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Senior Director, Professional Practice

Desiré Carroll, CPA, CA(SA) is a Senior Director, Professional Practice at the Center for Audit Quality. Her role involves advancing technical and policy-oriented projects to identify, develop, and seek consensus on issues affecting the public company auditing profession. This includes engaging with senior leaders across the financial reporting ecosystem, drafting comment letter responses to regulators, and developing thought leadership publications.

Before joining the CAQ, Desiré served as Associate Director – Sustainability Assurance at the American Institute of Certified Public Accountants (AICPA). Prior to that, she spent over 11 years at Deloitte primarily in their New York M&amp;A Transaction Services group and initially in their Audit practice. Desiré is a CPA and a South African Chartered Accountant.

Desiré Carroll, CPA, CA(SA)

In part 1of this blog we explored what we’d be looking for once the SEC released its long-awaited climate rule. With the wait finally over, read on for what we found.

Attestation requirements. Given that assurance over climate-related reporting enhances the...

In <a href="https://www.thecaq.org/aia-sec-climate-rule-what-were-looking-for-in-the-final-rule">part 1</a>of this blog we explored what we’d be looking for once the SEC released its long-awaited climate rule. With the wait finally over, read on for what we found.

<strong>Attestation requirements.</strong> Given that assurance over climate-related reporting enhances the reliability of that information and offers increased investor protection, we were pleased to see that the final rule retained the requirement for attestation over greenhouse (GHG) emissions disclosures. In a modification from the proposal, the SEC will require only large accelerated filers (LAFs) to progress from limited assurance to reasonable assurance at a later date. Accelerated filers will only need to obtain limited assurance. Certain investors may be disappointed with this modification, given their calls for companies to replace the use of limited assurance with reasonable assurance.<sup>1</sup> The final rule grants companies more time to obtain assurance than what was initially proposed, with the first assurance report required 3 years after the GHG emissions compliance date and the move to reasonable assurance by LAFs required after 7 years.

<strong>Regulation S-X requirements.</strong> The SEC had proposed disclosure of financial impact metrics which would have required a registrant to disclose the financial impacts from severe weather events and other natural conditions and transition activities on any relevant line item in the registrant’s consolidated financial statements during the fiscal years presented – applying a 1% disclosure threshold on a line-by-line basis. In response to feedback received (from numerous commentors, including the CAQ), the SEC modified its proposed regulation S-X requirements. The SEC removed the need to consider the impact of transition activities as part of this particular requirement. The final rule requires registrants to disclose the effects of severe weather events and other natural conditions. The SEC removed the requirement to disclose the impact on each line item of a registrant’s consolidated financial statements but retained the 1% disclosure threshold at the overall income statement and balance sheet level and also established de minimis thresholds. The SEC indicated that these revisions would help minimize costs and burdens on registrants while providing investors with decision-useful information.

[custom_quote text="The final rule requires registrants to disclose the effects of severe weather events and other natural conditions."]

<strong>Effective date.</strong> The SEC recognized it will take time for registrants, auditors, and others to prepare for implementing the requirements in the final rule in a way that will support the disclosure of high-quality information that is decision useful. Accordingly, the SEC made various accommodations. The final rules will be phased in for all registrants with the compliance date dependent upon the status of the registrant and the content of the disclosure. The final rules provide additional phase-in periods for disclosures pertaining to material expenditures, GHG emissions, the assurance requirement, and the electronic tagging requirement if the registrant is an LAF. The rule also provides an accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis by a domestic registrant, in its Form 10-Q for the second fiscal quarter in the fiscal year immediately following the year to which the GHG emissions disclosure relates.<sup>2</sup>

<strong>Alternative reporting provision. </strong>The SEC did not adopt an alternative reporting provision structured to encompass reports made pursuant to the criteria developed by the International Sustainability Standards Board (ISSB). The SEC acknowledged that some commenters (the CAQ being among them) had recommended that the Commission consider allowing the use of the ISSB’s climate-related disclosure standards as an alternative to the Commission’s climate disclosure rules. We were of the view that allowing the use of the ISSB Standards as alternative reporting to satisfy SEC registrant climate reporting obligations could have been a mechanism for enhancing global comparability for investors and reducing the need for registrants to report in accordance with multiple standards or requirements. While the Commission acknowledged that there are similarities between the ISSB’s climate-related disclosure standards and the final rules, and that registrants may operate in jurisdictions that will adopt the ISSB standards, the Commission indicated that those jurisdictions had not yet integrated the ISSB standards into their climate-related disclosure rules and accordingly declined to recognize the use of the ISSB standards as an alternative reporting provision at this time.

