SEC Proposed Climate Change Disclosures Put CFOs Under the Spotlight
CFOs are on the clock. With the SEC’s recent proposed climate change disclosures now beyond the comment period, ESG-related reporting requirements of some form are an inevitability. Now, it’s just a matter of waiting to see what form they take.
As the proposal stands, the requirements will affect nearly all SEC registrants as well as the private companies they have relationships with, including subsidiaries, customers, supply chain partners, and equity method investments.
Further, the requirements will impact both Regulation S-K and Regulation S-X disclosures. Therefore, CFOs will need to provide insights on a broad range of operations and performance, from the governance, oversight, and management of climate-related risks and GHG emissions, to specific financial metrics, estimates, and assumptions.
These new responsibilities will place additional strain on finance organizations already stretched thin by a continuing shortage of talent. Also, since the SEC proposal only represents the first step in what is sure to be additional ESG-related regulations and requirements in coming years, CFOs are facing a new paradigm for the reporting function, without much time to prepare and ramp-up.
Given the vastness of information required to meet the proposed SEC disclosure rules, data collection and analysis will play critical roles throughout. However, unless senior leaders are willing to drastically increase labor costs by expanding their reporting teams, technology will be essential to success.
Although current financial reporting processes and systems may provide a welcome touchstone and sense of familiarity, the bulk of ESG-related data and reporting will be uncharted territory. Thus, an essential first step in developing effective, efficient ESG reporting will be determining the people, processes, and technology needed to meet current and future requirements.
To identify what they will need, finance leaders should begin by the internal and external stakeholders involved to determine which ESG metrics they should initially focus on. From there, they can map those data metrics to their sources. For example, a human resources management system (HRMS) could be helpful in sourcing employee diversity data.
Similarly, while Scope 3 emissions data is not yet a requirement under many existing ESG reporting frameworks, the SEC included them in the proposed disclosure requirements for certain public entities under particular circumstances. Scope 3 represents an even more complex data collection process since it relies on information from value chain partners that may or may not be proactively establishing their own ESG reporting capabilities.
Initially, interviewing stakeholders, mapping data sources, and working with value chain partners for Scope 3 emissions data are vital to an organization’s ability to meet ESG reporting requirements. After that initial step, CFOs and their teams should identify technologies that will help streamline the collection, analysis, and reporting of those data streams.
Dedicated emission data gathering tools, supply chain management solutions, and specialized ESG reporting tools could all add significant value for companies, minimizing the headcount involved in ESG reporting, and, thus, freeing their people to add value elsewhere in finance and accounting.
Ultimately, whether an organization is starting its ESG reporting from scratch or already has some of the foundational pieces in place, the proposed SEC disclosure requirements are bound to stretch even the well-prepared teams, at least in the short-term.
To ensure compliance in a rapidly-expanding area of the regulatory environment, many CFOs will find the most efficient solution is to engage outside specialists already well-versed in the requirements, processes, and technologies involved in ongoing ESG reporting compliance, knowing the climb only gets steeper from here.
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