FINANCIAL REPORTING & IR

The past several months brought forward some important developments in climate reporting from both the U.S. Securities and Exchange Commission (SEC) and the International Sustainability Standards Board (ISSB). In March 2021, the SEC requested public input on climate-related disclosures as it considered the adequacy of current disclosures. The comment period closed in June 2021, and the SEC received 550 comment letters, with 75% of the respondents supporting mandatory climate disclosure rules. Accordingly, the SEC released its proposed climate reporting rules on March 31, inviting comments until June 17, 2022.

The SEC’s proposal would require disclosures in an annual report and in a registration statement:

• Certain disclosures (including metrics) would be required in a new note to the financial statements for both the registrant’s most recent fiscal year, and the prior fiscal year(s) included in the filing to the extent that the information is reasonably available. The proposed financial statement disclosures fall into three broad categories: financial impact metrics; expenditure metrics; and financial estimates and assumptions. All of these primarily revolve around incremental disclosures and quantification of climate-related events and conditions, and transition activities. All disclosures in the financial statements would be subject to audit as part of the audit of the financial statements and in the scope of the registrants’ internal control over financial reporting.
• Similar to financial statement disclosures, the disclosure of greenhouse gas (GHG) emissions would be required in the registrant’s filing, with Scope 1 and 2 GHG emissions being mandatory. More importantly, a registrant would also disclose a measure of GHG intensity, which is “a ratio that expresses the impact of GHG emissions per unit of economic value”. Examples of such ratios are CO2e per unit of total revenues or CO2e per unit of product produced. Disclosures relating to GHG emissions are also subject to some level of independent assurance.
• Other climate-related disclosures should be discussed and analyzed in their own section in the annual report or registration statement and discussed similarly to the MD&A. Such disclosures are expected to be broadly under the categories of governance, strategy and risk management.

It is expected that the final rules will impact most SEC registrants. An effective date of adoption will not be certain until the SEC adopts the final rules. Assuming an effective date of December 2022 for the final rules and a registrant with a December 31 year-end, large accelerated filers would likely be obliged to include the disclosures (excluding Scope 3 emissions) for fiscal 2023 (i.e. filed in early 2024). Scope 3 emissions are required for the next fiscal year.

Shortly after the SEC released its proposal, the ISSB issued new proposals on the first IFRS Sustainability Disclosure Standards, marking the next step towards equal prominence for sustainability and financial reporting. The proposals aim to create a global baseline for investor-focused sustainability reporting that local jurisdictions can build on.

The aim of both proposals is for companies to report on all relevant sustainability topics under a consistent global framework, with a focus on how these topics impact enterprise value. The reporting requirements would be largely connected to the financial statements. Therefore, companies will need processes and controls in place in order to provide information regarding sustainability of the same quality and timeliness as other financial information. The ISSB proposals are open for comment until July 29, 2022, and the final standard is expected to be issued by the end of 2022. Adoption will vary across different jurisdictions, but a rapid route to full adoption is expected.

Similar to some elements of the SEC’s proposal, the ISSB’s proposal would require companies to address sustainability topics across four content areas – governance, strategy, risk management, and metrics and targets. The proposal does not specify a single location where disclosures should be made. This means that information could be presented in many ways, such as within the general-purpose financial reporting or cross-referenced from another document such as a separate sustainability report. Cross-referencing information presented elsewhere is permitted, provided it is released simultaneously with the general-purpose financial report. Assurance requirements over such disclosures are subject to the decisions of local regulators in each jurisdiction.

Investor relations professionals have a key role to play, particularly in bridging the gap between the proposed disclosures and the company’s existing climate-related disclosures, as well as understanding the different ESG reporting requirements that are likely to become an area of increasing investor focus.

Keith Leung, CPA, CA is a Senior Manager, Accounting Advisory Services, and Rob Brouwer, FCPA, CPA is Canadian Managing Partner, Clients and Markets, for KPMG LLP in Canada.