[custom_quote text=" The SEC did not adopt an alternative reporting provision structured to encompass reports made pursuant to the criteria developed by the International Sustainability Standards Board (ISSB)."]

<strong>GHG emissions boundaries. </strong>Ultimately, the SEC allowed for flexibility in determining the organizational boundaries used when calculating GHG emissions. Unlike the rule proposal, which would have required a registrant to use the same scope of entities and other assets included in its consolidated financial statements when determining the organizational boundaries for its GHG emissions calculation, the final rule provides that the registrant must disclose the method used to determine the organizational boundaries, and if the organizational boundaries differ materially from the scope of entities and operations included in the registrant’s consolidated financial statements, the registrant must provide a brief explanation of the difference and describe the method used to determine those boundaries. This is a welcome revision given that many registrants have been voluntarily reporting under different organizational boundaries than what had been proposed. We expect this change to help address concerns about reporting challenges and compliance burden associated with the proposed requirement.

<strong>Framework to be used to support GHG emissions disclosures. </strong>The proposed rule concerning the presentation, methodology, including underlying assumptions, and organizational and operational boundaries applicable to the determination of Scopes 1 and 2 emissions did not specify a framework such as the GHG Protocol. We recommended the SEC specify in the final rule that a widely used framework, such as the GHG Protocol, should be used to help support GHG emissions disclosures being more comparable from company to company and limit companies from opting to use bespoke methods. While the final rule does not specify use of the GHG Protocol, it requires a brief description of the protocol or standard used to report the GHG emissions, including the calculation approach, the type and source of any emission factors used, and any calculation tools used to calculate the GHG emissions. The SEC indicated that such disclosure should assist investors in understanding the emission disclosures and promote consistency and comparability over time.

If you have questions about the final rule, please send them our way to consider covering in future blogs. Also, be sure to <a href="https://go.thecaq.org/l/834983/2020-04-22/fskb">sign up</a> for our CAQ newsletters to stay up to date on the resources we are developing to support stakeholders in understanding the new requirements. Download a high-level summary of the SEC climate rule <a href="https://www.thecaq.org/wp-content/uploads/2024/03/AICPA-CAQ-SEC-Climate-Rule-Summary.pdf">here</a>.

&nbsp;

<hr />

<strong>Endnotes</strong>
<h6>1. <a href="https://www.ceres.org/resources/reports/closing-gap-investor-insights-decision-useful-climate-data-assurance">Closing the Gap: Investor Insights into Decision-Useful Climate Data Assurance | Ceres</a></h6>
<h6>2. The rule also provides an accommodation that allows Scope 1 and/or Scope 2 emissions disclosure, if required, to be filed on a delayed basis as follows: 'If a foreign private issuer, in an amendment to its annual report on Form 20 F, which shall be due no later than when such disclosure would be due for a domestic registrant;' and 'if filing a Securities Act or Exchange Act registration statement, as of the most recently completed fiscal year that is at least 225 days prior to the date of effectiveness of the registration statement.'</h6>

SEC Climate Rule Part 2: What We Were Looking For in the Final Rule versus What We Found

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On March 6, 2024, the Securities and Exchange Commission adopted The Enhancement and Standardization of Climate-Related Disclosures for Investors. The final rule requires a registrant to disclose certain climate-related information in its registration statements and annual report. The rule aims to...

<p class="x_MsoNormal">On March 6, 2024, the Securities and Exchange Commission adopted <a href="https://www.sec.gov/rules/2022/03/enhancement-and-standardization-climate-related-disclosures-investors" data-auth="NotApplicable" data-linkindex="6"><i>The Enhancement and Standardization of Climate-Related Disclosures for Investors</i></a>. The final rule requires a registrant to disclose certain climate-related information in its registration statements and annual report. The rule aims to provide investors with consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s business, and how the registrant manages those risks. This publication provides a high-level summary of the rule, including insight into:</p>

<ul>
 	<li class="x_MsoListParagraph">Changes from the proposed rule</li>
 	<li class="x_MsoListParagraph">Content of the disclosures</li>
 	<li class="x_MsoListParagraph">Presentation and attestation of the disclosures</li>
 	<li class="x_MsoListParagraph">Phase-in periods and accommodations and</li>
 	<li class="x_MsoListParagraph">Compliance dates under the final rule</li>
</ul>

Summary of the Enhancement and Standardization of Climate-Related Disclosures for Investors

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The SEC has adopted new climate-related disclosure rules. The Center for Audit Quality and Anita Chan, who played an active role in the development of the proposed rule, will be breaking down the new rules in this informative session and...

