3 Steps to Prepare for SEC Climate Disclosure From a CPA
GHG emissions will be subject to regulated disclosures under the upcoming U.S. Securities and Exchange Commission (SEC) climate rule; in preparation, accounting and compliance teams are preparing now to shore up their GHG accounting to ensure readiness. These assurance and compliance processes will be crucial for investors and other stakeholders to know that companies are putting the same level of rigor into the accuracy of their emissions as they do their financial information. This process is a challenge for many, as GHG emissions auditability is unique due to the sophisticated accounting process of building carbon footprints. With regulations already passed in Europe and looming in the states, many companies are preparing to identify processes and infrastructure that ensure the right level of control and visibility into the data and methods used to develop GHG metrics.
This is not an entirely new exercise. Every organization has experience building controlled accounting processes within their financial accounting and SEC reporting teams. Historically, just like with financial accounting, they’ve looked to technology to build the processes in an efficient and controlled manner. Sustainability teams transitioning to IT-controlled accounting systems and documented data collection policies is similar to the transition accounting teams went through after Sarbanes-Oxley (SOX) laws were passed in 2002.
Following these three steps, your organization can begin to prepare SEC-ready GHG disclosures.
Step one: Develop a repeatable, transparent data collection process that can be documented internally and tested by third parties.
Collecting the right data to produce an accurate GHG footprint is critical. Each emission category will require your organization to select a specific type of data to collect or to use estimates of such data (if reasonable data is not available). To successfully comply with GHG emissions disclosure requirements, companies will need to document these decisions and estimates along with how that data is collected. Additionally, the process of collecting data will need to be repeatable and transparent enough for a third party to test that the process is being followed. The documentation and testing of internal controls is something financial accounting teams have done since SOX in 2002.
The pressure to “show your work” will only grow as regulations become a reality. Auditors reviewing GHG metrics will expect companies to be able to trace emissions back to the source data used to produce the calculation. This will be especially true as GHG metrics are filed in an SEC 10-K or in filings to other financial regulators. Without technology, the process of tracking data and tagging it to each piece of activity across your footprint is tedious, difficult to document, and exposes your organization to risk if mistakes are made. Technology allows organizations to stay organized and integrate data sources via an application programmable interface.
Step two: Organize and control GHG emissions calculations with the same rigor and technology infrastructure leveraged in revenue and expense accounting.
Historically, organizations have calculated their GHG emissions manually on spreadsheets: this will soon be a thing of the past. Financial accounting teams have used financial enterprise resource planning (ERP) systems for over 20 years to control their revenue and expense accounting. Carbon ERP systems allow organizations to submit activity data and have calculations performed automatically; this is considerably less risky than manually piecing calculations together.
Many GHG emissions calculations involve multiple variables called emission factors, and these emissions factors are updated annually. Leveraging technology ensures that these emissions factors are kept up-to-date, and calculations are done accurately 100% of the time. Due to the complexity of these calculations, it can be difficult to “show your work” on calculations in a spreadsheet, like many sustainability teams have traditionally done with GHG emissions. Moving forward, the most efficient and accurate way to prepare for compliance is through GHG technology tools that display GHG emission calculations in an activity ledger, enabling internal and external auditors to review every line item of activity and the calculations performed.
Step three: Integrate GHG emissions into your broader investor disclosure process to ensure consistency in all internal and external reporting.
With GHG calculations in hand and the ability to show the work for them, you’re ready to build disclosure management processes and integrate these metrics into your annual disclosures. Because your company has built a controlled data collection process and automated the calculation of your GHG emissions in a controlled IT system, GHG emissions metrics will be ready to be integrated with the rest of your environmental, social, and governance (ESG) disclosures and into SEC reports such as the 10-K filing mandated by the SEC proposal.
Climate & ESG News Roundup
Canada requires government suppliers to disclose emissions & set GHG targets
Starting April 1, 2023, suppliers to the Government of Canada will be required to measure, disclose, and adopt science-based targets for their GHG emissions. The new “Standard on the Disclosure of Greenhouse Gas Emissions and the Setting of Reduction Targets,” will affect suppliers of federal procurements greater than $25 million. Suppliers to the Government of Canada can fulfill the new requirement by joining its Net-Zero Challenge or a similar initiative, as Canada aims to reduce its emissions by 40-50% from 2005 levels by 2030 and achieve net zero by 2050. In addition, the new “Standard on Embodied Carbon in Construction,” will require all new major government construction projects to report and reduce their emissions.
