Finalization of the SEC’s anticipated proposal for climate-related disclosures will follow a process similar to other rulemaking, but there are some things to be aware of, according to a recent installment of Ernst & Young LLP’s Think ESG webcast. In “Navigating the next phase of ESG reporting,” industry observers also discussed how companies are preparing for the new regulations, the investor perspective on climate disclosures and what international activities are likely to impact non-EU reporters.
Here are key takeaways from the conversation.
Finalizing the SEC’s climate disclosure proposal will follow a similar process to other rulemaking, but there are some differences.
The SEC received an enormous amount of feedback on this proposal, and the staff and commissioners have held a significant number of stakeholder meetings to gather input. While the SEC’s Division of Corporation Finance analyzes all the comments and considers the costs and benefits of any final rule, the Office of the Chairman is also significantly involved.
Many companies are taking steps now to prepare for the final rule.
The webcast panel suggests companies should consider focusing on:
1. Getting executive boards up to speed on ESG.
Environmental, social and governance (ESG) disclosures are not one-size-fits-all; they are largely dependent on the size and structure of your company. ESG commonly resides with the governance committee, but some companies house ESG in their risk committee, or they may even have a separate ESG committee. These committees need to focus on carrying out oversight responsibilities. Finance professionals should keep their board aware of the evolving reporting landscape. Audit committees may also ask about policies and procedures for the collection and reporting of ESG information.
2. Determining how to produce investment-grade ESG metrics and nonfinancial information.
Some leading finance organizations are working cross-functionally to improve the rigor of the ESG reporting processes. While finance professionals don’t need to be experts in climate and carbon accounting, their skills in control processes and procedures may be leveraged to help understand the gaps in their current sustainability reporting compared with what they need it to be when the data is included in annual SEC filings.
Collaboration is important because no single department or person can cover the tasks required for sustainability reporting to be incorporated into regulatory filings. In many cases, it is a shared responsibility, with sustainability teams learning leading practices for data collection and reporting from the finance professionals. In turn, the finance teams can learn about the Greenhouse Gas Protocol and other technical subject matters from the sustainability professionals who have been collecting this information historically.
Some of the largest asset managers have nuanced views about climate reporting and the SEC proposal.
While many people assume that investors were unanimous in supporting all aspects of the SEC climate disclosure proposal, some of the largest asset managers had some differences of opinion. For example, some asset managers were in favor of mandating disclosure of greenhouse gas emissions in regulatory filings across the full range of Scope 1, 2 and 3 emissions.
However, not all agreed with that approach, with one positing that reporting companies should only report on Scope 1 and 2 emissions if they were materially exposed to climate risk. Furthermore, on the topic of Scope 3 emissions, some of the largest asset managers suggested in their comment letters to the SEC that certain Scope 3 estimations are too imprecise to be included in regulatory filings and that they should only be reported if material and reasonably estimable. However, several asset managers did indicate that Scope 3 emissions are a necessary supplementary disclosure of Scope 1 and 2 emissions; in their view, quantitative emissions disclosure would be incomplete without it.
Activities and proposals from the European Union are expected to impact companies from the Americas with significant operations in the EU.
Progress on the Corporate Sustainability Reporting Directive (CSRD) continues and it’s becoming clearer that companies in the Americas are likely to be affected by the CSRD, even if they are headquartered outside of the EU.
For example, significant European subsidiaries of global companies could be impacted if they meet two of three established criteria. If so, management reports of those EU entities would need to include ESG disclosures that are being drafted by the European Financial Reporting Advisory Group (EFRAG). The scoping is complex and multi-phased and as a result, companies with operations around the world should keep an eye out for developments in the jurisdictions in which they operate. Increasingly, it appears that many American organizations could have to implement both an SEC final rule as well as regulations coming from the EU.
The next phase of ESG reporting will evolve around a rapidly changing regulatory landscape, with both the SEC and the EU looking to finalize requirements in the near term. Companies should begin their readiness efforts now, rather than wait until the final text of the rules is published. Keep in mind that beyond the compliance exercise of new regulations, corporate reporting will need to adapt to the evolving information needs of investors, who aren’t monolithic in their views of what climate data is most critical for them.
Stay up to speed and learn more by monitoring the EY ESG reporting page and registering for our upcoming webcasts.