More than 70 percent of respondents to a survey from Compliance Week and advisory, tax, and assurance firm CohnReznick LLP said their companies were already preparing to comply with the climate-related disclosure rule proposed by the Securities and Exchange Commission (SEC).
The survey, conducted from late April until early June, received 248 responses from compliance and audit professionals representing a wide variety of public and private firms. Respondents overwhelmingly indicated they have enterprise-wide support within their organization to comply with the proposed rule, with only 7 percent saying they either disagree or strongly disagree with that statement.
In March, the SEC proposed its climate-related disclosure rule, a sweeping potential mandate that would force all public companies to quantify, measure, and disclose their effect on the environment.
The proposed rule would order public companies to include disclosures about how climate-related risks affect their strategy, business model, and outlook; how the company’s board and management oversee climate-related issues; and any plans for transition to a lower carbon footprint.
Of respondents to the survey, nearly a third (30 percent) said they worked for large accelerated filers, with another 17 percent at accelerated filers/non-accelerated filers and 10 percent at smaller reporting companies.
Almost one in four (23 percent) of the survey’s respondents said their firms were not registered with the SEC, meaning they are likely private and not directly affected by the proposed rule. Another 20 percent said they did not know their company’s filing status.
The respondents worked for firms from more than 30 industries; the top 10 were banking (6 percent), manufacturing (6 percent), accounting (5 percent), technology (5 percent), agriculture (5 percent), automotive (5 percent), healthcare (5 percent), business services (4.5 percent), education (4.5 percent), and insurance (4.5 percent).
“I think there is a general agreement in corporate America that (these disclosures) are being demanded by the market.”
Marisa Garcia, CFO Advisory Partner, CohnReznick
The SEC estimated it would cost about $640,000 for large public companies to comply with its proposed rule. When respondents were asked their estimate on what their firm would spend to comply, 39 percent said it was too soon to tell; 19 percent said the SEC’s estimate was just about right; 16 percent guessed their firm would spend less than $500,000; and 18 percent estimated they would spend as much as $1 million. Only 8 percent believed they would spend more than $1 million to comply.
Marisa Garcia, CFO advisory partner with CohnReznick, said it is unsurprising many companies are already preparing to comply with the proposed rule, even though the comment period ended June 17. The rule would not require large accelerated filers to collect data until 2023 and begin issuing climate-related disclosures in their annual Form 10-K filings until 2024.
“I think there is a general agreement in corporate America that (these disclosures) are being demanded by the market,” Garcia said during a Compliance Week webinar discussing the results of the survey. “And it’s also a recognition by public companies of the significant effort that is going to be needed in order to be able to comply with the rule’s audit requirements.”
New financial statement disclosures would be subject to audit and internal controls over financial reporting. They would have to include a note disclosing climate-related metrics, including amounts of negative and positive impacts separately for each line of the financial statements and disclosure of amounts by physical risks and transition risks, with expenditures expensed and capitalized for each.
Survey respondents were asked which role or job function would be leading their firm’s effort to comply with the rule. Nearly one in four (24 percent) said environmental, social, and governance (ESG)/corporate responsibility/sustainability, followed by compliance (15 percent), internal audit (12 percent), finance (12 percent), board of directors (11 percent), legal (8 percent), and risk (8 percent).
“The full breadth and scope of environmental issues, social issues, and governance matters touch so many parts of an organization. For this reason, the design and implementation of the underlying ESG programs within organizations needs truly to be a cross-functional effort,” said Maurice Crescenzi, principal at CohnReznick who leads the firm’s risk advisory practice. “In many organizations, we often see this cross-functional effort being led by ESG functions, corporate responsibility functions, and legal and compliance functions.”
The survey also asked which functions would play a supporting role in compliance with the new rule. Respondents, who could pick as many answers as they felt applied, said internal audit (43 percent), board of directors (42 percent), compliance (38 percent), legal (33 percent), ESG/corporate responsibility/sustainability (31 percent), risk (30 percent), finance (29 percent), supply chain/procurement (22 percent), and human resources (19 percent).
When asked whether the proposed rule would bring a heightened focus on how their organization reduces its carbon footprint, more than half of respondents (53 percent) said it would, 17 percent said it wouldn’t, and 29 percent said they weren’t sure.
“This rule exposes the reality of businesses in corporate America and how environmentally friendly they are,” Garcia said. Companies’ environmental strategies will be comparable for the first time, she said, which will “create a race for who will have the best grade. … There will be a desire to at least be average and within the pack. Companies are not going to want to be outliers, particularly on the negative side.”
The biggest impediment to compliance with the rule, respondents said, was a lack of resources, both in terms of money and personnel. (It should be noted nearly half the respondents, 110 in all, chose to skip this open-ended question). A close second was a lack of access to the data necessary to comply with the rule’s reporting requirements, followed by things like the pandemic; a lack of uniformity in climate regulation globally; finding the proper outside counsel/consultancy; and capturing all emissions, particularly among third parties and vendors.
“As is the case when designing enterprise risk management programs and ethics and compliance programs, the first step in setting out on the ESG journey is to get a baseline understanding of the organization’s ESG issues and risk profile,” Crescenzi said. “This sort of issues and risk inventory serves as the foundation for subsequent ESG program phases, such as program design, implementation, data validation, and reporting.”
No comments yet