Key takeaways on readiness for ESG regs and investor views

In the September 2022 installment of Ernst & Young LLP’s Think ESG webcast: Navigating the next phase of ESG reporting , renowned experts discussed expectations for the Security and Exchange Commission (SEC) proposal for climate-related disclosures, how companies are preparing for new regulations, the investor perspective on climate disclosures and what international activities are likely to impact non-EU reporters. I was privileged to moderate the conversation, and debriefed each section with Brian Tomlinson , Panelists included:

·??????John White, Partner at Cravath, Swaine & Moore and former Director of Corporate Finance at the SEC

·?????? Pamela Oberski , North America Finance Director and Finance Lead for ESG Reporting at Dow

·?????? Lindsey Stewart, CFA Director of Investment Stewardship Research at Morningstar

·?????? Andrew Hobbs , EY EMEIA Public Policy Leader

Here are five key takeaways from the conversation:

1.??????Finalizing the SEC’s climate disclosure proposal will follow a similar process to other rulemaking, but there are some differences.

The SEC received an enormous amount of feedback on this proposal, and additionally, the staff and commissioners have held a significant number of stakeholder meetings to gather input that will need to be considered. While the Division of Corporation Finance of the SEC analyzes all the feedback and proceeds to consider the costs and benefits of any final rule, the Office of the Chairman is also significantly involved.?

There are also many aspects related to the timing of when components of any final rule would be effective. For example, the proposal was drafted under an assumption that it would be finalized by the end of calendar 2022, with at least some components effective during 2023. The expected steps to finalize the rule include giving notice of an open meeting with the topic on the agenda, holding the public SEC meeting and vote to finalize the rule, publication of a fact sheet and publication of the final text of the rule in the Federal Register.?

2.??????Most companies are taking steps now to prepare for the SEC’s finalized rule on climate-related disclosures.

?To prepare for the upcoming mandates, companies should consider focusing on:

a)?????Getting executive boards up to speed on ESG. Environmental, social and governance (ESG) disclosures are not one-size-fits-all for every board; they are largely dependent on the size and structure of your company. The most common place for ESG to reside is with the governance committee, but some companies house ESG in their risk committees, or may even have a separate ESG committee. These committees need to focus on carrying oversight responsibilities. Finance professionals should keep their board aware of the evolving reporting landscape and their activities to get ready to include increasing quantities of climate and other ESG information in their regulatory filings. Audit committees may also ask about policies and procedures for the collection and reporting of ESG information.

b)?????Determine how you’re going to produce investment-grade ESG metrics and nonfinancial information. Some leading finance organizations are working cross-functionally in their organizations to improve the rigor of the ESG reporting processes. While finance professionals don’t need to be experts in climate and carbon accounting, their skills in control processes and procedures should be leveraged to help understand the gaps in their current sustainability reporting compared to what they want it to be when the data is included in annual SEC filings.?

The cross-functional collaboration is important because no one department or person can cover sustainability reporting. In many cases, it is a shared responsibility, with sustainability teams that are learning about data collection and reporting leading practices from the finance professionals. In turn, the finance teams can learn about the Greenhouse Gas Protocol and other technical subject matters from the sustainability professionals who have been collecting this information historically.

3.??????Some of the largest asset managers have nuanced views about climate reporting and the SEC proposal.

?While many people assume that investors were unanimous in supporting all aspects of the SEC climate disclosure proposal, some of the largest asset managers had some differences of opinion. For example, some asset managers were in favor of mandating disclosure of greenhouse gas emissions in regulatory filings. On the other hand, not all agreed with that approach, with one positing that reporting companies should only report on Scope 1 and 2 emissions if they were materially exposed to climate risk. Furthermore, on the topic of Scope 3 emissions, some of the largest asset managers suggested in their comment letters to the SEC that some Scope 3 estimations are too imprecise to be included in regulatory filings and that they should only be reported if it is material and reasonably estimable. However, a different asset manager did indicate that Scope 3 emissions are a necessary supplement to disclosure of Scope 1 and 2 emissions; in their view, quantitative emissions disclosure would be incomplete without it.

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4.??????Activities and proposals from the European Union are expected to impact companies from the Americas with significant operations in the EU.

Progress on the Corporate Sustainability Reporting Directive (CSRD) continued this summer, with the parties agreeing to a compromise. While final text and Member State ratification is still to come, it’s becoming clearer that companies in the Americas are likely to be affected by the CSRD. Two provisions in the scope of the CSRD could impact multinational organizations, even if they are headquartered outside of the EU.

First, any significant European subsidiaries of global companies could be impacted if they meet two of three established criteria . If so, management reports of those EU operations would need to include ESG disclosures that are being drafted by the European Financial Reporting Advisory Group (EFRAG).?

As a result, companies with operations around the world should keep an eye out for developments in the jurisdictions in which they operate. Increasingly, it appears that many American organizations could have to implement both an SEC final rule as well as regulations coming from the EU.

Looking forward

The next phase of ESG reporting will evolve around a rapidly changing regulatory landscape, with both the SEC and the EU looking to finalize requirements in the near term. Companies should begin their readiness efforts now, rather than wait until the final text of the rules is published. Keep in mind that beyond the compliance exercise of new regulations, corporate reporting will need to adapt to the evolving information needs of investors, who aren’t monolithic in their views of what climate data is most critical for them.

Stay up to speed and learn more by monitoring the EY ESG reporting page and registering for our upcoming webcasts.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization. Moreover, they should be seen in the context of the time they were made.