The U.S. Securities and Exchange Commission (SEC) has proposed a historic new rule that would require publicly traded companies to significantly increase reporting of their climate-related risks, emissions, and net-zero transition plans.
The new climate proposal aims to enhance and standardise companies’ climate-related disclosures for investors and other market participants, including greenhouse gas emissions and exposure to climate change risks – ensuring consistency in the quality, and comparability, of information contained in corporate climate disclosures.
If enacted, the new ruling would apply to all public companies that file the US 10-K as well as foreign private issuers that file 20-F forms with the SEC. Although the SEC’s regulations don’t apply directly to private companies, privately owned businesses that are in public company value chains still need to pay attention.
“Under the rule, companies would be required to disclose climate change risks to their operations when they file registration statements, annual reports, and other filings,” Wes Bricker, PwC’s US Trust Solutions Co-Leader tells Business Chief.
Wes says the SEC’s proposal is historic for the US and fits into a global pattern that is increasingly pushing for critical reporting requirements for greenhouse gas emissions, climate risk disclosure, and other sustainability-related information.
“While climate disclosures around the world vary, the SEC’s proposal seeks to foster comparable, consistent climate information that companies with global operations are already complying with and the rule aims to be consistent with the building blocks approach set out by international organisations,” he says.
Ensure consistency and prevent greenwashing
An increasing number of organisations are making net zero commitments and providing reporting to share information about emissions and their pathway and milestones to transition – a disclosure of metrics relating to company climate journeys that is currently voluntary.
But now regulators, investors and other stakeholders are increasingly asking for comparability, consistency and enhanced quality in ESG reporting, explains Wes, and SEC rulemaking is a step in that process. “This is an important step to prevent greenwashing and to make sure everyone has access to the same quality of information,” he says, adding that the timing of the proposal is reflective of what investors are expecting from businesses.
“Historically, the SEC steps in to enact measures when there’s a significant need for the disclosure of information relevant to investors’ decisions. Many companies have made net zero commitments and have been voluntarily disclosing their climate journey. But investors, as well as consumers and other stakeholders, are not only expecting companies to report this, but the overall market is pushing companies to disclose it in a standardised way that allows for comparability.
“Accurate and standardised reporting also provides investors and other market participants with more consistency. As well, standardised reporting creates accountability for companies in regard to their progress in meeting their ESG goals and protecting the business from climate-related risks.”
Wes explains the proposal is a much-awaited step by the SEC to respond to investors’ expectations to have better, more reliable information to make decisions. “It’s a necessary step to provide investor-grade, decision-useful information that can inform the decisions that underpin the functioning of the capital markets,” he says.
And while the final adoption of the new ruling may not happen until 2024, Wes urges business leaders to “pay attention and make preparations now to properly anticipate and prepare for the rule requirements”.
Challenges for business
Wes explains that like other compliance-related measures, the proposal does require additional resources, costs, investments and time, which may present a burden especially for smaller businesses that are public companies.
“Businesses are at different points in their ESG journey making it easier for some to comply with the proposal, whereas for others, significant investments will be necessary,” he says.
To meet these new requirements, many businesses will likely need to transition to investor-grade and tech-enabled reporting, to “dramatically accelerate their climate change reporting processes, while implementing effective governance and internal controls”.
In a comment letter to the SEC, PwC proposed that the effective date of any final rules should be phased and should also consider the time needed to develop and implement related systems, processes, and controls. “A phased approach would allow businesses to have additional time to review the final rule’s impact, potentially reducing the cost and burden of implementation,” explains Wes.
Ramifications for the leadership team
For senior leaders, the SEC’s climate disclosure rule carries various ramifications but perhaps the most important, according to Wes, is how compliance with the proposed rule will play an important part in telling a company’s overall financial picture to investors, government regulators, and other critical stakeholders.
“Senior leadership will need to continually consider how its climate-related risks position a company across both the short and long term. With these disclosures no longer being voluntary, senior leadership also must be mindful of how climate-related risks offer a new way for investors to compare companies across the same industry.”
Ultimately the role of complying with SEC’s ruling will lie with the CFOs and their role leading a company’s overall finance operations. The climate-related disclosures will filter into a company’s overall filings which squarely sits as the responsibility of the CFO.
Additionally, part of a CFOs role will be explaining how these climate-related risks translate to a company’s overall financial impact. The office of the CFO will also need to figure out both in terms of cost and structure how it will reorganise itself to comply with the final rule.
