Guest Post: With Uncertainty Over the SEC’s Climate Rule, It’s Time To Build Your Compliance Strategy With the Cloud
By: Donavan Hornsby, Chief Market Strategy Officer at Benchmark ESG
Achieving and disclosing investment-grade evidence of environmental, social, and governance (ESG) performance excellence are, together, quickly becoming more a necessity for companies than a “nice to have.” And while, historically, such an appraisal of these practices may have been a nod to their demonstrated investor relations and broader reputational advantages, global regulatory bodies are proving determined to up the ante.
Case in point is the U.S. Securities and Exchange Commission’s (SEC) ongoing effort to bring transparency, uniformity, and, above all, credibility to companies’ sustainability claims. Top of the agenda is the SEC’s proposal (the “Proposed Rule”) to standardize and make compulsory a set of climate-related financial risk disclosures for public companies, the leading point of a multi-pronged effort to stabilize the haphazardly constructed sustainable investing edifice.
Yet the SEC’s imminent rulemaking, heretofore welcomed by financial and non-financial corporates alike, is proving objectionable. Business leaders and industry groups are raising alarm over the compliance and reporting burden that the Proposed Rule represents for registered issuers and, by extension, the firms across their value chains.
Regardless, companies can expect the SEC will finalize, adopt, and enact the Proposed Rule by year’s end, with its attendant compliance and reporting obligations to take effect, at least in part, soon thereafter. The trouble, clearly, is the uncertainty surrounding the Proposed Rule’s final scope and specificity. Taken with the dual need to accommodate the investment community’s insatiable appetite for comparable, decision-useful ESG performance data, and a “wait and see” approach is out of the question.
In response and preparation, business leaders can secure their footing amidst this seismic shift in the ESG disclosure landscape with a data-driven, governance-forward strategy. To that end, executives will need to shore up their legacy ESG performance measurement, management, and reporting processes. Priority should be given to their companies’ greenhouse gas (GHG) emissions accounting, existing disclosure controls and procedures, climate risk governance frameworks and oversight protocols, and data assurance and verification competencies. This, at least, will provide the foundation for an immediate SEC compliance management strategy.
Successful execution of these internal reforms and, in turn, the preparation of a durable compliance strategy, however, will require business leaders to implement a cloud-supported ESG data management and reporting platform; a digital system that will unify the various functional teams and source data systems while simplifying and automating the processes of data gathering, analysis, and reporting to various stakeholders
The first of these tactics hardly needs explanation. The SEC, through its Proposed Rule, is laser-focused on companies’ disclosures of the GHG emissions that they own or control and, in some cases, the emissions in their value chain over which they only have indirect control. For the more than 90% of companies evidently incapable of executing such comprehensive emissions accounting, let alone collecting and translating into financial terms the full slate of climate-related enterprise performance data eyed by the SEC, this is a considerable challenge.
Accordingly, executives will first need to retire the manual, spreadsheet-driven processes for operational emissions and climate risk data collection, collation, storage, retrieval, and reporting employed by the majority of public companies. By way of substitution, cloud-supported digital platforms are a proven upgrade. These systems are capable of advancing the accuracy, completeness, contemporaneity, and integrity of data describing asset-level and enterprise-wide emissions, among other climate-related performance issues.
But these systems are simply a means to an end. Their capacity to support compliance with the Proposed Rule depends on their user’s action. Specifically, executives need to know what information to capture, as well as what insights into climate risk management performance they’re meant to support in order to configure the platform’s data management, analysis, and reporting functions appropriately. For direction, at least at the outset, executives should consult two key resources.
The first of these are the SEC’s comment letters on companies’ climate-related disclosures. These letters, which have been sent to a handful of SEC-registered issuers, raise issue with their recipients’ apparent internal disclosure control failures, manifest as discrepancies between the contents of companies’ voluntary (i.e., unregulated) ESG and Corporate Social Responsibility (CSR) reports and their legacy, SEC-mandated financial disclosures. These letters will equip executives with insight into the SEC’s prescriptive interpretation of materiality (i.e., financial relevance) regarding companies’ climate-related risks and impacts, which the Proposed Rule fails to explicate in full.
Additionally, executives can take some solace in knowing that the Proposed Rule is largely based upon the voluntary Task Force on Climate-Related Financial Disclosures (TCFD) framework. The SEC appears prepared to employ materiality determination guidelines, as well as guidance for setting and disclosing climate risk governance frameworks and oversight protocols, that are similar to those established by the TCFD.
Yet, while early objections to the Proposed Rule may target its requirements for accounting of GHG emissions and other climate-related financial risks, executives cannot afford to overlook the governance aspect.
With an eye to the TCFD framework, companies will be expected to disclose the internal entities responsible for overseeing enterprise climate risk management; their goals for managing their climate risks; their plans for managing and investing in progress toward those goals, as well as their corresponding climate-related outcomes; and, finally, the financial implications of the climate risk management efforts they’ve deployed.
Here, too, the advantages of a cloud-supported ESG data management and reporting platform cannot be overstated. Regardless of whatever climate risk management goals the company sets, these systems equip their users with continuous insight into their progress toward them. For the operationalization of disclosure-relevant climate risk governance frameworks and oversight protocols, ensuring that designated personnel have the ability to confidently assess the financial ramifications and, in turn, feasibility of short, medium, and long term climate risk management goals has clear advantages.
But just as the full range of climate-related issues, financial metrics, and governance components deemed subject to disclosure under the Proposed Rule are uncertain, so too are the climate risk data assurance and verification requirements. More specifically, there’s uncertainty regarding which firms are qualified and therefore permitted to perform the required independent certification of the data enclosed in companies’ climate-related disclosures.
Even still, executives must appreciate that the same platforms that support accurate GHG emissions accounting and, in turn, informed climate risk governance and oversight, are capable of facilitating internal and external audits, too. The key lies in these platforms’ data tagging, collation, storage, and retrieval functions, which enable their users to easily delineate for third parties both the sources of and processes for deriving their disclosed climate risk management outcomes.
Achieving compliance with the Proposed Rule, not to mention satisfying investor demands for decision-useful ESG data, will require business leaders to act immediately upon what’s already confirmed. But ensuring SEC compliance and ESG performance excellence over the long haul will require more.
To operationalize reliably durable processes for quantifying, governing, and verifying climate risk management and sustainability performance outcomes, executives will need to be resourceful. And it’s by leveraging the cloud’s capabilities for unifying enterprise teams and systems, improving process efficiency, informing internal decision-making, and streamlining reporting functions that they will be able to confidently adapt their SEC compliance and, by extension, their broader ESG performance management and reporting competencies in response to whatever needs may arise.