Climate change: What the SEC proposal means for companies, auditors

By Andrew Kenney

A long-awaited draft proposal from the SEC could bring new standardization to the way companies report on climate-related risks and their own carbon emissions, with auditors set to play a major role in assurance on climate reporting.

The draft rule builds on prior SEC guidance and reflects changes in the market, said Wes Bricker, CPA, U.S. vice chair for PwC and U.S. trust solutions co-leader.

"I think this is a very significant step for businesses in their reporting for emissions, but everything requires context," Bricker said in an interview.

The AICPA has created a downloadable summary of the SEC proposal, outlining the key components and other important facts. The summary document also refers readers to other resources that can be used to better understand sustainability issues.

Thousands of companies are already reporting on greenhouse gas emissions and have set goals and commitments, Bricker said. Companies also increasingly are disclosing information about climate risks in various reports — often in response to global regulations in the European Union and elsewhere.

"All of this has come together for the current Commission as they've looked at both where companies are reporting, the information needs of investors, and then the opportunity to introduce a rule that would raise the bar for all companies and advance the goal of more consistent, more comparable and more decision-useful information for those who use financial filings," Bricker said.

According to the SEC proposal, certain registrants — such as large accelerated filers and accelerated filers — would have to subject select greenhouse gas emissions disclosures to attestation, according to Dennis McGowan, CPA, vice president of professional practice for the Center for Audit Quality, which is affiliated with the AICPA.

Publicly traded companies also would need to disclose climate-related risks and their effects on company strategy in their 10-K reports, and a proposed footnote to financial statements would include certain climate-related impacts, McGowan said.

"In some ways, some of this ESG reporting and assurance is already happening. But the proposed requirements could bring about a shift from a voluntary system of reporting to a more mandate-based system and putting this information in documents being filed with the SEC could bring some scale to this reporting and the related assurance, resulting in more comparability from company to company," he said.

Even if companies are collecting climate information, it often won't be easily accessible in the format required by the SEC, said Corinne Dougherty, CPA, audit partner with KPMG IMPACT. The information may currently be scattered across websites, investor questionnaires, proxy statements, sustainability reports, and more, she said.

"Companies will need to understand this increasingly sophisticated approach to aggregate the data, apply the right calculations and then align them with the particular disclosure frameworks, define them, and document proper governance of the process," she said.

The SEC proposal draws on existing guidance from the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol, which dictates how companies can calculate their direct and indirect carbon emissions within different scopes, Dougherty said.

"A gap analysis should be performed for companies to identify the extent of processes and controls over the identification of climate-related risk, Scope 1 and 2 greenhouse gas emissions, and then also the financial metrics, including the financial impact metrics, expenditure metrics, and the financial estimates on assumptions," she said.

Bricker, of PwC, said that companies must take stock of their current internal and external reporting: "Is it consolidated at a group level, or is it specific to a division, a segment, a geography?" he said.

"Maybe it takes a small change to a process — to accumulate consolidated information — or maybe it's a larger investment that they would want to make in order to support their operations and the quality of their reporting."

Bricker encouraged companies to consider creating an "ESG controller" position. He described it as "someone who really understands the operational data, the financial data, and can connect different domains within a company — can understand the controls, the process, and the reporting, both internal and external."

McGowan said that large companies already are preparing for the growing importance of environmental, social, and governance disclosures.

"I don't want to understate the complexity of the proposed requirements," he said. "They could bring about significant changes to corporate reporting, but I do think that companies as well as accounting firms are used to making changes to adapt to new requirements to implement new standards."

The proposed standards, Dougherty said, reflect a growing interest in the marketplace.

"While this is still a proposal it does coincide with the rising investor demand and regulatory changes globally," she said. "Companies really should start preparing now."

Andrew Kenney is a freelance writer based in Colorado. To comment on this article or to suggest an idea for another article, contact Ken Tysiac at

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