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The SEC’s climate proposal and the European Union’s proposed reporting standards on broad sustainability topics are driving a lot of action in finance, legal, compliance, sustainability, and enterprise risk management (ERM) functions. The SEC’s proposal on workforce reporting may not be far behind. The expansion of the topical scope of reporting beyond financial data will require cooperation among different functional groups in new ways and at a deeper level than in the past. It will also change how C-suites and boards provide oversight of data collection and reporting on environmental, social and governance (ESG) topics.
This post discusses climate disclosure because of the pending SEC proposals. But the detailed discussions of ESG issues in many company’s sustainability reports are also public statements for which the company is responsible. They should be rigorously checked for accuracy and supported by thorough backup documentation. The two steps described here are just as valuable to other types of ESG reporting as they are to climate reporting.
To meet the demands of the SEC proposals, operational teams with responsibility for climate change activities will need to work with legal and compliance to ensure that the data meets current quality standards. Finance will need to assess the impact on financial statements and the need for disclosure. Internal audit will need to be on top of the new processes. And multi-disciplinary oversight teams will need to make sure the right channels of internal and external communication are connected and working. All of this will have to come together in a coherent form that the CEO, CFO, audit committee, and full board can be confident in before they approve and sign public filings.
These two steps can help companies meet the challenge.
First, a multidisciplinary team including legal, finance and investor relations should write the narrative that the company wants to tell in its public filings. The CEO, CFO, GC and the board should sign-off on that narrative. Every company will find that there are elements of their “want to” narrative that they are not yet doing or not yet doing well. These are the holes to be filled before regulatory filings are due. Part of this process includes scrubbing through all of the company’s public statements about climate. If those statements are not aligned with the “want to” narrative and with its regulatory filings, the company will need a strategy to resolve the misalignment. A clear, comprehensive narrative will be increasingly important as the enforcement landscape matures and as investor and other stakeholder demands for accountability and reporting intensify.
Second, companies should apply a key piece of their Sarbanes Oxley Act (SOX) compliance procedures to their climate reporting processes. The SEC proposals require certain climate data to be included in the 10K. The CEO and CFO will have to sign off on that data, and the board and audit committee will have to approve the filings. Twenty years ago, when SOX added those sign off requirements, most companies built “certification chains.” Business unit CFOs or accounting directors certified their numbers up the management chain so that the CFO and CEO could rely on those upstream certifications in submitting their own certifications to the SEC. Now, companies will need certification chains on climate data.
The certification chains will be harder to forge for climate than they were for SOX. Many people in the new reporting chains will be outside the finance function and not have experience with the level of scrutiny and quality control required for financial reporting. Consider the sustainability manager at a non-US plant owned by a US public company. She is tasked with measuring scope 1 and scope 2 GHG emissions for the plant, and reports her information up through the sustainability function. When the GHG certification chain is created, she is told she will need to sign a document drafted by lawyers certifying that same information up a chain that will end with the CFO, CEO, audit committee, and board and on which they will rely to sign SEC filings. Experience from SOX implementation says that many people in the company faced with a situation like the plant sustainability manager will worry about liability - both external and internal. They will want more resources and time to ensure accuracy, documentation, and data quality and will ask for more support and assistance from the finance function and ERM.
Incomplete communication between operational units is another issue that will be surfaced as companies build their certification chains. Certifications will need to span functional areas that have different expertise and use different languages. For example, there will be points in the reporting chain where operational information is being certified to someone in the finance function. If the operations certifier can’t translate the information into financial information and the finance receiver of the certification can’t understand the operations data, that communication gap will need to be bridged through training, hiring, or consultants’ support.
The board, too, is likely to ask for more detailed information and more documentation, which is to be expected when adding new information to SEC filings. In the case of the climate proposal’s governance disclosure provisions, some of the new information will concern the board’s own actions. Board members are likely to - and should - want to walk through those descriptions in detail, make sure they accord with their own understanding and are properly documented in company files.
Writing the company’s “want to” narrative and building out the certification chains can help a company prepare for the SEC reporting requirements for climate. They can also help to clarify overall ESG goals and map out the organizational teams that need to work together to achieve those goals and ensure their reporting is accurate and properly documented.
Jamie Gamble is Managing Director, PwC’s Trust Solutions