Open Letter to Business Leaders on the Cost of Carbon Disclosure
Dear Executives and Board Members:
This Earth Day, investment in your climate disclosures is an investment in the planet. By now you’re likely aware that upon the adoption of the SEC’s proposed rules on climate-related disclosures, your company will be required to include its carbon footprint calculations and climate-related risks and opportunities in reports filed with the SEC. Understandably, since this release, a major focus from companies has been on the cost of compliance. Here’s what we know.
Carbon accounting and disclosure are not new. In 2021, over 13,000 companies representing over 64% of global market capitalization were disclosed through the voluntary global disclosure system CDP, formerly known as the Carbon Disclosure Project. If all goes to plan at the SEC, all public companies will be mandated to disclose this information in filing as early as 2024. But how much should you expect this to cost?
Studies cited by the SEC and outlined in the Proposed Rule indicate the cost of climate change disclosure can range from $400,000 to $650,000 depending on the size, complexity, and maturity of the company. Persefoni’s own experts and engagements with clients around the world are consistent with the higher end of these estimated costs.
Where are these costs coming from?
According to the SEC’s estimations, larger reporting companies can anticipate first-year compliance costs to total $640,000 with $180,000 of that accounting for internal costs and $460,000 going to costs for outside professionals. Smaller reporting companies could see first-year costs reach $490,000 with $140,000 for internal costs and $350,000 for outside professionals. The SEC’s cost estimates include, to the extent necessary, hiring additional staff and re-allocating in-house personnel, securing third-party consultancy services, conducting climate risk assessments, measuring emissions, integrating new software or reporting systems, obtaining assurance, and more. That means, your company could expect lower costs than the SEC’s estimates by virtue of already having these systems in place.
Based on the key aspects of this proposal, companies could expect GHG emissions quantification and climate-related risk analysis and reporting to be their main categories of spending. In practice, this will look like partnering with a third party to quantify your carbon footprint, running a climate scenario analysis over the short, medium, and long term, then identifying the corresponding risks and opportunities and incorporating them into a climate risk management plan. Keep in mind, that the SEC will not mandate disclosure of a scenario analysis unless your company has already used these tools.
We will all benefit from the influx of climate reporting. Ultimately, these proposed requirements will arm investors and stakeholders with the comparable, reliable information they have been needing for quite some time. Once the marketplace has useful data, and actually uses it, we can expect to see a fundamental shift in how companies shape and prioritize their climate strategies.
With time and tech, costs are expected to decrease over time
It is also extremely reassuring to know that the cost of compliance will come down as software solutions become adopted throughout the market and companies gain more experience with carbon accounting and management.
The global convergence of climate reporting standards we are all witnessing at the moment will have a positive cascading effect as more companies are reporting in a way that is consistent and comparable. The fragmentation that has existed in the market has been costly for companies trying to determine what to report and which questionnaires to respond to, as investors have been seeking useful data.
Carbon accounting, much like financial accounting, is complex. Luckily, the technology exists to simplify this challenge and help companies source efficient, cost-effective solutions for this huge data challenge. Assembling sustainability reports can take an inordinate amount of time on low-return activities, like searching for data or formatting spreadsheets. Technological solutions not only lower the barrier to entry for carbon accounting, they also facilitate assurance (required in the SEC proposal), reduce the cost of auditing, and most importantly, they make data more useful for determining and managing your climate strategy.
The Persefoni platform enables you to confidently calculate your organization’s carbon footprint to assemble a complete greenhouse gas inventory across Scope 1, 2, and 3—best of all it’s built on the Greenhouse Gas Protocol - the accounting standard referenced by the SEC. Each calculation is recorded in a transparent ledger for audit and assurance. Together with partners like Workiva, Bain & Co, and CGI, as well as counsel from our unrivaled Sustainability Advisory Board (SAB) of global industry experts, Persefoni ensures organizations are fully enabled to comply with the growing expectations of international regulators and investors.
This Earth Day, invest in preparation
The rapid pace of regulation in climate-related financial disclosure can be overwhelming, but there is enough clarity now to start preparing for compliance. Most companies start by running a gap analysis to determine what climate information your company is currently collecting and reporting on and what the SEC will require. For Earth Day, Persefoni’s ESG, sustainability, and climate disclosure experts Kristina Wyatt and Tim Mohin have written guidance on three actions companies can take now to prepare for the SEC climate-disclosure rules. Read the FastCo Op-Ed here.
No company will walk the same path in adhering to carbon disclosure requirements, however, starting with tools that ensure that you have quality, auditable data is essential.
Why Persefoni? Our end-to-end solution
Data sits at the core of disclosure and compliance. Through the power of technology, we've mastered transforming an invisible complexity into an actionable metric. My vision in co-founding Persefoni was to simplify the hyper-complex world of carbon accounting to enable companies and financial institutions to decarbonize.
Part of the decarbonization journey is to ensure that companies can easily comply with emerging regulations and investor demands. For this reason, we’ve partnered with Workiva, the market-leading software platform for SEC financial filings, to provide an end-to-end solution simplifying SEC forms with a single cloud solution. This partnership helps clients integrate their carbon and financial disclosures into a single SEC filing. In addition, our consulting partners – Bain & Company and CGI – can assist clients in developing an overall management strategy for climate risk.
Focused on the cause
I love to solve complex problems with cutting-edge software solutions. But Persefoni is more than that. And our entire (growing) team are dedicated to building tools that enable the transition to a low-carbon economy.
Scientists warn that we are running out of time and drastic reductions are urgently needed across all sectors. All of the many actions needed to address the looming crisis have one thing in common - good data. As management guru Peter Drucker said, “If you can't measure it, you can't manage it.”
Celebrating this Earth Day with optimism,