The SEC has adopted new climate-related disclosure rules. The Center for Audit Quality and Anita Chan, who played an active role in the development of the proposed rule, will be breaking down the new rules in this informative session and answering questions such as:
<ul>
 	<li>What will companies need to disclose?</li>
 	<li>What are the attestation requirements?</li>
 	<li>When will these rules take effect?</li>
</ul>

Breaking Down the New SEC Climate-Related Disclosure Rules

Event

The Center for Audit Quality (CAQ) supports the SEC’s vote to adopt a final rule that will bring clarity, consistency and comparability to company-reported climate information and will require assurance over certain aspects of this information. In adopting the final...

The Center for Audit Quality (CAQ) supports the SEC’s vote to adopt a final rule that will bring clarity, consistency and comparability to company-reported climate information and will require assurance over certain aspects of this information. In adopting the final rule, the SEC has recognized the valuable role that assurance plays in bringing accountability and objectivity to company-reported climate disclosures.

“While we are still digesting the final rules, the SEC took a step forward today in providing much needed clarity on the reporting of climate-related information by public companies,” said Julie Bell Lindsay, Chief Executive Officer of the CAQ. “Whether greenhouse gas emissions or the impact of climate issues in company financial statements, audit firms – with their deep understanding of company financial records, operations, business strategies and internal controls – stand ready to bring their independence and objectivity in providing assurance on this information.”

Statement of Support for the SEC’s Final Rule on Climate-Related Disclosures

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Over the last few years, with growing interest in reliable, decision-useful, ESG information, the Center for Audit Quality has been focused on ESG reporting and assurance: analyzing reporting and assurance trends among S&amp;P 500 companies, highlighting the role of the...

Over the last few years, with growing interest in reliable, decision-useful, ESG information, the Center for Audit Quality has been focused on ESG reporting and assurance: analyzing reporting and assurance trends among <a href="https://www.thecaq.org/sp-500-and-esg-reporting">S&amp;P 500</a> companies, highlighting <a href="https://www.thecaq.org/rota-climate">the role of the auditor in climate-related information</a> and responding to key requests for comments on relevant proposals from the <a href="https://www.thecaq.org/news/caq-comments-on-sec-climate-disclosure-rule-proposal-supports-objectives-but-identifies-needed-changes">SEC</a> and exposure drafts from the <a href="https://www.thecaq.org/international-sustainability-standards-board-ifrs-s1-and-s2-for-public-comment">International Sustainability Standards Board</a> and the <a href="https://www.thecaq.org/comment-letter-iaasb-proposed-international-standard-on-sustainability-assurance-5000">International Auditing and Assurance Standards Board</a>. In this blog, we share our recent analysis of SEC correspondence with corporations regarding the climate-related disclosures in their 10-Ks.

The SEC staff continued to <a href="https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures">correspond</a> with companies regarding their climate-related disclosures through the end of 2023. The CAQ analyzed the comment letters for almost twenty companies that the SEC initiated correspondence with from January 1, 2023, through December 31, 2023,<sup>1</sup> regarding their climate-related disclosures in Form 10-K filings. The number of companies that the SEC initiated corresponded with regarding their climate-related disclosures in Form 10-K filings decreased from almost 30 in 2022<sup>2</sup> to almost 20 in 2023.

During 2023, the SEC staff asked a smaller subset of questions compared to 2022 and largely focused their questions on four areas within these letters. These areas included questions about why companies had more expansive disclosure in standalone ESG report(s) or the company website compared to Form 10-K, the impact of climate related regulation or business trends on the company, the physical effects of climate change on the business, and the purchase/sale of renewable energy credits (“RECs”) or carbon credits and offsets. The SEC staff asked all but two of the companies about each of these four areas.

The SEC staff corresponded with small, mid and large-cap companies. Roughly 35 percent of the companies were in the consumer staples and consumer discretionary industries and approximately 24 percent of the companies were in the finance industry. The remainder of the SEC’s correspondence was across a variety of industries.

