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SEC Climate Risk Disclosure Rules: Is Your Company Prepared?

Background

In March 2022, the US Securities and Exchange Commission (SEC) proposed broad changes for publicly traded companies to disclose data and risks on climate change. The proposal would require disclosure on prospective risks and material impacts on the business, strategy, and outlook caused by climate change. It would also require disclosures on greenhouse gas emissions and action plans to comply with companies’ publicized environmental commitments (e.g., net zero). It has become evident that we have reached a tipping point, where many companies will need to address reporting challenges to meet both compliance requirements and stakeholder demands for trust and transparency.

SEC’s Final Rule Anticipation

Based on the Fall 2022 Regulatory Agenda released by the SEC on January 4^th, 2023, the SEC is expected to finalize the rules sometime in Spring 2023. While it’s unknown exactly what the final rules will hold, it is important that companies acknowledge that the final ruling changes will be sweeping to report their ESG efforts. Although it is unexpected for the SEC to go exactly with the current proposed rules, it is expected that the final ruling could still require detailed disclosures associated with climate risk and “investor-grade” greenhouse gas emission data. The SEC will likely phase in the rules over the next few years.

How Should Companies Start Preparing?

Every public company is currently required to have rigorous processes and controls for its financial data per Sarbanes-Oxley (SOX) compliance rules. But is your company up to the challenge of bringing the same level of rigor to its climate data? Currently, all reported data has been voluntary in corporate social responsibility or sustainability reports. Post SEC’s final ruling, the company’s annual filings in the 10-K will require reporting of “investor-grade” climate data.

Imagine how the SEC’s proposed climate disclosure rules will change your company’s reporting. Start with the end in mind; think about the data governance, key stakeholders, systems, and processes that must be put in place. The data must be collected, analyzed, and verified and stakeholders must be brought up to speed to make that vision a reality. The organization will need to be prepared for independent assurance.

Top 5 Considerations for companies to start preparing for climate disclosures and reporting:

1. Assess climate risk and impact across your business and financial statements
   Perform a climate risk assessment to evaluate how various climate risk scenarios will affect your company’s financial performance and operations and how the company’s operations will have an impact on the environment. Consider physical risks (natural events such as weather, floods, storms, and wildfires due to rising temperatures or sea levels) to operations, infrastructure, or the supply chain. Consider transition risks (policy, legal, technology, market, economic, and brand/reputation). Evaluate the likelihood and impact of these risks on your financial statements (identify impact at financial statement line-item level) and report those in your footnote disclosures.
2. Understand your climate data
   It will be critical for companies to start thinking about what constitutes climate data, the sources of this data, data collection (completeness), data quality (accuracy), data transformation, and reporting strategy so they can provide investors, customers, suppliers, auditors, and management with reliable data that would be deemed as “investor-grade.” The data must provide an accurate view of Scope 1 and Scope 2 emissions. The company must also consider Scope 3 data for the future, as it will be challenging.
3. Establish standardized climate data processes and systems
   Going forward, standardization of how climate data is collected, stored, and verified will need to be established. Developing an effective climate data reporting framework by adopting a common taxonomy across all company functions will be critical. Defining processes and implementing systems infrastructure to collect, store, rinse, process and report will be essential. Ensure systems can integrate with other systems to enable automated data collection, storage, calculations, and reporting.
4. Implement effective climate data governance
   Similar to SOX, identify who in the organization will ultimately be accountable for oversight and governance of that data. Empowering the right leaders will be critical to drive the effort. It will be important to implement effective internal controls to ensure data is accurate and complete to meet the standard of “investor-grade.” Start by considering a controllership-led approach (i.e., ESG Controller) that works with the different functions to drive accurate and complete reporting processes.
5. Align and educate stakeholders
   Companies will need to ensure they align and educate key stakeholders of the upcoming SEC rule on complying with these climate disclosures. Change is never easy and will require people to take on a new role or add responsibilities to drive reporting of this data. Effective change management will be crucial for this upcoming change.

How Centri Can Help

Climate change disclosures are just the beginning for ESG reporting. The SEC’s regulatory agenda has human capital disclosures and cybersecurity disclosure proposals in store for 2023, which will require most companies to make a big leap forward in how they collect and report on ESG data. Key to your company’s success in meeting these increased disclosure expectations will be to develop a plan to implement the right processes and controls for data reporting, the ability to break down silos, and work collaboratively across functions. Centri’s team of ESG experts can help prepare your company in these areas and guide you to confidently move forward with your ESG journey. Contact us to learn more.

Mihir Jhaveri, CPA, CIA, CISA, CFE, CITP, CGMA

Managing Director | ESG Practice Leader

Mihir Jhaveri

Partner | Risk & Sustainability Practice Leader | CPA, CIA, CISA, CFE, CITP, CGMA

Mihir is a Partner at Centri Business Consulting and the leader of the firm’s Risk & Sustainability Practice. He has over 15 years of experience helping large Fortune 500 publicly-traded and private companies drive process improvement, minimize company risks, and enhance corporate governance. View Mihir Jhaveri's Full Bio