On March 21, 2022 the SEC released its proposal, The Enhancement and Standardization of Climate-Related Disclosures for Investors.
SEC Release Nos. 33-11042 and 34-94478
As investors seek more in-depth and better quality information about climate risk, we agree that standard-setting will achieve more consistent and comparable disclosures. We believe the objective of such standard-setting should be to meet the needs of investors in a way that is practical and minimizes the costs to preparers. Further, like other new disclosure requirements in the past, additional interpretive guidance and ongoing collaboration with standard-setters would be beneficial.
— Scott Flynn, KPMG US Audit Vice Chair
Global baseline disclosures
We support a ‘building blocks approach’ that would allow national and regional jurisdictions to build on a global baseline to set supplemental standards that serve their specific jurisdictional needs.
This practical approach would allow the Commission (and others) to support a global baseline without sacrificing the nature or timeliness of its independent actions. It would also reduce the cost and complexity of compliance for companies with a global footprint.
In November 2021, the IFRS® Foundation announced the formation of the International Sustainability Standards Board (ISSBTM) with the vision of creating that global baseline. The IFRS Foundation has had the advantage of being able to build on existing expertise, and has considerable support from institutions as well as from companies and investors around the world. It released its first proposals at the end of March 2022.
The Commission is a member of the newly formed ISSB Jurisdictional Working Group, whose aim is to enhance compatibility between global baseline and jurisdictional initiatives.
The Commission’s proposal has implications for the preparation of financial statements, the audit of financial statements, and the attestation of greenhouse gas (GHG) emissions. In each of these areas, we encourage the Commission to actively liaise with other US standard-setters, namely the FASB, the PCAOB and the AICPA.
In respect of the proposed financial statement disclosures, their scope is more expansive than other Commission-mandated disclosures. Interpretative guidance would help achieve the desired level of consistency and comparability, and would benefit from a process that involves ongoing collaboration with the FASB. Given the scale and scope of this proposal, we believe such collaboration would be particularly helpful in meeting the Commission’s objectives.
We also recommend interaction with the International Auditing and Assurance Standards Board, and with other regulators globally. Similar to sustainability disclosures themselves, preparers and practitioners would benefit from collaboration and maximum interoperability at this level of standard-setting.
Financial statement disclosures
We understand the Commission’s desire to bridge the current information gap between the perceived needs of certain investors versus the reality of applying current accounting and auditing standards. We also recognize the importance of companies disclosing the actions they are taking to deliver on their climate ambitions and the effects of climate risk in general, and acknowledge that one way to achieve this is to identify specific line items in the financial statements that are affected.
However, if disclosure is triggered by 1% of any line item in the financial statements (including absolute values of immaterial amounts), the proposed approach means that an event, condition or activity that is otherwise clearly not material could trigger disclosure. At the same time, other events that are arguably more important to the company’s operations might not exceed the 1% threshold and therefore would not be disclosed. It is not clear to us that this type of disclosure is what investors are seeking, and it would likely be costly and difficult to implement.
While the disclosure threshold is not described as a materiality threshold, we believe the effect could be the same in terms of its application. We recommend that the final rule be framed in the context of existing materiality guidance.
We agree with the Commission’s leverage of the work of the GHG Protocol, which is the leading source of guidance on the measurement and reporting of GHG emissions. We also understand the Commission’s reasoning that it should allow flexibility in measurement methodologies and not simply wholesale import the standards and guidance of the GHG Protocol, which is not currently subject to regular updates and maintenance.
To that end, we think the recent announcement by the GHG Protocol that it is embarking on a project to assess and update its guidance is a positive step. We recommend that the Commission actively engage with the GHG Protocol’s project. In the meantime, we support continued use of the GHG Protocol while it is being updated, or until such time as an alternative complete emissions accounting model emerges.
The proposal represents a new phase in corporate reporting for most companies, and it will take time to both develop and implement processes and controls over all of the proposed disclosure requirements. Similar to the implementation of a significant new accounting standard, we believe the period to adoption should be commensurate with the size of the undertaking.
There are a number of approaches to transition that could be explored, but ultimately we encourage the Commission to thoroughly consider responses from registrants regarding the time they need to prepare for the final rule.