Month: September 2022

SEC Proposed Climate Disclosure Rule:

Challenges and Tips

At September 1, 2022, it has been almost six months since the SEC proposed a rule on disclosure of climate related risks.  It has been nearly three months since the comment period closed.  DHC was asked to offer challenges and suggestions at the Compliance Week ESG Conference in September 2022.   Compare these to your own.  See how they align with an SEC final rule.

Challenges

• The “1% Rule”: It is not clear what aspects of income, expenses, asset value, or liabilities could be subject to climate-related events or risks.   Some might be obvious, such as (for an insurance company) increases in claims for flood damage.  For most, though, the nexus between operational costs, asset value and other components of financial statements isn’t yet clear.  This is arguably the whole point of the proposed rule.  Investors want to know how climate change could affect – and have affected – financial performance. 
• Company Processes and Controls: These are not fully aligned with reporting frameworks, such as TCFD[1].  Many processes to gather data and information are informal (or non-existent).  They are not yet developed as internal controls, such as the Internal Controls Framework used for financial reporting, posing challenges for CFOs, CEOs, General Counsel, or parties responsible for signing SEC filings.   
• Pace of Change: The need for data, information, IT systems and controls is outpacing reliable platforms, and experienced resources. Vendors are racing to provide solutions as though one will fit all.  It won’t.
• Attestation/ Assurance: The SEC proposal would require attestation of GHG emissions inventories.  If required by the financial auditor or another CPA firm, this would raise the bar considerably for documentation and preparation.  This may also discard decades of experience by technical and other consultants. 
   
• Goals and Targets: Some requirements are triggered only if a company reports goals and targets.  If you don’t, the first question from analysts will be “why not?”  Goals and targets create expectations for future reporting periods. Companies will be challenged to prepare and implement action plans, backed by sufficient resources to achieve their goals.

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[1] Task Force on Climate-Related Financial Disclosures; see www.fsb-tcfd.org