The SEC’s proposed rule on climate disclosure confirms that ESG reporting is a business reality and not a trend that will fade and go away.
In March of 2022, the SEC proposed the Enhancement and Standardization of Climate-Related Disclosures for Investors, a rule which would require companies to include certain climate-related information in registration statements and financial reports. The SEC’s action to standardize climate reporting takes into consideration feedback from investors as well as replies to a request for public feedback issued in 2021. According to a potential timeline included in the Proposal, using an example Final Rule issuance in December 2022, the timeline will be quick: Large accelerated filers with a calendar year end will need to be compliant with most of the proposed requirements for fiscal year 2023.
“Environmental impact is clearly a driver of what customers want and what investors want. Embracing it will add value to your corporate strategy. Look at it as not something you have to do, but want to do.”
A recent webcast hosted by Janet Malzone, Grant Thornton’s National Managing Partner of audit services, provided an opportunity to hear representative board and corporate leadership perspectives on the evolving disclosure landscape, and the strategic opportunities for companies that look at it as more than a compliance exercise. The discussion featured Marjorie Whittaker, Managing Director ESG & Sustainability, Grant Thornton LLP; Kimberly Ellison-Taylor, CEO of KET Solutions, LLC, and independent board director for Mutual of Omaha, US Bancorp, and EverCommerce Inc.; and Brad Korch, Senior Vice President and Head of Investor Relations at EverCommerce Inc.
What is the SEC’s proposed rule for climate-related disclosure? “Investors understand that some companies in their portfolios are better positioned to weather the transition from a high carbon economy to a low carbon economy and they are increasingly using emissions information to assess a company’s exposure to transition risks. That’s why there is a need for investor-grade reporting,” said Whittaker.
The proposed rule broadly includes three buckets of disclosure:
Key survey findings
• Descriptor of your company’s current ESG maturity level:
- 11.5% – ESG is a significant driver of strategy
- 22% – Making good progress
- 51% – Basic level or just getting started.
• How many internal and external stakeholders are asking for the company’s ESG data:
- 33.5% – Either a significant number, many, or majority of stakeholders are asking
- 43% – Few stakeholders are asking
• Descriptor of confidence in the company’s ability to tackle ESG requirements over the next 2-3 years considering the ongoing talent shuffle and current economic outlook:
- 32% – Confident or strongly confident
- 22% – Somewhat concerned
Survey findings from webcast polling questions N=667. Responses do not total 100% as each question contains the opportunity to opt out of responding.
- Qualitative disclosure: How has a company identified, assessed and prioritized climate risks? What is its climate risk strategy? How is it performing against its strategy, in addition to disclosures about oversight by the board?
- Disclosure of greenhouse gas (GHG) emissions metrics: A quantitative measure across the company’s value chain. Disclosures are categorized as Scope 1, 2, and 3 (see sidebar).
- Financial statement metrics: Metrics disclosed in the notes of the audited financial statement regarding the impact of climate related events and risks.
“This is a lot to get your arms around,” said Whittaker, “which makes it even more clear that the topic is here to stay. Although private companies aren’t required to comply, their stakeholders will continue to request ESG information. And any company doing business in a jurisdiction where there is some form of regulated disclosure, like the UK and the EU, will need to be in compliance with their rules.”
The message is clear: ESG is here to stay
By raising climate reporting standards to the level of financial disclosure, the SEC is supporting investor efforts to make decisions based on a company’s verifiable climate footprint measures. Companies that were in a “wait and see” mode are taking action to kickstart or renew their focus on their ESG journey.
“Four or five years ago, I started hearing some meaningful ESG questions from investors,” said Korch. “Questions like ‘Do you have an ESG program?’ But it quickly accelerated to ‘Do you report to CDP or Morningstar’s Sustainanlytics?’ ‘Can you share your full ESG report with us, and answer our survey?’ And it’s become clear that not providing information can have significant impact on retaining them as investors, and on stock price.”