“CFOs increasingly work across the enterprise and are intertwined with company operations,” says Wes. “A big reason for this connection is the need for the integration of finance with day-to-day business operations in order to plan ahead and pivot for the future. An ESG Controller that is familiar with operational and financial data is an important role to add to implement ESG capabilities and establish business requirements aligned with expectations.
“This function also plays a role in developing measurement and reporting policies, performing risk assessments for the design of internal control and governance, and preparing a forecast to inform whether the plan is on track in relation to objectives and incentives.
“Ultimately, the proposed climate change disclosure rules – and the leaders who will help meet the new requirements – play a vital role in building trust in our capital markets and Institutions.”
Considerations in executing ESG goals
Wes emphasises the importance of companies having the right team in place to manage climate change and other ESG reporting. Though businesses will already have internal controls and experts who manage financial reporting, there is a need for an ESG team, and a good step is to create a position for an ESG Controller.
“An ESG Controller has the authority to implement ESG capabilities and is able to connect the dots within an organisation, including across internal and external controls and processes, as well as operational and financial data, to help deliver on ESG Objectives.”
To successfully execute on ESG goals, Wes says companies also need to realise the importance of integrating ESG metrics with corresponding financial metrics and business’s corporate narrative. There shouldn’t be one ESG narrative and a separate financial narrative – the two need to be intertwined.
“Here at PwC, we’re working to connect our ESG narrative with our financial narrative by publishing a Climate-Related Financial Disclosures Report, which launched in January 2023. As part of PwC’s global network, we’ve committed to net zero emissions by 2030, with respect to our own operations. The disclosure report focuses on the risks the climate poses to our US firm so we can continue to strategically plan and respond to the uncertain impacts of climate change.
“That integration of financial metrics and ESG metrics helps to not only bolster the success of complying with the SEC’s proposal and executing on ESG goals, but also helps make a connection between what a company is saying and what it is doing when it comes to ESG. That ultimately can help companies build trust with various stakeholders, including investors and consumers.”
Wes Bricker – public service passion
Wes Bricker, PwC’s Vice Chair – US Trust Solutions Co-Leader, has been fortunate to have several experiences at the SEC, serving as a Professional Accounting Fellow and also being appointed to Chief Accountant.
“Both of these positions were incredible opportunities that allowed me to be in public service and follow in the footsteps of my Uncle Blake who worked as a public defender,” says Wes. “These experiences offered me an opportunity to apply my previous experience in audit, law and public policy to build a stronger accounting profession in a way that protected the public interest and rebuilt trust in our capital markets.”
Wes tells Business Chief that the SEC focuses on supporting an environment that’s worthy of the public’s trust, whether it’s promoting investor protection, capital formation or the fairness and efficiency of our markets.
“People must trust that the system will operate effectively. It’s a mission I feel passionately about to this day.”
At PwC, Wes has been able to bring a balanced understanding and appreciation for the stakeholders, regulations, policies and standards that impact the accounting profession. “I’ve been able to apply my insights and knowledge to support my clients and our people and help the firm in our never-ending pursuit of quality and adherence to all applicable standards and regulations.
“As CPAs, whether serving in the private or public sector, we have an important responsibility to the public to provide assurance over financial information so stakeholders across the capital markets can have confidence that there is reliable, quality data they can use to help make more informed decisions. Building that trust requires the inclusion, not exclusion, of a diversity of thoughts, backgrounds, perspectives, functions, and disciplines.
“I am incredibly proud of my public service and the many opportunities to work with professionals from different backgrounds, including government, private sector and academic institutions, to help advance the reliability of decision-useful information.”
5 things every company should consider on their ESG journey
While all businesses are at different points in their ESG journey, here are five things all should consider:
- Assemble a cross-functional team to create accountability for ESG performance Finance has the experience to oversee accounting, controls and reliability of ESG information, while sustainability teams have the deep subject matter experience and context. Companies should address any knowledge gaps through upskilling or hiring.
- Ensure you have the data regulators will expect It’s critical to clearly define ESG metrics, their scope and boundaries, what systems the information comes from and who the owners are inside the company. To do so, companies should gather baseline data to compare current performance against future goals and milestones.
- Set an overarching strategic approach to ESG This is not an exercise merely to tick a regulatory box, but to create sustainable advantage and value. Companies should connect ESG strategies, milestones and reporting to the overall business strategy.
- Upskill corporate directors Boards, especially audit committee members, need to better understand how ESG fits into the overall business strategy to appropriately manage governance oversight responsibilities
- Prepare for independent assurance The SEC proposed independent, third-party assurance for Scope 1 and Scope 2 emissions to bolster confidence in climate change information (for accelerated or large accelerated filers).