The CAQ reviewed certain climate-related quantitative disclosures companies provided in their response to the SEC and reviewed how companies described those climate-related items. The CAQ observed that when companies provided quantitative climate-related information within their correspondence with the SEC, that information most often pertained to losses associated with physical risks or insurance costs, and carbon credit or offset costs. Of the almost 20 companies analyzed, a few takeaways the CAQ identified in its review of climate-related quantitative disclosures are:
<ul>
 	<li>When a company described costs associated with physical climate-related risks they were typically costs incurred due to property damage from severe weather events like hurricanes.</li>
 	<li>Roughly 60 percent of the companies indicated that they purchased RECs, or carbon credits/offsets of various amounts during the reporting period, all deemed immaterial for reporting purposes.</li>
</ul>
We explore each of these items in greater detail below.
<h3><strong>Costs associated with physical risks</strong></h3>
The types of costs associated with climate-related physical risks that companies disclosed in their comment letter correspondence were mostly related to property damage due to severe weather. Other costs included lost revenue, lost production or increased operating costs resulting from severe weather. Four companies provided an indication of what the costs associated with climate-related physical risks were as a percentage of certain revenue or expenses. Two companies noted that the costs were less than 0.01% of total operating expenses and another noted that the costs were less than 1% of net income. The last company was an insurance company and noted that natural catastrophe losses accounted for 4.9%-9% of revenue for the three years presented in their 10-K.

In response to the SEC’s question about weather-related impacts on the cost or availability of insurance, many companies indicated that they had not experienced any material change in cost or availability of insurance due to climate related matters. Almost a dozen companies reported quantitative figures and noted that property insurance costs ranged from less than 0.003% to 0.2% of total operating expenses, cost of sales, or total selling, general and administrative expenses. One company provided their cost of insurance relative to income/loss before taxes and noted that their property insurance costs represented 2-14% of income/loss before taxes for the years presented in their 10-K.
<h3><strong>RECs and carbon credit/offset costs</strong></h3>
Roughly 40 percent of the companies analyzed indicated that they did not purchase RECs or carbon credits/offsets during the reporting period. The remaining companies purchased carbon credits or offsets of various amounts all deemed immaterial for their reporting purposes. One of the companies that purchased RECs purchased enough to completely match their electricity consumption for the year. Almost 20 percent of the companies analyzed provided an indication of what their carbon credit/offset costs were as a percentage of certain revenue or expenses, indicating that such costs represented less than 1% of revenue, net income, or operating expenses.
<h3><strong>Conclusion</strong></h3>
During 2023, compared with 2022, the SEC corresponded with fewer companies and focused on a subset of the questions noted in their <a href="https://www.sec.gov/corpfin/sample-letter-climate-change-disclosures">sample letter</a> to companies regarding climate change disclosures. When companies provided quantitative climate-related information within their correspondence with the SEC, that information most often pertained to losses associated with physical risks or insurance costs, and carbon credit or offset costs which companies generally indicated were immaterial for disclosure purposes. Companies noted that they would continue to evaluate these matters in future periods and consider the need for additional disclosure should amounts and risks become more material to their financial statements.

<hr />

<strong>Endnotes</strong>
<h6>1. The CAQ analyzed SEC correspondence accessed through www.alphasense.com as of January 16, 2024. The SEC may release correspondence that occurred from January 1, 2023, through December 31, 2023, after January 16, 2024, which would not be reflected in this analysis. This data only includes companies where information was not marked as confidential. In several instances companies disclosed amounts associated with a particular line item, however, the value was blank and indicated a request for confidential treatment. Those unknown figures are excluded from the analysis.</h6>
<h6>2. The CAQ analyzed SEC correspondence accessed through www.alphasense.com as of January 14, 2023. The SEC may have released correspondence that occurred from January 1, 2022, through December 31, 2022, after January 14, 2023, which would not be reflected in the count of the twenty-nine companies.</h6>

SEC Correspondence with Corporations regarding Climate-Related Disclosures

It has been 993 days since the Center for Audit Quality (CAQ) responded to the SEC’s request for public input on climate change disclosures, and 622 days since we responded to the SEC’s rule proposal, The Enhancement and Standardization of...

It has been 993 days since the Center for Audit Quality (CAQ) responded to the SEC’s <a href="https://www.sec.gov/news/public-statement/lee-climate-change-disclosures">request for public input</a> on climate change disclosures, and 622 days since we responded to the SEC’s rule proposal, <a href="https://www.sec.gov/files/rules/proposed/2022/33-11042.pdf"><em>The Enhancement and Standardization of Climate-Related Disclosures for Investors</em></a> (proposed rule).

In less than a week the SEC will hold an <a href="https://www.sec.gov/os/agenda-open-030624">open meeting</a> to consider whether to adopt rules to require registrants to disclose certain climate-related information. The long-awaited climate rule is almost here! The meeting will be held virtually on March 6, 2024 at 9:45 ET and will be webcast at <a href="http://www.sec.gov">www.sec.gov</a>.