When governments require suppliers to measure, report, and reduce their GHG emissions, it creates a ripple effect for corporate climate action, as we’ve seen with similar requirements proposed in the US by the Biden Administration last year. The Federal Supplier Climate Risks and Resilience Rule would require federal contractors receiving more than $50 million in annual contracts to measure, disclose, and reduce GHG emissions and climate risks. The rule followed a series of Executive Orders from the Biden Administration to require major federal suppliers to do the same. The US federal government has been publicly tracking GHG emissions associated with federal contractors and procurements for years with the Federal Supplier Greenhouse Gas Management Scorecard in 2015 and more recently with the GSA Federal Contractor Climate Action Scorecard in 2020.
First veto of the Biden presidency protects ESG investing through DoL rule
Last week, the US House and Senate passed legislation to repeal the Department of Labor (DoL) rule that allows pension fund managers to consider ESG factors in their investment decisions. The Republican party, including two moderate Democrats in the Senate, believes that ESG factors should be left out of investment decision-making, due to their belief that the rule acts to “encourage fiduciaries to make decisions with a lower rate of return for purely ideological reasons.”
The Biden administration has already vowed to veto this bill, reminding the anti-ESG crowd that the DoL rule is in no way requiring pension funds to prioritize ESG: “To be clear, the 2022 rule is not a mandate – it does not require any fiduciary to make investment decisions based solely on ESG factors. The rule simply ensures that retirement plan fiduciaries must engage in a risk and return analysis of their investment decisions and recognizes that these factors can be relevant to that analysis.”
This DoL rule allowing ESG considerations in fund management was finalized at the end of 2022 to reverse a Trump administration rule that blocked the inclusion of ESG factors in retirement funds. Speaking on the Senate floor last week, Democratic Senate Majority Leader Chuck Schumer said, “This isn’t about ideological preference — it’s about looking at the biggest picture possible for investors to minimize risk and maximize returns. Why shouldn’t you look at the risks posed by increasingly volatile climate incidents?”
Greenwashing enforcement is global
Greenwashing, or the act of presenting false or misleading claims about an entity’s sustainability credentials, is being taken seriously by regulators, with multiple enforcement actions in the last two weeks. In the UK, Lufthansa was forced to stop an advertising campaign with the tagline “Connecting the world. Protecting its future.” The UK Advertising Standards Authority found that even though Lufthansa had long-term sustainability targets, the ads were misleading as there were “currently no environmental initiatives or commercially viable technologies in the aviation industry which would substantiate the absolute green claim ‘protecting its future.’” Meanwhile, in Australia, the asset manager Mercer is being pursued by regulators for allegedly including high-emitting fossil fuel companies in its sustainable investment products, despite marketing claims that such companies would be excluded.
Within the US, the SEC has established a Climate and ESG Task Force within the Division of Enforcement to “proactively identify ESG-related misconduct.” In 2022 alone, this group publicly announced charges against 6 entities, including Goldman Sachs Asset Management ($4M fine) and BNY Mellon ($1.5M fine) for violations regarding their ESG products. The SEC’s upcoming climate disclosure rules are likely to only ramp up enforcement actions in the US.
Events You Can't Miss
- The 2023 Wall Street Green Summit will take place in New York City from March 13-14. Leaders from climate tech, asset management, and journalism will convene to discuss themes including ESG reporting and clean energy technology. Registration is open now.
- Tomorrow, San Diego will host this year’s Women’s Private Equity Summit. As private equity increasingly faces climate and ESG regulation, Persefoni’s Kristina Wyatt will speak to the crowd about ESG regulations that are affecting investment firms around the globe.
- For finance leaders looking to get up to speed on the latest ESG disclosure proposals and understand how to pursue compliance, the Financial Executives International (FEI) will be hosting a virtual ESG Updates Conference on March 29-30 to answer top-of-mind questions regarding regulation around the globe. Registration is open now for members and non-members. Mike Wallace, Persefoni’s Chief Decarbonization Officer, will be moderating a panel on ESG reporting software solutions.
