By Guest Columnist ROBERT KERR, audit and assurance partner at Deloitte and Touche.
For some years now, many organizations have embraced community-minded environmental, social and governance (ESG) initiatives. These initiatives aim to improve the world and burnish an organization’s reputation in the community. No small business asset, ESG has been a strong signal on the corporate radar screen. It’s bound to become an even stronger signal now that the Security and Exchange Commission (SEC) has announced intentions to regulate the reporting of these initiatives. The SEC’s climate proposal was unveiled in March of 2022.
This is a significant area of focus for the Atlanta business community, due to its size and stature. With a GDP of $442.2 billion, the Metro Atlanta economy is one of the biggest in the country, according to data from the Metro Atlanta Chamber of Commerce. The area is home to 16 Fortune 500 and 13 Fortune 1000 companies, as well as 200 organizations on the Inc. 5000, the list of the nation’s fastest-growing companies. Given the maturity of the Atlanta business ecosystem, understanding what steps to take as it relates to ESG is a priority.
Robert Kerr is an audit and assurance partner at Deloitte and Touche.
Currently, corporate reporting around climate change is largely unregulated and, in many cases, inconsistent across companies. Yes, capacity and governance are required to enact these changes, but ESG oversight is not clearly defined. Deadlines for collecting and reporting data are unclear and typically extend well beyond 10-K filing deadlines, which are decidedly not unclear. Processes and controls for climate-related data likely aren’t quite as developed as they are for financial data — likely because disclosure is voluntary, at least for listed companies. Assurance, an organization’s path to accurate, high-quality, and reliable disclosure, is currently not required.
The SEC proposes to add rigor to the above by requiring certain disclosures. Among them — governance of climate-related risks and their expected short-, medium-, and long-term effect on a company’s business model, strategy, and risk-management processes; the effect of climate-related activities on a company’s financials; Scope 1, 2 and in some cases Scope 3 greenhouse gas (GHG) emissions; assurance regarding GHG disclosures; and information on climate-related targets and transition plans.
The SEC proposes a timeframe of multiple years for implementing these disclosure requirements, stretching from 2023 to 2027. That gives organizations some time to gather the necessary resources, both technological and human, to meet these new standards. How? Here are seven suggestions:
- Establish or refine climate governance. Decide which board members and members of management should oversee climate-related matters and assign clear roles and responsibilities. Schedule regular meetings for climate-focused conversations and add educational seminars to the mix. Consider linking compensation to ESG or climate performance for applicable executive positions.
- Include the Right People. Engage with stakeholders regarding the new reporting rules. This should include education on climate-related risks, data collection, and target setting. It should also include establishing a cross-functional sustainability council that has clear roles, responsibilities, objectives, monitoring, and accountability.
- Build Reporting Agility. To prepare for assurance, standardize governance and controls around ESG to enhance data quality, timeliness, automation, and relevance. Bring relevant stakeholders up to speed on the proposed SEC requirements and reporting timelines. Align with recognized frameworks and standards, for instance, the Greenhouse Gas Protocol and the Task Force on Climate-related Financial Disclosures (TCFD).
- Establish Controls for Climate-Related Data. Determine what’s on hand and what’s needed, as far as technology, processes, and controls, to report this data; leverage existing financial reporting control structure, if necessary. Document current process flows and matrices for climate-data reporting and prepare for the SEC’s regulatory timeline. Then establish near- and long-term plans to meet the timeline for Scope 1 and Scope 2 GHG emissions and potentially phased-in Scope 3 GHG emissions.
- Think Strategically. Take the time to fully understand and prepare for new disclosure requirements and integrate climate risk and opportunity analyses into business strategy.
- Identify Climate Risks and Opportunities. This includes physical and transition risks and opportunities to the business, for instance, legal and policy, market, product, and physical hazards. Determine how these risks might affect the financial statements over the short-, medium-, and long-term. If a scenario analysis has been completed, use it to disclose scenarios, parameters, assumptions, and financial impact.
- Be Transparent. Prepare for accelerated reporting timelines, similar to those for financial reporting. Create a plan to obtain and/or increase the level of assurance. Disclose relevant metrics and evidence that indicate progress toward achieving targets. Consider financial accounting and reporting implications and engage internal audit in the processes.
This may sound like a major undertaking, and it can be if you are not prepared. While the clock is ticking, there is ample time to take the necessary steps toward compliance. The goal is that these initiatives will ultimately lead, one hopes, to a greener Atlanta and a healthier planet.
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