The Expertise Every Team Needs for Investor-Grade Climate Reporting
It takes two to make this thing go right: investor-grade climate reporting requires climate data and financial controls expertise on the same team.
The SEC is taking a closer look at corporate sustainability reports, and, even though the disclosures in these communications are voluntary, investors use them to make decisions. That means the SEC is interested in what they have to say—and each CFO should be, too.
Of course, with the SEC’s new climate risk disclosure rule on the horizon, the reporting of certain information included in these sustainability reports will no longer be voluntary for public companies. Companies will need to start publicly reporting scope 1, scope 2, and potentially scope 3 emissions. They will need to identify and contextualize both physical and transitional climate risks. And they will need to include all this information in regulatory filings. Company CFOs must be able to confidently attest to the fact that the information is indeed investor-grade.
None of this is going to happen overnight. More importantly, it’s not going to happen without climate data experts and financial experts working together as part of the same team. When a company puts all the right skill sets against this initiative, investors can fully trust the information that is delivered. And the CFO can sleep better at night.
Companies can start with these steps to achieve investor-grade climate reporting:
Build the team
Now that the SEC has put climate reporting squarely in the CFO’s purview, it will no longer suffice for a company’s sustainability officer or environmental and safety department leader to bless the company’s published climate data. Ultimately, the CFO will have to attest to the information, and increasing an executive’s comfort level in doing so calls for multiple specialized skill sets to be in place.
This includes climate data scientists who understand what information to collect, how to collect it, and how to analyze and interpret the data. Just as importantly, companies need accounting and financial reporting advisors who know how to ensure the organization’s information is audit-ready. Having these experts work collaboratively from the start —as opposed to having the first group hand off to the second group— is the key to ensuring efficient workflows, avoiding gaps or oversights, and creating disclosures that are timely, robust, and accurate.
Identify the data and inputs required to meet new disclosure recruitments
The SEC’s proposed climate disclosure rule is more than 500 pages long. While it’s important for someone on a company’s in-house team to fully understand the specific implications for the organization, generally the biggest asks (and newest territory) for most companies fall into three areas:
- Climate data, including scope 1, scope 2, and (potentially) scope 3 emissions including metrics encompassing direct and indirect emissions from produced and purchased energy.
- Climate data governance, including identifying the right leaders and owners within an organization who are responsible for the oversight of this reporting. This also may include establishing a consistent data framework across an organization’s impacted areas.
- Risk statement and risk management information identifying physical and transitional climate-related risks, their potential impact on the business, and processes for addressing these risks.
While the quantitative metrics, and carbon equivalent emissions specifically, are receiving a lot of public attention, it is important to remember that the qualitative disclosures can present just as many challenges and just as big a lift for organizations new to climate reporting. A company’s team will need to equally address both areas to prepare for all required disclosures.
A great first step is to complete a climate risk assessment, or a systematic evaluation of potential hazards stemming from climate-related events and trends. The results of this study can help financial leaders focus on the most significant risks and the actual and potential financial impacts on revenues, expenditures, assets and liabilities, and financing.
Put robust data collection processes in place
Currently, very few public companies are disclosing climate data in the Form 10-K, but many firms are including such information in corporate sustainability reports (CSRs). In these cases, the relative infancy of the disclosures and the diversity in practices used to source and report the data suggest that few organizations have reached the status of investor-grade climate reporting. Yet.
With the SEC’s proposed rule, climate information in the CSR will now be included in a company’s Form 10-K and will be subject to disclosure controls and procedures. It will take significant effort for most companies to identify, collect, and evaluate the right data and ensure disclosures are indeed investor-grade.
When getting started, leaders should consider identifying the right team of people who will be responsible for collecting the information that populates the company’s greenhouse gas (GHG) inventory. This group should have an in-depth knowledge of the company but also include specialists who appreciate the complexity and judgment involved regarding how the information is used to calculate emissions. Defining the boundary (for instance, scoping in all the different activities across the organization that will need to be included in a company’s GHG calculation) can be a challenge and will require subject matter expertise to ensure nothing is inadvertently excluded.
Bake in the required controls
It’s one thing to collect comprehensive climate data. It’s another to ensure the data is complete, accurate, and calculated correctly.
Right now, many companies are housing ESG and climate data in spreadsheets or communicating it via emails—processes that are ripe for human error. And, it’s not uncommon for companies to state that their ESG data is “informed by” a reporting framework such as the Task Force on Climate Related Financial Disclosures, which leaves a lot of room for interpretation by investors. Imagine a public company stating that its financials are “informed by” generally accepted accounting principles (GAAP) as opposed to decisively stating that the numbers are reported in accordance with GAAP. An approach like this simply isn’t done. As regulatory disclosure requirements around climate data grow and investor expectations of consistency of information increase, organizations will be required to have mature processes and controls in place.
Establishing a strong process rigor—akin to financial information reported in the 10-K—starts by analyzing the design (or lack) of current processes. This enables a company to identify and then close any gaps in its ESG disclosure controls. Often, this will involve:
- Standing up a carbon accounting function to review and validate the assumptions, methodologies, and processes that go into collecting and calculating the data, ultimately ensuring create greater levels of assurance.
- Conducting a climate-forward fraud risk assessment to consider the myriad of fraud-related risks including greenwashing, i.e., overstating how environmentally responsible an organization is. This process will include identifying and implementing additional controls to mitigate the potential for misstatement or misrepresentation of climate data.
- Involving internal audit in the process. Internal audit can be an invaluable partner in driving ESG reporting efforts regardless of whether the team has specific ESG expertise or not. These professionals know how to dive into data and ask challenging questions that will help identify gaps in process and controls. Organizations can supplement the internal audit team’s expertise and bandwidth by bringing in experts with ESG experience or by hiring external consultants.
- Creating clear segregation of duties between those who prepare, review, and internally audit the disclosures.
- Establishing a holistic governance structure for ESG reporting including an ESG disclosure committee made up of individuals with the right expertise to review all ESG disclosures included in the 10-K and other sustainability reports. Beyond climate-related matters, the SEC currently has proposals in place covering other ESG issues such as human capital management and cybersecurity. Depending on the company, other local regulations may already exist requiring disclosure of these types of information. Companies can get ahead of the game by considering the comprehensive reporting requirements and ensuring all executives with a stake or a say in this information have a seat at the table and a role in overseeing the organization’s ESG reporting and strategies.
Make climate reporting something investors—and the CFO—can really trust
The time for investor-grade climate reporting has arrived. For companies that are new to the game, there is no way around the reality that establishing the appropriate processes and controls will require significant effort. But it will help to take a two-pronged approached with the organization’s climate experts and accounting or audit experts. These parties should be working together from the start to establish processes and methodologies that are comprehensive and verifiable.