Get Ready for Climate Change…Disclosures, Part 3

ESG criteria are becoming increasingly popular in the market and in the world of business, and regulators are starting to follow suit. Their first topic of focus: climate change. We introduced you to the some of the new disclosures that may be required in the near future. This week, we close with the audit and/or review requirements over those disclosures. Get ready for attestation 101.

Attestation of Climate Change Disclosure Requirements

In recent years, many companies have already begun making voluntary disclosures of their GHG emissions or climate change plans to reduce their carbon footprint. However, those disclosures generally occur in a separate sustainability report or other document outside of the Company’s SEC filings. As a result, those disclosures fall outside of the SEC regulatory requirements, and may not be subject to any audit or review procedures, which lowers confidence in the numbers that are produced.

The SEC’s proposed rules will require public filers to include the disclosure requirements we mentioned last week within the Company’s SEC filings, such as a 10-K for its annual report. Within that filing, most of these disclosures will be reported either as a separate Climate Change disclosure report within the filing, or contained within Management’s Discussion & Analysis (MD&A) sections. However, in becoming part of the SEC filing, this would also require all of the above disclosure requirements to be subject to either limited assurance (review) or reasonable assurance (audit) procedures, similar to how such procedures must be performed over a Company’s financial statements and related footnote disclosures. That means hiring a new independent auditor to review or audit your climate change disclosures each fiscal year, or increasing the scope of services with your existing auditor.

Authorities are still deciding on the necessary qualifications or certifications for an independent auditor to effectively perform attestation procedures on climate change disclosures. However, there is a possibility that it will fall within similar requirements as an auditor of US GAAP accounting and financial statements.

Once the rules are finalized by the SEC, it will take quite some time for companies to review the requirements, develop processes for gathering the necessary data, execute those processes effectively, and draft the required disclosures within their filings. This will be especially difficult for companies’ Scope 3 GHG disclosures. This significant effort was acknowledged by the SEC, which introduced a phase-in approach for the disclosures based on filer types. Assuming that these rules are finalized in 2022, the following schedule was proposed:

• Large Accelerated Filers will be required to adopt all of the required disclosures beginning fiscal year 2023, with the exception of the Scope 3 GHG disclosure that will require adoption beginning FY2024. Limited assurance (review procedures) will be required for the non-Scope 3 disclosures beginning FY2024, and reasonable assurance (audit procedures) will be required beginning FY2026.

• Accelerated Filers will be required to adopt all of the required disclosures beginning FY2024, with the exception of the Scope 3 GHG disclosure that will require adoption beginning FY2025. Limited assurance (review procedures) will be required for the non-Scope 3 disclosures beginning FY2025, and reasonable assurance (audit procedures) will be required beginning FY2027.

• Non-Accelerated Filers will be required to adopt all of the required disclosures beginning FY2024, with the exception of the Scope 3 GHG disclosure that will require adoption beginning FY2025. However, there are currently no attestation requirements proposed for these filers.

• Filers that qualify as smaller reporting companies (SRC’s) will be required to adopt all of the non-Scope 3 required disclosures beginning FY2025; the proposed rules are considering exempting them from Scope 3 disclosures. There are also currently no attestation requirements proposed for these filers.

Conclusion

To be very clear, the disclosure requirements are not official or finalized. The SEC released its proposed rules in March 2022, and is currently in the process of receiving comments from all stakeholders over a two-month period. It must then review and address all of the received feedback in order to revise and determine the final rules. This process can take some time; the SEC is aiming to issue the final rule by December 2022, but whether that target is met is yet to be seen. What this means is two main things. First, it is very likely that the disclosure requirements will change based on stakeholder feedback. Some of the above requirements may be removed or edited, or some new requirements could still be added.  Second, the timeline above on when disclosures are required to be adopted, reviewed, and audited could change, based on both stakeholder feedback and any delays in finalizing the rules (e.g., if the final rules are not published by the end of 2022, whether this would delay everything by one year).

With that said, it’s likely that most of the disclosure requirements we mentioned will remain in the final rules; this is because they were proposed based on initial stakeholder feedback and are based on frameworks being used in regulations by many other countries around the globe. So, it is important for companies to begin developing a game plan on how to capture and validate all of the necessary information for these disclosures, especially around GHG emissions.

Lastly, while all of the above disclosure requirements currently only apply to companies that are publicly-traded in the US, nonpublic companies shouldn’t ignore them. Many institutional investors will likely begin requiring or incentivizing their investees to provide some form of these disclosures in the future, and any companies included in the upstream/downstream activities of a public filer will likely need to begin gathering GHG emission data for the public company’s Scope 3 GHG disclosures. Starting the discussion now with your management team, and even looking for specialists in the ESG space, will help set you up for success going forward.

How ready is your company for these climate change disclosures? Have you begun the process, are you in the planning phase, or do you have no idea how to even begin?