Why the SEC climate rule deserves CPAs’ attention

Ami Beers, CPA, CGMA, senior director–Assurance & Advisory Innovation for AICPA & CIMA, joins the JofA podcast for this episode to guide CPAs on how to approach the new SEC rule on climate-related disclosures.

The SEC adopted the rule March 6. But, about a month later, it put a stay on the rule’s implementation, in response to multiple legal challenges to the rule. Some argued that the SEC overstepped its authority, and others said the SEC didn’t do enough.

Either way, it’s likely the rule will affect corporate reporting going forward, despite the lack of clarity now. Beers explains that and more, underscoring the importance of not waiting to understand the rule.

Resources

• May 23 webinar mentioned by Beers
• AICPA and Center for Audit Quality summary document
• JofA March 6 article on rule adoption
• JofA March 14 need-to-know summary

What you’ll learn from this episode:

• Ami Beers’ rundown of the recent timeline of sustainability reporting and the SEC’s adoption of its rule on climate-related disclosures.
• What the data, in multiple surveys from the AICPA and the International Federation of Accountants, shows about companies’ reporting on climate information.
• What’s next regarding the legal challenges affecting the rule.
• Why Beers said “there’s a lot to unpack” regarding the rule.
• Why, despite legal hurdles, Beers believes the rule should remain on CPAs’ radar.
• The importance of legislation in the European Union and California on climate-related reporting.

Play the episode below or read the edited transcript:

— To comment on this episode or to suggest an idea for another episode, contact Neil Amato at Neil.Amato@aicpa-cima.com.

Transcript

Neil Amato: Welcome back, listeners, to the Journal of Accountancy podcast. We’re glad to have you here for another episode. This is Neil Amato with the JofA.

For this episode in mid-May, we’re going to talk about the SEC climate rule and what it means for accountants and reporting requirements going forward. Our guest is Ami Beers. Ami is a CPA who holds the CGMA designation. Her title is senior director–Assurance and Advisory Innovation for AICPA & CIMA. Ami, thanks again for joining us.

Before we get into some of the details of that SEC climate rule adopted March 6 and some developments since, could you first take a moment to reflect on the journey to this point and the historic nature of the rule being adopted?

Ami Beers: Absolutely. Thank you, Neil. Thanks for having me back.

We have been tracking the sustainability reporting for a while, and we’ve been conducting some research, and we’ve been working with IFAC, which is the International Federation of Accountants. We actually have four years’ worth of data through that report, and we just actually released our fourth update this past February. What it shows is that companies both around the world and here in the United States have been voluntarily reporting this information and actually getting assurance on this information. It’s because of the market. It’s because investors are demanding this information. Large companies are making commitments around some of these topics, and they’re holding themselves accountable. So they’ve been voluntarily reporting on their process.

Back in 2021, the SEC actually conducted a consultation and requested input on disclosures around climate change. They heard from many different people, specifically from investors, that this information is really vital to their decision-making. Back in 2022, they did a proposed rule, where they proposed the climate disclosure rule for investors and enhancing investment decisions. Since then, they’ve received over 24,000 comment letters on this rule. It took them a while obviously to get through all that information and all of that feedback from all of those different letters. So here we find ourselves with the final approved rule that came out in March of this year.

Amato: I’m going to ask you a question about what I’m calling historic response. But can we first go back to 24,000 comment letters? Have there ever been that many comment letters before?

Beers: Never. It is the first of its kind.

Amato: Wow. After the final rule was released, in fact, within hours of its adoption, two state attorneys general, with the support of eight other states, filed a petition for review with the Eleventh U.S. Circuit Court of Appeals. Then nine days later, the Fifth U.S. Circuit Court of Appeals temporarily paused the SEC rule. That’s obviously noteworthy, but the first reporting related to the rule isn’t until fiscal year 2025. So what’s the status of the litigation and how, if at all, should it affect CPAs and other finance professionals regarding the rule’s adoption?

Beers: Unfortunately, this has become really a very heated political issue. Actually, since the rule was finalized in March, we now have 11 different cases that have been filed challenging the rules. These are from individuals, the states, as you mentioned, some nongovernmental organizations, and even climate advocates, because these challenges are actually going in both directions, where some are saying the SEC has overstepped and others are saying they haven’t gone far enough.

These challenges and these cases have been filed in different courts around the country. So there’s been a consolidation order. Actually on April 4, the SEC said, OK, we’re going to voluntarily stay this implementation of the rule and we’re going to wait for the judicial review, which will actually take place in the Eighth Circuit Court. Now, we don’t know exactly what’s going to come of this. But the SEC has said it will defend its rule, so more to come.

Amato: Exactly. Is there any real timeline for that court procedure?

Beers: I’ve heard later this year, but I don’t really have specifics, unfortunately.

Amato: Yeah, I mean, the final rule took much longer than we expected, so it could be lengthy. After all these years of waiting and speculation about the rule itself, CPAs do have something concrete from the SEC related to this. What’s your advice — legal delays aside or any changes — what’s your advice on how to get started?

Beers: We shouldn’t wait. There is a lot to unpack in this rule. My advice would be, if you’re a public company and you could be subject to the requirements of this rule, you really will need to read and understand the rule and look for resources that provide some insight into some of these requirements.

The AICPA and CAQ actually have come together and put a summary of the high-level requirements of the rule. We’ve posted that on our website. But some of the things that you really need to think about [include] that this has a financial statement impact and there are new requirements for new footnote disclosures. There are reporting requirements outside of the financial statements that are going to take some time to understand.

