Seeing the Full Picture: The Three P’s of Climate Reporting Readiness
The US Securities and Exchange Commission is poised to begin requiring publicly traded US companies to report metrics, management, and processes regarding climate-related risks. In order to prepare for these highly anticipated SEC requirements that include assurance over climate data, finance leaders (including chief financial officers, chief accounting officers, and controllers) now find themselves leading and overseeing ESG reporting and climate-related disclosures. CFOs and accounting teams’ reporting infrastructure and processes will need to become more robust as the level of rigor and scrutiny over ESG metrics is elevated.
Companies can be most prepared by bringing ESG strategies and data to the forefront of the people, processes, and platforms impacting the financial reporting function.
People: building and training a cross-functional team
Data sources for an organization’s climate-related information can include utility bills, purchasing agreements, risk management documentation, and other origins. For example, the company personnel that handles utility bills could be located in a different department and location than those tasked with refueling company-owned vehicles. These teams may be further disconnected from enterprise-wide financial accounting and reporting structures. And further still, for companies beginning this process, there may be limited knowledge of greenhouse gas (GHG) emissions and climate-related risk information within many of these teams.
Climate reporting can often be a new concept for finance, legal, and communications teams. Upskilling these teams on voluntary frameworks and best practices from the Taskforce for Climate-related Financial Disclosures (TCFD), Greenhouse Gas Protocol, and CDP (formerly Carbon Disclosure Project) can ground non-ESG stakeholders in environmental concepts. Similarly, as ESG reporting migrates from voluntary disclosures to mandatory reporting, company leaders will need to prepare ESG-focused teams for the scrutiny that comes with regulatory reporting requirements in the United States and other global markets.
To start, teams will need to become more connected to each other as each team will have an important role in reporting auditable climate data in line with regulatory requirements. Often a company’s first step will involve setting up an ESG steering committee with representation from various departments, including investor relations, legal, financial planning, accounting, and operations. The function of the steering committee is to centralize the data collection and reporting process, and the most successful steering committees have senior leadership representation.
Process: taking a page out of the financial reporting playbook
The departments collecting data (including facilities, real estate, purchasing, and operations) need to work more closely with the internal audit and accounting teams. From data sources to data managers, the chain of information through the organization needs to be clearly documented throughout the data collection process. As climate data moves up the organization (with oversight by the steering committee), the internal controls processes already in place to handle financial information will naturally broaden in scope. Considering that, finance and accounting leaders are leaning heavier into ESG reporting initiatives and broader sustainability strategies.
As the SEC steps up its expectations concerning ESG reporting, companies can expect enhanced scrutiny over financial reporting involving climate data and disclosures. To ensure the climate data is complete and accurate, each company’s management, board, and auditors will require a process transformation that minimizes the risk of human error and enhances documentation of new controls, including management review. Ultimately, the way that ESG data flows through an organization into reporting outputs will be similar to that of financial reporting, with the inputs and metrics being the primary difference. A thoughtful and documented approach that expands internal audit and controls governance into climate data reporting is arising as a best practice across public companies, as is an organization’s integration of the intellectual capital of sustainability and controls experts.
Platforms: leveraging tools to transform reporting
Most companies starting down this path utilize Excel-based tools. Because collecting the right metrics (e.g., the use of electricity and fuel), understanding the sources of the data, and calculating the right information can be a messy process for the first few years, a tool with a ubiquitous and user-friendly format like Excel makes it easier for multiple teams across various departments to understand the metrics and collection process. Even when using Excel-based tools, having internal controls around the metrics and data sources is going to be necessary as regulators begin to scrutinize climate data. As companies mature in their reporting strategies, they may begin looking at software solutions to further centralize the annual collection and calculation process. When organizations are looking for these types of platforms, it can feel challenging because there are so many software platforms, and, on the surface, each offers the same solution. However, not all platforms are created equal. ESG software platforms range significantly in their maturity as an ESG-specific solution, ease of use, functionality, general user-friendliness, and whether organization-specific ESG reporting strategies align with what the platforms can offer. Add in the daunting task of choosing a platform, plus having to train every person that interacts with climate data within the company, and the initiative can seem incredibly overwhelming.
As a starting point, companies should consider the existing platforms in the organizational ecosystem and whether those platforms have specific ESG and climate data add-on capabilities. The steering committee should understand their software needs and whether these needs are met with the current ecosystem. These needs could be limited to auditable climate data and GHG calculations, or the organization could have larger ESG goals in mind for annual ESG reporting and questionnaire submission. Conducting a demo of multiple platforms alongside various internal stakeholders will help ensure a smooth process, regardless of which tools the company implements.
No matter what tools the organization uses to collect and calculate data, the input of data must be checked to ensure accuracy and completeness. This is true whether the organization is using Excel-based tools or a more sophisticated software solution. An effective GHG calculation tool will keep audit and internal controls processes in mind by including controls at each stage of the calculation process: data input, calculation, output, and reporting.
Putting it all together
The migration of ESG and climate reporting into regulatory filings will require companies to train their people, develop more robust and thoughtful internal controls, and determine what auditable data tools to utilize. While every organization is at different stages of maturity of its ESG reporting, these considerations can help ensure that the climate data each company is collecting, calculating, and reporting holds up to regulatory scrutiny.
ESG & Climate Reporting Readiness
Taking stock of where your organization is currently at and what people you have in place is a great first step in an effective climate reporting strategy. Specialty firms like Riveron can help your company understand where you are at, develop a tailored roadmap, and execute an action plan focused on your people, process, and tools.
Whether your company is public today or has future plans for entering the capital markets, these steps will prepare your team for success with investors, regulators, and auditors. If you’d like support as you prepare for climate reporting, connect with our experts.