SEC climate-related disclosure attestation requirements
The Securities and Exchange Commission (SEC) proposed rule changes in March that would require public companies to make climate-related disclosures and add new attestation requirements for accelerated and large accelerated filers.
Under the umbrella of environmental, social, and governance (ESG) reporting, the SEC's goal in issuing the nearly 500-page proposal is to provide "consistent, comparable, and decision-useful information" for investors about climate-related risks.
Under new Regulation S-K Items 1504 and 1505, qualitative and quantitative disclosures would be required both inside and outside of financial statements, and new sections of annual reports and registration statements would be required.
"This is a big deal because we knew it was coming but not what it would look like," Damon Busse, a partner at accounting firm Baker Tilly stated. "Now, a lot of analysis needs to be done."
"Because not all of the new disclosures will be subject to attestation, it will be important for registrants and their providers to structure disclosures appropriately to be clear as to what is and is not subject to attestation."
According to Ruth Tang, audit partner and ESG reporting and assurance leader at KPMG, new financial statement disclosures would be subject to audit and internal controls over financial reporting.
Financial statements would include a note containing climate-related metrics, such as the amounts of negative and positive impacts for each line of the financial statements, as well as disclosure of amounts by physical risks and transition risks, as well as the expenditures expensed and capitalized for each.
When the total dollar amount of the impact exceeds 1% of the related financial statement line item, proposed disclosure is required. Furthermore, climate-related risks and uncertainties related to estimates and assumptions would have to be disclosed.
"The biggest surprise for me was the required disclosures inside the financial statements, particularly the 1 percent bright line threshold for line-by-line financial statement impact," Busse said. He pointed out that the SEC rarely provides clear materiality thresholds that differ from how management and auditors think about materiality.
Other proposed disclosures include a discussion of risk oversight by management and the board of directors; the process for risk identification, assessment, and management; whether risks have had (or are likely to have) a material impact on the company's strategy and business model; and a description of any risk mitigation transition plan.
There are also proposed metrics and methodology for Scope 1 (direct), Scope 2 (indirect produced by purchased energy), and Scope 3 (supply chain/vendors) greenhouse gas (GHG) emissions, as well as information about the company's climate-related targets, such as the scope, timeline, and data used to measure progress and update the plan each year.
Depending on when the proposed rules are adopted by the SEC, the disclosures would be phased in over different effective dates. If the rules are finalized by December 2022, calendar year-end filers will be required to make the following disclosures:
- For large accelerated filers, fiscal year 2023 (FY2024 for Scope 3 disclosures, if material);
- For accelerated and nonaccelerated filers, FY2024 (FY2025 for Scope 3 disclosures, if material); and
- For smaller reporting companies, FY2025 (exempt from Scope 3 disclosures).
For accelerated and large accelerated filers, Attestation Assurance is required for Scope 1 and 2 GHG emissions disclosures outside of the financial statements. Scope 3 disclosures, which are also subject to a safe harbor provision for affected registrants, do not require attestation.
The proposed attestation requirements are based on the AICPA's model, which divides attestation engagements into two categories:
- Limited assurance (state whether the provider is aware of any material modifications that should be made to the subject matter for the disclosure to be in accordance with, or based on, the requirements in S-K Item 1504 or for the assertion about the subject matter to be fairly stated), or
- Reasonable assurance (provide an opinion about whether the subject matter is in accordance with, or based on, the requirements in S-K Item 1504 in all material respects or that the assertion about the subject matter is fairly stated in all material respects).