The Securities and Exchange Commission wants input from accountants on rules it is developing for disclosing climate risks and environmental, social and governance reporting.
SEC commissioner and former acting chair Allison Herren Lee asked for feedback Monday during a webcast co-hosted by the Center for Audit Quality, the American Institute of CPAs, the Chartered Institute of Management Accountants and the Sustainability Accounting Standards Board. She was joined by officials from those organizations, as well as Deloitte, BlackRock, Travelers, National Grid and the Corporate Leadership Center.
The SEC has been focusing more on ESG reporting as investors have been pouring more money into those funds in recent years, and the Biden administration has emphasized climate change issues and incentives for renewable energy sources. Last week, President Biden signed an executive order on climate-related financial risk that would require an assessment of such risks by financial regulators. Standard-setters like SASB have come under pressure from financial regulators to harmonize their standards with those of other organizations in the ESG space, including the International Integrated Reporting Council, with which it is planning to merge this year. Meanwhile, the International Financial Reporting Standards Foundation is in the process of setting up a global sustainability standard-setting board that it would oversee alongside the International Accounting Standards Board.
In her speech, Herren Lee tried to dispel some of the myths surrounding the materiality of ESG disclosures. “As we all debate and deliberate over these issues, a great deal of attention is focused on the concept of materiality,” she said. “Materiality is a fundamental proposition in the securities laws and in our capital markets more broadly. The system for public company disclosure is generally oriented around providing information that is important to reasonable investors. Although the SEC must craft the rules, and companies, with the help of lawyers and accountants, must comply with them, the viewpoint of the reasonable investor is the lens through which we all are meant to operate.”
She asked for feedback from accountants, auditors and others as the SEC tries to set rules for ESG and climate risk disclosures. “This is a highly-sophisticated audience of accountants, auditors, attorneys and other professionals, with deep knowledge concerning public company accounting and other disclosures — how to identify, prepare and verify them,” she said. “The SEC needs your advice, your thoughts and your expertise as we endeavor to craft a rule proposal for climate and ESG disclosures.”
The concept of what a reasonable investor expects from companies and the SEC may be changing. “I think that the concept of a reasonable investor, especially the concept that it’s dynamic and evolves over time, has served U.S. capital markets very well,” said SASB CEO Janine Guillot. “I do think it’s becoming increasingly difficult for companies to apply that concept in practice. The reason is that investor views are increasing. If you compare it to the 1970s, I think you can say you’d have a pretty good idea of what a reasonable investor might look like. It’s a financial analyst and a major active asset manager, or a sell-side research analyst. Today you have a huge, huge array of investors with different investment strategies. At the end of the day I think standards are so beneficial. The standard-setting process can accumulate a lot of different views, both corporate and investor views, and try to come to some sort of consensus. That standard-setting process is incredibly valuable for companies in terms of helping divine the view of a reasonable investor so they’re not sitting there trying to wade through what sounds like potentially a lot of different contradictory views.”
Accounting groups are already developing guidance on ESG assurance and auditing services for practitioners. Earlier this year, the AICPA and the CAQ teamed up to develop an ESG reporting and attestation roadmap for audit practitioners. “While today, as we know, largely ESG reporting has taken place outside of more traditional financial filings or SEC filings, we see with this move toward an emphasis on greater financial relevance of topics like climate risk, climate change and diversity, there is an evolution in disclosure and the avenues for disclosure that preparers increasingly are looking to provide the information and meet the information needs of investors in particular,” said Kristen Sullivan, sustainability and KPI services leader at Deloitte, who also chairs the AICPA’s Sustainability Assurance and Advisory Task Force. “As we see that disclosure evolving, naturally we’re seeing a conversation around the role and the value of assurance provided by independent auditors. The audit profession is steeped in bringing independence, accountability and standards-aligned analysis as well as objectivity to the review of corporate performance disclosure. That’s really no different [from] transitioning skills to other performance information that’s provided around risks and opportunities to the business [and] the way management is measuring and monitoring performance, such as ESG information. This roadmap is a really important tool.”
Corporate boards are increasingly recognizing the importance of ESG issues. “I felt the recent issuance of those reports and some of the key actions they recommend for establishing effective governance are a really good roadmap for boards to be following as well,” said Corporate Leadership Center CEO Deb DeHaas, a retired vice chair and partner at Deloitte, referring to the AICPA and CAQ roadmap. “I have been interviewing for different public company boards and it was quite interesting to me over the last six to nine months as I went through that process to hear how many boards are actually looking to add additional capabilities to their board, people who would bring knowledge of sustainability topics. I think there is a growing recognition that those skills and experiences are going to be valuable in the boardroom.”
The SEC’s request for comment on climate disclosures, and the comments it has received so far, can be found here. Questions of materiality, and how the SEC will be weighing those factors, go beyond just climate change risks, however. “Obviously, materiality is going to be something that the SEC and all of us need to be looking at as well as the costs and burdens,” said CAQ executive director Julie Bell Lindsay. “It seems like the SEC is focusing on climate risk disclosures, but also diversity, equity and inclusion, as well as human capital disclosures.”