Read on for what the CAQ will be looking for in the final rule.
<ol>
 	<li><strong><strong>What are the attestation requirements? </strong></strong>Perhaps not surprising, but given we are the Center for <em>Audit </em>Quality, we were supportive of the proposed rule requiring certain registrants to subject certain greenhouse (GHG) emissions disclosures to attestation as this will enhance the reliability and quality of GHG emissions disclosures. Our most recent <a href="https://www.thecaq.org/sp-500-and-esg-reporting">S&amp;P 500 ESG Reporting and Assurance Analysis</a> revealed that 64% of S&amp;P 500 companies that reported ESG information already obtain assurance over certain GHG emissions information. Research shows that assurance over climate related reporting offers increased investor protection, in particular when performed by an external audit firm. We will be paying close attention to the final rule’s attestation requirements – and in particular those requirements that will enable the SEC to promote consistent, comparable, high-quality attestation over GHG emissions.</li>
 	<li><strong>What are the regulation S-X amendments? </strong>Climate-related risks, like any other risk, will vary from company to company. The time horizon for when those risks become material to the financial statements and are reflected in the underlying financial statement accounts also can vary from company to company. At the same time, investors continue to call for greater insight into how climate-related risks are affecting the financial statements. We were supportive of the SEC’s efforts to provide more clarity on what climate-related matters a company must disclose in their financial statements. However, we expressed concerns that the proposed financial statement metrics requirements as written in the proposed rule would not achieve the intended objectives and will result in various practical implementation challenges. We recommended the SEC consider alternatives that could help focus registrants on preparing more meaningful cost-effective climate-related disclosures that are comparable from company to company. Subsequent to our comment letter response to the SEC, we held a roundtable with Ceres to discuss alternative S-X requirements. We will be paying close attention to the S-X amendments in the final rule.</li>
 	<li><strong><strong>What is the effective date or dates for the new requirements? </strong></strong>Implementing the requirements in the final rule in a way that will support the disclosure of high-quality information that is decision useful will take time for registrants, auditors, and others to prepare. While many S&amp;P 500 companies mention climate-related matters in their 10-Ks, the extent of that disclosure is limited. Our most recent <a href="https://www.thecaq.org/sp-500-10k">Analysis of Climate-Related Information in S&amp;P 500 Companies’ 10-Ks</a> revealed that only 125 companies provided some insight into their GHG emissions – suggesting that many companies have a long way to go to prepare for all of the proposed disclosures. We will be interested to see how much time the effective date or dates will provide for preparation to comply.</li>
 	<li><strong>Will an alternative reporting provision be adopted that is structured to encompass reports made pursuant to the criteria developed by the International Sustainability Standards Board (ISSB)? </strong>The CAQ is supportive of a globally accepted ESG reporting system that is built from existing standards and frameworks that can be adapted to the needs of investors in different jurisdictions. Accordingly, we were supportive of an alternative reporting provision structured to enable reporting pursuant to criteria developed by the ISSB. Allowing the use of the ISSB Standards as alternative reporting to satisfy SEC issuer climate reporting obligations could be a mechanism for enhancing global comparability for investors and reducing the need for issuers to report in accordance with multiple standards or requirements. We will be looking to see whether the SEC adopts an alternative reporting provision that is structured to encompass reports made pursuant to the criteria developed by the ISSB.</li>
 	<li><strong>What are the boundaries for GHG emissions disclosures</strong>? In the proposed rule the SEC aligned the organizational boundaries for GHG emissions disclosures with the boundaries of the consolidated financial statements. However, many companies have been voluntarily reporting under different organizational boundaries than proposed. As a result, companies could encounter reporting challenges and burdens as they move toward reporting under a different boundary. We will be looking to see what boundaries the final rule will require companies to use when determining their GHG emissions disclosures.</li>
 	<li><strong>What framework should be used to support GHG emissions disclosures? </strong>The proposed rule concerning the presentation, methodology, including underlying assumptions, and organizational and operational boundaries applicable to the determination of Scopes 1 and 2 emissions did not specify a framework such as the GHG Protocol. We understand the SEC did not specify a framework so that registrants would have flexibility to adapt to new approaches and GHG emissions methodologies as they emerge. We recommended the SEC specify in the final rule that a widely used framework, such as the GHG Protocol, should be used to help support GHG emissions disclosures being more comparable from company to company and limit companies from opting to use bespoke methods. We will be looking for whether the SEC specified a framework in the final rule.</li>
</ol>
The CAQ will be paying close attention to the SEC’s final climate rule. Be sure to sign up for our <a href="https://www.thecaq.org/">CAQ</a> newsletters to stay up to date on the resources and tools we are developing to support stakeholders in understanding the new requirements.

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SEC Climate Rule Part 2:

What We Were Looking For in the Final Rule versus What We Found

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