The SEC’s Proposed Climate-Related Disclosures for Investors: Start Now

The SEC's proposed climate-related disclosures

Many organizations are aware of a recent proposal by the U.S. Securities and Exchange Commission (SEC) for companies related to climate related disclosures. These organizations are grappling with how the proposal applies to them and how to prepare. The proposal requires disclosure of scope 1 and 2 greenhouse gas (GHG) emissions, first with limited assurance, then reasonable assurance. Scope 3 emissions are not required disclosures unless they are material or if the registrant has set a GHG emissions reduction target that includes scope 3 emissions.

The SEC released the proposal in March 2022, with the original expectation it would become final by December 2022. However, the proposal has been delayed several times and currently many expect it will become final by fall 2023. In the proposal, compliance for accelerated filers is for fiscal year 2023 that will be reported on the Form 10-K issued in 2024.

Due to the delay, we expect compliance will be pushed back one year so accelerated filers would be required to comply for fiscal year 2024 that will be reported on the 2025 Form 10-K. Non-accelerated filers are required to comply one year behind.

Given the delays of the pending rule and the inherent politics associated with the proposal, many organizations are debating whether to start preparing now or wait for more guidance. Many are worried the proposal may change as the political landscape changes. Here are reasons why an organization should start planning now for the new rule.

Why plan now?

The first reason organizations should start planning now for the new climate related disclosure rule is because implementing a sustainability program is much more time consuming than many organizations realize, and the level of effort required can be surprising.

Begin implementing a process by developing the proper structure, starting with the organization's governance. Your board must be engaged in the implementation process. A committee reporting directly to the board should include individuals with a broad perspective, as will be necessary to consider the broad implications of emissions.

This is not just for the accounting department. Operations, procurement, risk management, human resources, and other business units may have insight into the supply chain, manufacturing process, product usage, end of product life, employee commutes, business travel, and many other considerations that may be material to an organization's emissions.

Some larger organizations have created a chief sustainability officer role that drives the execution of the sustainability strategy. Smaller organizations may simply have a sustainability lead. Recently, organizations are realizing the need to create a sustainability controller role, responsible for the collection, analysis, and reporting of sustainability data for both internal and external stakeholders.

Finally, create a team responsible for working with the business units throughout the enterprise under the direction of the sustainability lead to gather, enter, manage, and report the appropriate information.

Once in place, the governance and management structure has several important responsibilities, including selection of standards, determination of material topics, and selection of reporting tools (i.e., will the organization rely on Excel spreadsheets or will they invest in a software solution).

The determination of material topics by itself is time consuming. This is not a simple scoping exercise, but rather a process of understanding from all stakeholders where the material emissions occur based on the organization's business model and opportunities for reduction. It is not necessarily a point-in-time discussion, but rather how emissions change over time. The board should be aware of and sign off on the material topics determined by the committee.

An organization may begin the process of calculating emissions (at least for scope 1 and 2) with Excel spreadsheets. Depending on the size of the organization and complexity of emission records, an organization may elect to purchase a software solution. There are many solutions on the market, so use proper due diligence when selecting one. As the organization's governance navigates these issues, it may also consider how to execute on gathering, managing, and reporting on sustainability information.

It will likely take two years or more of consistent effort to institute a sustainability program and have it audit ready. It's a good idea to start now.

How the new rules might compare to Sarbanes Oxley

A comparison often mentioned is Sarbanes Oxley (SOX). This is an accurate comparison with one caveat — it is comparable to the early days of implementing a SOX program as opposed to SOX as it currently exists. Generally, most SOX programs are mature — with processes and controls in place that have been tested for years.

To comply with the proposed rule, even with limited assurance, these nonfinancial processes and related controls need to be brought in-scope for SOX. In some cases, the existing SOX controls may be appropriate. Management will need to determine which existing SOX controls cover these nonfinancial processes and identify gaps that must be addressed.

Getting your report audit ready

Most organizations' sustainability groups are not mature, so although there may be a process in place to gather, enter, manage, and report the data, it may not necessarily be audit ready. The process should be designed to be repeatable and completed timely and accurately.

Many organizations currently have a sustainability report posted on their website. The underlying processes and deadlines that support the data utilized for this type of report may be soft and subject to change. Develop opportunities to refine and standardize these processes and have robust documentation with clearly identified controls.

The sustainability group should collaborate with the internal audit group to verify the sustainability group's controls are appropriate. There should be clear lines of responsibilities so the internal audit group is not the control — and not responsible for the control — but are responsible for testing the sustainability group's controls.

Once the sustainability group has gone through a full reporting cycle, include the sustainability report in your internal audit plan. When the SEC's proposal becomes final, it will be in-scope for SOX.

It is not unusual for audit findings to be identified related to new controls subject to audit testing. Therefore, it is critical to test these controls before they are subjected to SOX. Typically, refinements are made to the process and controls after the first round of audit scrutiny. Waiting until after the rules are final may not be enough time to test and remediate any deficiencies discovered.

How we can help

These actions take a considerable amount of time and resources. It will likely take two years of consistent effort to institute a sustainability program and have it audit ready. It's a good idea to start now.

CLA can help you with climate strategy, governance oversight, transparency reporting, tax, digital, internal auditing, and controls. Our industry-specialized professionals understand the strategic, operational, financial, and regulatory issues that affect your organization, and use their core knowledge to help you achieve your sustainability goals.