The multiverse of ESG

Day 1 of the 2022 AICPA & CIMA Conference saw ESG perspectives from preparers, but few formal comments from the SEC.

There was high expectation that ESG would be a recurring theme on the opening day of the Conference. The Office of the Chief Accountant made only limited formal remarks, although SEC Acting Chief Accountant Paul Munter answered ESG questions at the end of Day 1. In addition, a panel of preparers gave their perspectives on preparations for ESG reporting.  

Finalizing the climate rule

While not commenting on the timing of the SEC’s final climate rule, OCA staff did talk about international developments. Nigel James highlighted that the SEC is not alone in progressing ESG reporting by registrants, with ESG rulemaking becoming a reality in a number of countries – including under the Corporate Sustainability Reporting Directive in the EU. Read about the CSRD here.

Regarding developments with the International Sustainability Standards Board (ISSB), James specifically called out that the ISSB had voted to require disclosure of Scope 1, 2 and 3 greenhouse gas (GHG) emissions based on the GHG Protocol, with some relief for Scope 3. Read more about the ISSB’s decision here.

“I’m keen to see where the SEC lands on Scope 3 emissions, how the financial statement impact note will be structured, and how international developments might influence the final climate-related disclosure rule. But let’s not forget that human capital, board diversity and cyber disclosure rules are also on the Commission’s agenda, so a lot to look forward to.”

— Anita Chan, KPMG Partner

Munter answered questions on the comparability of international ESG standards. He emphasized that the SEC is engaged on the international front and trying to achieve as much interoperability as possible. However, he noted that all ESG initiatives are moving parts and therefore achieving interoperability has challenges. While not being able to promise the outcome, Munter made it clear that there’s lots of discussion; and he acknowledged that if the standards or rules are aligned, it will improve comparability and be more cost-effective for companies.

“My belief is that the forthcoming climate standard from the International Sustainability Standards Board could eventually form the default disclosures for US companies. During COP27 we saw CDP announce that they’ll require the disclosures from 2024, and that’s going to affect a lot of US companies.”

— Julie Santoro, KPMG Partner

Here’s a reminder on the status of ESG-related rules and/or proposals in the US.

Analyzing responses to the climate proposal

Munter re-emphasized previous messaging that the Commission is diligently working through the more than 15,000 responses received. In recent public appearances, SEC staff has reminded us that companies are already making disclosures, and investors are making decisions based on that information. Therefore, the SEC’s proposal on climate-related disclosures is about bringing ‘consistency and comparability’ to those disclosures.

Learn more about responses to the SEC’s climate proposal here.

Regardless of whether a final rule is issued or its timing, we expect climate-related disclosures by registrants to be discussed in Wednesday’s comment letter panel and SEC enforcement update.

Human capital proposal remains in progress

SEC staff did not comment on the forthcoming human capital disclosure proposal. Chair Gary Gensler’s recent remarks have outlined that the Commission is still considering the need for potential enhancements to the human capital disclosure rule from two years ago. He also continues to emphasize that the Commission is a disclosure-based rather than a merit-based regulator, meaning that SEC rules are intended to provide investors with the information they need to make decisions, and not to change behavior.

Previous speeches have highlighted the following specific disclosures as being under consideration, but it remains to be seen whether they are in the proposal:

  • workforce turnover
  • skills and development training
  • compensation and benefits
  • workforce demographics, including diversity
  • health and safety.

Cybersecurity top of mind for all

Read our blog on cyber discussions at the Conference here, including perspectives on the governance aspect of the SEC’s proposed cybersecurity disclosure rule.

A perspective from preparers

KPMG ESG Audit Leader Maura Hodge moderated a panel discussing how registrants are preparing for ESG reporting. She was joined by Sheryl Burke, Senior Vice President of Corporate Social Responsibility at CVS Health; Daniel Lim, ESG Controller at Alphabet; and Michael Tovey, Corporate Sustainability Controller at Bank of America.

All panelists stressed that ESG reporting is not just a compliance exercise, and they are not simply waiting for the SEC’s climate rule. Lim noted the increasing stakeholder pressures and expectations from investors, but also consumers, employees and a company’s supply chain. Tovey called out the impact of overseas regulations – such as the newly approved Corporate Sustainability Reporting Directive in the EU, commenting on the expansiveness of the required disclosures and its impact to US companies. Read more about the EU disclosures here.

Burke spoke to the focus of investors on ESG-related issues and the importance of engaging; she noted that addressing investor concerns before receiving a shareholder proposal is key to managing reputation.

Governance was a key theme of the discussion. Both Tovey and Lim spoke about their ESG steering committees that provide oversight and accountability – they encouraged collaboration between sustainability and financial reporting. Lim explained his company’s executive-level council established to evaluate Alphabet’s sustainability goals; this council enables a consistent and clear disclosure strategy and narrative across all communication channels.

The biggest challenge noted by panelists was data, with Burke noting the lift is meaningful – but a good governance foundation is crucial to success.

“We’re entering a new era of reporting. The traditional sustainability report is a thing of the past. Instead, regulatory reporting will include investor-grade information and dynamic, real-time web reporting will be used for customers, employees and suppliers. Start reimagining the future of reporting today.”

— Maura Hodge, KPMG ESG Audit Leader

Read more about the ESG reporting journey here.