Organizations are getting ready for the Securities and Exchange Commission to finalize the climate-related disclosure rule it proposed last year, or at least a scaled back version of it.
A report released Tuesday by the Financial Education & Research Foundation, a research affiliate of Financial Executives International, and Persefoni, a climate management and accounting platform, looks at how ESG continues to hold an important and growing role for companies, how the SEC’s prioritization of ESG reporting has affected reporting efforts, and how finance functions are evolving in response to the SEC’s climate proposal. Ahead of the new requirements, finance teams are taking a closer look at their existing and planned infrastructure for reporting, while trying to address the challenges posed by reporting on climate, which remains challenging for many organizations.
While the SEC’s proposed rule is still under review and hasn’t been finalized, it would mean several aspects of ESG reporting would no longer be voluntary, but regulated, requiring businesses to adhere to certain disclosures related to climate in financial statements and filings as well as other regulatory statements. It creates additional complexity from how climate change might affect the organization. Companies are still navigating the complexities of ESG and their efforts at implementing a strategy are nascent, with only 11% of S&P 500 companies listed among signatories of the Taskforce on Climate-related Financial Disclosures (TCFD), as of December 2022.
Nevertheless, finance teams are focusing more on building an ESG reporting system, with 97% of the finance professionals surveyed saying they’re developing oversight of ESG reporting, and 93% saying they’re increasing finance’s role in preparing disclosures related to the SEC’s proposal. Eight out of 10 of the 50 chief accounting officers and controllers polled reported being most keenly focused on building the complex processes needed to address organizational ESG reporting. However, the survey respondents named difficulties in obtaining scope 3 data (77%), which refers to emissions from suppliers, vendors and partners, along with the general complexity of the climate data (58%) as the most significant challenges to meeting the SEC’s climate proposal.
SEC chairman Gary Gensler has indicated the Scope 3 emissions disclosures may need to be left out of the final rule, reportedly telling the Council of Institutional Investors that calculations of Scope 3 emissions aren’t as well developed.
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“It is clear that there is a new sense of urgency to ESG in light of the SEC’s proposed climate disclosure rules,” said Andrej Suskavcevic, president and CEO of Financial Executives International and the Financial Education & Research Foundation, in a statement. “Our latest ESG report is specifically designed to help our members better navigate these uncharted waters. We expect that this latest research will serve as an essential guide for all financial teams and organizations working to develop best practices and implement the most relevant metrics and controls needed for accurate and transparent financial reporting.”
The SEC is likely to face legal challenges over the climate-related disclosure rule when it’s finalized, and it has already attracted some opposition in Congress about the potential burdens on companies.
