Overview
We designed this issue of our rCFO Brief for CFOs, Accountants, Senior Financial Executives, and Institutional Investors to gain a deeper understanding of coming Climate Reporting and disclosure Regulations. This is within the 5th Pillar of our 5 Pillar rCFO framework, as outlined above.
There are 510 pages of Climate Rule disclosures proposed by the SEC! Wow! It took
our Integrate22 IWG team many hours and days to get through the document and wrestle with the complex issues addressed therein. One might have a sense as you read through the proposal that the SEC went beyond a reporting / disclosure framework to prescriptive mandates. Some of this orientation may be addressed in its final rules. We anticipate the final Climate Rule will be out by the end of 2022, possibly near the dates of the Integrate22 conference. Further, as these Climate Rules are extensive, we do not believe that the SEC will add new proposals for Human Capital disclosures, until the Climate Rule work is complete.
The impact of this new rule cannot be overstated. Accurately counting GHG emissions is a critical requirement for heading off negative climate change impacts. Until now, company emissions and climate risk information has not been readily available to investors. The data, when provided, is fragmented and presented in a wide array of formats, and is without clarity on what is being measured, how it is being measured, or what assumptions are being used.
Integrate22 conference will be held at Fordham University in New York City on Nov 29 through Dec 1. Over these three days we will be “workshopping” the SEC’s Climate Rule;
the why, what, when, and how, as well as the other 4 Pillars in our rCFO framework. If you have interest in and/or responsibility for implementing these new disclosure rules, then this is the conference to attend. We can hold 300 people, so register as soon as possible. This is a live, in-person conference.
Integrate’s Executive Summary
Companies will be required to disclose audited greenhouse gas emissions in much the same way they’re required to disclose audited financials. This long-anticipated Climate Disclosure Rule is a solid step toward a livable climate, one that we’ve been working toward for years. Here are some of the particulars:
- The proposal focuses on Scope 1 and Scope 2 only, not scope 3. Specific disclosure requirements will create comparability across companies. Scope 1 and 2 emissions must be “assured” – that is, audited by an expert 3rd-party, in the same way financials are audited. By definition, assured disclosures are subject to litigation: A) Scope 3 emissions reporting is protected from litigation, and B) Scope 3 auditing is phased in over two to three years.
- The TCFD framework has been widely accepted by issuers, investors, and other market participants and reinforces our view that the framework provides an appropriate foundation for the proposed amendments.
- The proposed climate-related provisions under Regulation S-X requires a registrant to disclose certain disaggregated climate-related financial statement metrics that are mainly derived from existing financial statement line items.
- The SEC is proposing to include the climate-related disclosure rules in Regulation S-K and Regulation S-X because the required disclosure is fundamental to investors’ understanding the nature of a registrant’s business and its operating prospects and financial performance, and therefore, should be presented together with other disclosure about the registrant’s business and its financial condition.
- The definition of “Materiality” is vague, as are the processes and penalties for attestation and how these issues will be adjudicated.
- The SEC’s approach to “Scenario Analysis” is not well contextualized. The SEC proposes requiring a registrant to describe the resilience of its business strategy in light of potential future changes in climate-related risks. A registrant also would be required to describe any analytical tools, such as scenario analysis, that the registrant uses to assess the impact of climate related risks on its business and consolidated financial statements, or to support the resilience of its strategy and business model in light of foreseeable climate-related risks.
Highlights
Summary
Page 43; with notations… “We are proposing to add a new subpart to Regulation S-K, 17 CFR 229.1500-17 CFR 229.1507 (“Subpart 1500 of Regulation S-K”) that would require a registrant to disclose certain climate-related information, including information about its climate-related risks that are reasonably likely to have material impacts on its business or consolidated financial statements, and GHG emissions metrics that could help investors assess those risks. A registrant may also include disclosure about its climate-related opportunities. The proposed new subpart to Regulation S-K would include an attestation requirement for accelerated filers and large accelerated filers regarding certain proposed GHG emissions metrics disclosures. We are also proposing to add a new article to Regulation S-X, 17 CFR 210.14-01-17 CFR 210.14-02 (“Article 14 of Regulation S-X”) that would require certain climate-related financial statement metrics and related disclosure to be included in a note to a registrant’s audited financial statements. The proposed financial statement metrics would consist of disaggregated climate-related impacts on existing financial statement line items. As part of the registrant’s financial statements, the financial statement metrics would be subject to audit by an independent registered public accounting firm, and come within the scope of the registrant’s internal control over financial reporting (“ICFR”).”
Content
Page 44; with notations… “The proposed climate-related disclosure framework is modeled in part on the TCFD’s recommendations, and also draws upon the GHG Protocol. In particular, the proposed rules would require a registrant to disclose information about:
- The oversight and governance of climate-related risks by the registrant’s board and management;
- How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
- How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook;
- The registrant’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes;
- The impact of climate-related events (severe weather events and other natural conditions as well as physical risks identified by the registrant) and transition activities (including transition risks identified by the registrant) on the line items of a registrant’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities;
- Scopes 1 and 2 GHG emissions metrics, separately disclosed, expressed:
- Both by disaggregated constituent GHGs and in the aggregate, and,
- In absolute and intensity terms;
- Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions;
- The registrant’s climate-related targets, and transition plan, if any.
When responding to any of the proposed rules’ provisions concerning governance, strategy, and risk management, a registrant may also disclose information concerning any identified climate-related opportunities.
Presentation
Page 46; with notations… “ The proposed rules would require a registrant (both domestic and foreign private issuers):
To provide the climate-related disclosure in its registration statements and Exchange Act annual reports;
- To provide the Regulation S-K mandated climate-related disclosure in a separate, appropriately captioned section of its registration statement or annual report, or alternatively to incorporate that information in the separate, appropriately captioned section by reference from another section;
- To provide the Regulation S-X mandated climate-related financial statement metrics and related disclosure in a note to the registrant’s audited financial statements;
- To electronically tag both narrative and quantitative climate-related disclosures in Inline XBRL; and
- To file rather than furnish the climate-related disclosure.
Attestation
Page 47; with notations… “The proposed rules would require an accelerated filer or a large accelerated filer to include, in the relevant filing, an attestation report covering, at a minimum, the disclosure of its Scope 1 and Scope 2 emissions and to provide certain related disclosures about the service provider.”
Phase-in Timing
Page 48; with notations… “The proposed rules would be phased in for all registrants, with the compliance date dependent upon the status of the registrant as a large accelerated filer, accelerated or non accelerated filer, or SRC, and the content of the item of disclosure.”
Background
Page 15; with notations… “While our proposals include disclosure requirements designed to foster greater consistency, comparability, and reliability of available information, they also include a number of features designed to mitigate the burdens on registrants, such as phase-in periods for the proposed climate-related disclosure requirements, a safe harbor for certain emissions disclosures, and an exemption from certain emissions reporting requirements for smaller reporting companies.”
Background
Page 30: with notations… “In addition, a diverse group of third parties has developed climate-related reporting frameworks seeking to meet investors’ informational demands. These include the Global Reporting Initiative (“GRI”), CDP (formerly the Carbon Disclosure Project), Climate Disclosure Standards Board (“CDSB”), Value Reporting Foundation (formed through a merger of the Sustainability Accounting Standards Board (“SASB”) and the International Integrated Reporting Council (“IIRC”), and the TCFD.”
Background
This summary scratches only the surface of what is covered in the proposal. We have attempted to highlight the more relevant aspects of the Rules. To learn more about these issues, please go to
the ESG Finance website and review the Expertise Section of the site, as well as looking at the Agenda for the Conference.
