There has been a flurry of information over the last few weeks regarding Environmental, Social, and Governance (ESG) and climate-related disclosures. Both the US Security and Exchange Commission (SEC) and the International Financial Reporting Standards’ International Sustainability Standards Board (ISSB) have published their disclosures draft documents.
US SEC Proposed Changes to S-K
With growing concern over climate-related risks and impacts, the Security and Exchange Commission (SEC) is recognizing the need for standardized reporting so investors can make more informed decisions. To facilitate more consistent metrics for gauging sustainability performance, the SEC has proposed a new rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors.
The fact sheet from SEC highlights three Scopes within the disclosures:
- Direct greenhouse gas emissions from registrant operations
- Indirect greenhouse gas emissions from purchased energy
- Indirect emissions from upstream and downstream activities in the registrant’s supply chain
There’s good news: whether or not you report externally now, it’s likely you’re well on your way to fulfilling scopes 1 and 2 of the proposed rule. Assuming an effective date in December 2022, you’ll need to disclose that compliance data based on filer type (2023 data filed in 2024 for large accelerated filers, and 2024 data files in 2025 for accelerated filers). Recognizing that scope 3 presents some uncharted territory for many companies, the phase-in period for supply chain GHG reporting is extended another year. Given the added cost and challenge of collecting upstream and downstream scope 3 data, businesses that are proactive about reporting strategy will be at an advantage in managing compliance by these deadlines.
As written, companies would be required to disclose: climate-related impacts on business operations (to demonstrate integration of climate-related risks into business model, strategy, or risk management process); activities to mitigate or adapt to identified risks (including innovations or new processes); and research and development expenditures. Within those disclosures, companies would cover impacts to and from products and services, suppliers and other value chain parties. Further, the disclosures would be timebound and include the time horizon for each described impact (short, medium, or long term as defined by the company when determining materiality).
For more information about reporting requirements, you can view the proposed rule in full here.
IFRS S1 and S2 Disclosure
The International Financial Reporting Standards disclosure requirements are very similar. The IFRS S1 General Requirements for the disclosure of Sustainability Related Financial Information cover the spectrum of material sustainability-related impacts, whereas IFRS S2 Climate-Related Disclosures is more granular and focused specifically on material climate-related impacts.
The IFRS S1 Exposure Draft proposes that an entity be required to provide users of general purpose financial reporting with information that enables them to assess the connections between various sustainability-related risks and opportunities; the governance, strategy and risk management related to those risks and opportunities, along with metrics and targets; and sustainability-related risks and opportunities and other information in general purpose financial reporting, including financial statements.
More specifically, S1 is designed to enable the users of general-purpose financial reporting to understand:
- Governance processes, controls, and procedures used to monitor and manage significant sustainability-related risks and opportunities;
- The business strategy for addressing significant sustainability-related risks and opportunities,
- The processes, by which sustainability-related risks and opportunities are identified, assessed, and managed; and
- How an entity measures, monitors, and manages its significant sustainability-related risks and opportunities.
The IFRS S2 Exposure Draft would require an entity to provide information that enables users of general purpose financial reporting to understand:
- Governance: the governance processes, controls and procedures an entity uses to monitor and manage climate-related risks and opportunities
- the climate-related risks and opportunities that could enhance, threaten or change an entity’s business model and strategy over the short, medium and long term, including: whether and how information about climate-related risks and opportunities inform management’s strategy and decision-making;
- The current and anticipated effects of climate-related risks and opportunities on its business model
- The effects of climate-related risks and opportunities that could reasonably be expected to affect the entity’s business model, strategy and cash flows, its access to finance and its cost of capital, over the short, medium or long term
- The resilience of its strategy (including its business model) to climate-related risks:
- risk management—how climate-related risks and opportunities are identified, assessed, managed and mitigated by an entity
- Metrics and targets—the metrics and targets used to manage and monitor an entity’s performance in relation to climate-related risks and opportunities, including
- performance and outcome measures that support the qualitative disclosures across governance, risk management and strategy disclosure requirements
- Targets an entity uses to measure its performance goals related to significant climate-related risks and opportunities
More information on the applicability and details of both Standards can be found at the links below.