Companies are going to need to assess whether these issues are material enough and whether they require disclosures. Companies need to determine what’s going to be involved with that process. They need to understand the different risk areas. They’re going to need to start gathering some of the data, and much of this information will come from sources both internal but also external from the company. They’re also going to need to start collaborating with others across the company because it’s going to impact different areas, through operations and whatnot.

All of this is going to require establishing governance and processes to establish these different reporting requirements. Also, as I mentioned, because there’s a financial statement impact, you’re potentially probably going to have to establish some new accounting policies.

All of this is going to take some time to get through. Now, we’re going to be hosting a webcast that will review these rules and what practitioners really need to know. This is going to be a really good opportunity to get some insights for how accountants within the organization as well as CPA advisers and also assurance providers should prepare to get ready.

Amato: That’s good. Thank you for the mentions of those resources. I’ll first note that we’ll have the links to both of those in the show notes for the episode. The first being the AICPA and CAQ summary. CAQ stands for Center for Audit Quality. We’ll have that. The first broadcast, so to speak, of the webinar is May 23, 9 a.m. ET. We’ll have the link in the show notes. Is there anything more to say about that webinar coming up on May 23?

Beers: That’s a great opportunity, because not only will it talk about what the requirements are of the rule and give you the technical requirements, but you’ll get some insights and advice on how to get started, and depending on what role you play either within the organization or externally from the organization, what are some of the things that you should be thinking about and some of the ways you can approach this.

Amato: In the summer of 2023, the ISSB, the International Sustainability Standards Board, adopted a global baseline for climate disclosure. That was an event, I guess, regarded as a key step toward ending the alphabet soup of sustainability reporting. But the SEC rule doesn’t require the use of the global baseline, does it?

Beers: That’s true. But I would say that many of the requirements of the SEC rule are based on the recommendations of the TCFD framework, and so that was the Taskforce for Climate-Related Financial Disclosures. The TCFD was actually incorporated within the ISSB, and that is what many of what those standards are actually based on. There is actually connectivity and overlap.

While it’s early days for ISSB standards — you mentioned, yes, they were just released last year and many different countries are taking a look and assessing those standards and determining whether those will be adopted within those countries and different jurisdictions, the SEC rule with its finalization in early 2024 — I think they’re taking a look at the landscape and hopefully will determine eventually as other countries start adopting them that the ISSB standards would be accepted by companies who are reporting for other jurisdictions.

Amato: Great. Thank you for that. We mentioned it at the top of the show. Your title includes the words “assurance and advisory.” What does this new rule say about assurance, and what’s the potential impact of that on CPAs?

Beers: As I mentioned, there are new requirements within the financial statements themselves. With a new note disclosure, obviously, your financial statement auditor will be directly impacted with the audit of this new footnote and looking at the accounting policies around that and making the determinations of whether companies are reporting this or not. That’s an impact on the audit.

In addition, I mentioned that there are requirements for reporting information outside of the financial statements within the 10-K. Now, the financial statement auditor will still have responsibility for some of that information and at least in terms of reading it and understanding it and making sure that there’s no inconsistencies from the financial statements. But there’s also an additional requirement that the greenhouse gas emissions statements within the 10-K have a separate attestation engagement. Now that engagement can be performed by the same auditor who’s doing the financial statement audits themselves, or it can be a different auditor. Again, a lot to uncover there for the auditors, a lot of opportunity and a lot to take a look at.

Amato: This is going to continue to be something that has to be unpacked, has to be waited out as far as the legal parts of it. There’s always more we could say, but what else that I haven’t asked you about do you think it’s important to end on today?

Beers: Well, because of the stay, I think many companies might think that they want to wait and see what happens and see how this whole thing plays out. I personally think that would be a mistake.

If you’re a public company in the U.S. and you’re subject to these other reporting requirements, say from the state of California, who has climate laws around reporting these climate risks and greenhouse gas emissions, as well as companies that are here in the U.S. but maybe [are] doing business in the EU, for instance, there’s lots of requirements related to their Corporate Sustainability Reporting Directive.

You don’t have the luxury to do nothing at this point. You’ll be starting to implement those requirements for those other regimes, and you probably should consider the SEC rules in that analysis because you don’t want to have to come back when the SEC rule does come out and redo any processes if there’s differences. That’s something to think about.

Now, if you’re not subject to those EU and California requirements, there are things that you might still need to become educated about if you’re a public company and you are subject to the SEC rule, again, there’s a lot there. It’s going to take some time. But if you’re not public and you’re not subject to those other requirements, you might still be getting asked for this type of information.

Many large companies who are subject to the state of California rules or the EU laws have to report on the impact to their value chains. Many of them have themselves announced targets and commitments to meeting certain metrics. Smaller companies who do business and are in the value of chains of these larger companies might start to see some requests come through from their customers in terms of purchasing contracts and metrics and reporting that they’re going to need to do.

Companies like Walmart and Microsoft and Amazon, they’ve established these supplier policies that require information to be reported to them. My advice is to really become educated, become aware because this sustainability reporting may be coming to a channel near you soon.

Amato: It’s a good point. Even if you think, this doesn’t really affect me, the nature of supply chains today, chances are some company that someone else works with is going to be affected and have to have new requirements, so to be savvy about the rule is important.

Beers: That’s right.

Amato: Ami, thank you very much for joining us. We look forward to what this holds in the future, but we appreciate this mid-May update.

Beers: Thanks for having me, Neil. Always a pleasure.