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Ready for SEC climate reporting? Six things to check
Envision how the SEC’s proposed climate disclosure rules will change your company’s reporting. Now work backward—think about the systems and processes that must be put in place, the data that must be collected, analyzed and verified and the stakeholders who must be brought up to speed to make that vision a reality. Get started with these six steps.
How can you prepare for SEC climate reporting requirements?
- 1. Leverage the controllership organization to accelerate climate reporting
- 2. Understand your climate data
- 3. Establish effective climate data governance
- 4. Assess climate risk across the business
- 5. Determine impact to the financial footnotes
- 6. Get stakeholders aligned and educated
1. Leverage the controllership organization to accelerate climate reporting
To meet the new SEC disclosure requirements, it’s important to empower the right leaders to drive the effort. Start by considering a controllership-led approach that works closely with the sustainability, legal and risk functions, as well as integrating many other facets of your organization. You may also want to consider adding an ESG controller to your teams to help drive this process. Giving the reins to those in charge of financial reporting will help to ensure that your company is ready when the new SEC rules take effect.
2. Understand your climate data
For many companies, the data needed to provide an accurate view of Scope 1 and Scope 2 emissions (not to mention material Scope 3 emissions or those included in climate-related goals) will be challenging to corral. The data may not have been collected in a digital form, but if it has, are the systems in which it resides able to communicate with each other? Is the data being collected in a format that makes it easy to verify and audit?
Every public company is used to applying rigorous processes and controls to its financial data, as required by Sarbanes-Oxley (SOX). But is your company up to the challenge of bringing the same level of rigor to its climate data? Before the SEC’s proposal, this data has primarily shown up in corporate social responsibility or sustainability reports. These have very different standards to the SEC filings that will soon be required to show climate data.
3. Establish effective climate data governance
Going forward, compliance will be much easier for companies that standardize how climate data is collected, stored and verified. That’s likely to mean adopting a common ESG data framework across all of your company’s functions. It also means identifying who within your organization is ultimately accountable for oversight and governance of that data. This person will be responsible for verifying that controls and processes involving ESG data are appropriate and effective and that they meet SEC requirements. In all likelihood, this will be beyond the scope of the sustainability function—another excellent reason to consider adding an ESG controller to your team.
4. Assess climate risk across the business
Make sure everyone involved understands how various climate change scenarios will affect your company’s financial performance and operations. What if global average temperatures are held in check, rising less than two degrees Celsius? What changes if they rise more? This is an area in which it’s particularly important to break down silos and bring a cross-functional approach. It’s no longer sufficient for one function to have a monopoly on climate risk.
5. Determine impact to the financial footnotes
The SEC’s proposal would require companies to describe whether and how the climate risks they face are impacting their financial statements — or are reasonably likely to do so in the future — with specific reference to the financial metrics disclosed in the notes to the financial statements. To meet that mandate, your company should develop “impact pathways” to connect those events to likely accounting entries (the expected debits and credits). From there, it will be important to identify the financial statement line items most likely to be affected and work with their finance process owners to capture the right information for the footnote.
6. Get stakeholders aligned and educated
Change is never easy, and the organizational shifts companies will face to comply with these climate disclosure rules will entail a lot of change. These may include employees taking on new roles, responsibilities moving between functions, new systems and processes and, not least of all, higher stakes and increased expectations around how companies tell their climate stories. Some employees may need upskilling. Others may simply need clear communication about what’s different and why. No matter what, effective change management is crucial.
Climate change is just the beginning for ESG reporting
The SEC proposal will require most companies to make a big leap forward in how they collect and report on ESG data. Taking the right approach will make a big difference when it comes to meeting the proposed deadlines. It may also have an even broader impact down the road by providing a playbook companies can use to meet future additional ESG reporting requirements. These may include the enhanced human capital disclosure rules that the SEC is currently developing or the European Union’s Corporate Sustainability Reporting Directive.
Key to your company’s success in meeting these increased disclosure expectations will be the ability to break down silos and work across functions. Even in this collaborative environment, it’s important that those overseeing financial reporting are at the fore. A controllership-led model provides the right level of oversight and familiarity with public company reporting requirements. By starting with a clear picture of what must be included in new ESG disclosures, developing a plan to implement the right processes and controls to assemble the data and carefully managing the necessary changes within the organization, your company can put itself in a position to succeed under this new reporting environment.
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