“At Grant Thornton, we see it from both sides,” said Malzone. “On one side, we see how our clients are working to address ESG information requests from their clients. On the other side, we’re experiencing the same demands. The number of requests we get for ESG information is pretty significant. It’s also important in attracting and retaining employees. We set our goals and provide a publicly available sustainability report that shows our progress.”
Preparedness is key
For every company with a robust ESG strategy, there are hundreds that haven’t started yet. “My advice is to just start,” says Ellison-Taylor.
Here are some proven actions to consider:
Greenhouse gas (GHG) emissions disclosures Scope 1,2 & 3
- Scope 1: Direct GHG emissions from operations owned or controlled by the registrant
- Scope 2: Indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling consumed by operations owned or controlled by the registrant
- Scope 3: All indirect GHG emissions not otherwise included in Scope 2 emissions, which occur in upstream and downstream activities of the registrant’s value chain, such as purchased goods and services or the use of the registrant’s products by customers
Set up a representative steering committee to guide strategy. Most surveys on ESG include a question about whether there is someone on the board or executive team who is focused on ESG. Ellison-Taylor recommends, “A good starting point is a steering committee comprised of representatives of the key functions — HR for DE&I, operations for environmental, and legal for governance. It brings the expertise to guide strategy.” A materiality survey can help the committee better understand what’s important to stakeholders and identify the right KPIs and initiatives for the near and long term.
Focus on data. There is a significant quantitative element in the proposed rule and it can be a daunting task to get energy data nailed down. In Scope 3, where companies operationally have the least control, there will be estimates and approximations involved in the reporting. Given the complexity and visibility, it’s important to focus on data collection and integrity, and building a process that ensures the appropriate level of reviews and disclosure controls.
Ensure processes and communications channels are in place. The SEC’s proposed rule on climate change disclosure would ask companies to comment on specific questions, especially at the board and management levels, and this creates work from the reporting readiness perspective. Determine whether the company needs additional processes or communications channels to support its answers for these questions.
Deliver a consistent message. “Whatever you say in one place has to agree with what you say in other places,” said Malzone. “Consistency is key.” For example, when recruiting on campus where students have expressed concern about potential employers’ environmental footprint, “the company shouldn’t be handing out lunches in plastic bags,” said Ellison-Taylor. “They are looking for alignment in what we say and what we do.”
How the board supports the ESG strategic plan
The SEC’s proposed rule on climate change
The SEC’s proposed rule on climate change asks probing questions like:
- How does the board assess management’s performance against their plan to address climate-related issues?
- How has the company integrated climate risk management into their overall risk management function?
- How frequently does management meet with the board and what types of topics are discussed in the meetings?
Ask the strategic questions. Companies look to directors to provide strategic oversight. The first question should be “What is going to be materially meaningful to stakeholders?”
Create a structure. There is a lot under ESG. “If it’s going to be meaningful enough that leadership is willing to rest their compensation against it, there must be a structure in the company and at the board level. It’s too big for one committee to own all aspects,” said Ellison-Taylor. There may be a lead ESG committee member, but all board members should be participants in the discussion.
Embrace the proposed rule. The SEC’s proposed rule on climate change rule, if adopted, would provide a codified approach to disclosures, a long-term benefit to companies now juggling the unwieldy process of answering individual questionnaires from multiple stakeholders like customers, investors and suppliers. When boards see the value from the strategic perspective, they can ask the questions that move the company toward preparedness.
Look to the experts. The board mantra of “noses in and fingers out” should guide board involvement in ESG strategy. To oversee activity, “I am a huge fan of internal audit and count on them for their three lines of defense,” said Ellison-Taylor. “The board needs their rigor. Internal and external audit, and the risk team will help us feel comfortable about preparedness and activities.”
The SEC disclosure requirements would bring opportunities for boards and management to advance their ESG strategies and deliver enhanced value to customers, employees, investors and all their important stakeholders. Now is the time to take action.
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