is reported accurately and in a timely manner.
Each quarter, a registrant also must disclose whether its DCPs are effective, and the chief executive and chief financial officer each must take responsibility in a signed certification required by the Sarbanes-Oxley Act for the design and evaluation of DCPs. In addition, certain disclosures in the proposal will be included in a note within financial statements, subject to audit by an independent registered public accounting firm and come within scope of the registrant’s internal control over financial reporting. While this could take extra effort, it will also lend additional credence to company disclosures and create investor confidence in climate-related messaging from organizations.
Key questions to consider include:
- What processes are in place to manage climate-related risks? How are they integrated into the risk management framework? Are you using a publicly available framework (e.g., the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Framework)?
- What technology systems currently control the completeness of climate-related data?
- What controls are currently in place over climate-related information? What additional controls would be needed to meet the SEC requirements under the proposal? How can the company leverage its current financial statement risk management and controls to apply to new climate-related disclosures?
- Are there established policies and procedures to promote consistency of climate-related data and reporting and in financial statement disclosures? What is the current approach to remediate control gaps with metric owners, process owners and management?
- What required processes will add new information to the annual report without slowing preparation?
Takeaways for every company
While the proposal requirements may not yet be final, changes to ESG reporting are anticipated, and companies should prepare now for any process change, technological needs or operational shifts that may be required. Staying informed and current on proposal news will also be a critical part of your overall planning process and ultimately a key influencer on whether you can successfully align your business around reporting requirements for continued success.
This is a two-part series from Ernst & Young LLP on the SEC’s proposed climate-related disclosures rules. Read Part One: How the proposed new SEC rules on climate-related disclosures will impact your organization. For more information, visit ey.com/en_us/thinkESG.
Marc Siegel is Corporate & ESG Reporting Thought Leader, Ernst & Young LLP. Brian Tomlinson is Managing Director, Finance Accounting Advisory Services (FAAS), Ernst & Young LLP. Eloise Wagner is FAAS Technical Accounting Advisory Group Leader, Ernst & Young LLP.