Now that the Securities and Exchange Commission has proposed rules for disclosing risks related to climate change, publicly traded companies are starting the heavy lifting involved in reporting the newly required environmental, social and governance information. First, however, they need to figure out who is qualified to do it.
The SEC released its proposed climate disclosure rules in March. Broadly speaking, they call for issuers to report their greenhouse gas emissions and offer analysis on the risks posed by climate change to companies’ operations and strategies. The SEC’s guidance also asks for companies to provide information on goals and transition plans related to environmental risks, a key ESG topic.
As is the case when it comes to traditional financial statements, companies with market capitalizations of $250 million or more would need to have their climate disclosures certified independently. The requirement has left accounting and consulting firms jockeying to take over the work involved in both reporting and auditing companies’ climate-related ESG data.
A recent piece in The Wall Street Journal explored the market landscape for what it described as the “potentially lucrative task” of auditing climate reporting. Importantly, while certified public accountants must verify issuers’ financial statements, the SEC’s proposal would enable companies to tap other service providers – consultants or engineering firms that certify ESG disclosure statements, for instance – to write attestation reports for environmental data. The so-called Big Four accounting firms, meantime, are apparently lobbying to keep the universe of qualified ESG-specialized auditors for climate reporting as small as possible.
Of course, companies first must create climate statements before those statements can be audited. Issuers are encountering problems there, too, as they struggle to identify third-party operators possessing the expertise and scale to assist with preparing those reports. The alternative is costly: hiring new in-house ESG reporting teams to handle data collection and disclosure.
Overall, these early stumbling blocks seem commonplace in cases of regulatory shifts as significant as the one that is currently taking place with climate-related reporting. Some enterprising consultants foresaw the spike in demand for their services; regulators and politicians kicked around the possibility of environmental disclosures for years ahead of the actual release of the proposed rules. Understanding the size of the new market is another matter, and no one could predict what that would look like with certainty. Over time, the supply of ESG-focused auditors and service providers will inevitably expand to meet issuers’ environmental disclosure needs.
In the meantime, the response to the new corporate governance requirements established by the Sarbanes-Oxley Act of 2002 could prove instructive for both issuers and the SEC as the climate-reporting rules go into effect. Back then, the commission granted short-term relief to companies that found it unfeasible to comply immediately with the new rules. Count on the SEC using that same discretion to give issuers extra time to get their houses in order if necessary.