What You’re Saying About the SEC Climate Disclosure Proposal
From financial executives to industry groups to farmers, you all have some opinions on the Securities and Exchange Commission’s proposed rule on climate disclosures. With 11,000 form letters and thousands of original public comments having flooded into the SEC on its proposal, Steve Soter of the Off the Books podcast dug into the feedback to break down some of your biggest concerns.
The comments brought to the surface questions on timing, scale, and one proposed requirement that companies disclose impacts of climate-related events and activities if the impacts represent at least 1% of a financial statement line item.
“I do think that 1% breakout in the financial statement footnotes poses some logistical problems for SEC practitioners,” said Steve, who submitted comments on the proposal on behalf of the SEC Professionals Group, where he is an executive advisor. “But I was also expecting feedback to relax the proposed greenhouse gas emission audit requirements, as well as the timing.”
The breakout of the 1%
This portion of the SEC’s proposed rule received several comments from practitioners. It could pose an operational hurdle to many organizations with the variable impact that climate may have, which poses difficult questions for disclosure and accounting.
One example was provided by the Financial Executives International’s Committee on Corporate Reporting (CCR), who used romaine lettuce to display the many variables the come with measuring indirect impacts.
“Consider a retailer impacted by severe weather events that reduces the supply of romaine lettuce. Suppliers may increase prices to cover those costs, which would increase the cost of sales to the retailer. The retailer may pass along a portion of those rising costs to their customers. Costs passed on to customers may result in increased revenues, or customers' buying patterns may change,” said the FEI’s CCR. This pattern created by an indirect impact is so interrelated and variable that it is leaving practitioners wondering if the usefulness of these disclosures can outweigh the effort it takes to produce them.
When looking into effort to produce these disclosures, it begs the question: When are practitioners going to get all of this done?
Many organizations are worried they don’t have enough of it to respond to the SEC’s proposal. The Chamber of Commerce pointed out that this proposal was under edits throughout the comment period, which brought about changes to page numbers, questions, and the number of questions asked.
“The Chamber of Commerce highlighted that the SEC asked only 15 questions before, and they gave a ton of time. Now they’re asking almost 1,000 questions, and we're barely getting more than a couple of months,” said Steve.
The SEC received several comments on the timing of the comment period and on the proposed implementation timeline of the new rules. With plates already stacked high, many practitioners are worried about when they will get everything done.
A 10-K is typically completed in February or March for a calendar-year company, but a sustainability report with data on greenhouse gas emissions might not be compiled until spring or even the summer months. If the SEC rule is adopted as proposed, it would mean completing the new requirements on top of existing disclosure requirements in the same amount of time.
Some SEC Pro Group members suggested a solution for that: Form SD. This form requires organizations to disclose any impacts related to conflict minerals or responsible sourcing. It is generally not due until the end of May, which would give organizations more time to comply with the proposed climate disclosures, if disclosures were to be made on that form instead.
Climate disclosure trailblazers
While there are many questions still left unanswered, there are some organizations like Etsy that have been incorporating ESG into their 10-K annual reports for years.
Even organizations that have begun incorporating it into their 10-Ks have a few questions. To hear more, head over to Off the Books!