The 886-page rule on climate-related disclosures adopted last week by the SEC doesn't make for light reading, but a resource published by the AICPA and the Center for Audit Quality (CAQ) sheds some light in 883 fewer pages.
The "Summary of The Enhancement and Standardization of Climate-Related Disclosures for Investors SEC Release Nos. 33-11275 and 34-99678" provides a valuable overview of the rule, which mandates a significant set of new disclosures — via both Regulation S-X and Regulation S-K — as early as fiscal year beginning (FYB) 2025.
"Media reports that the rule is watered down leads people to think this is not a big deal. However, going through the requirements of the rule, it really is a huge deal and a lot of work for companies that haven't yet started the process," said Ami Beers, CPA, CGMA, senior director–Assurance & Advisory Innovation for AICPA & CIMA.
Now is the time for CPAs to start getting acquainted with what to expect.
What's included?
The summary covers what all companies registered with the SEC, including foreign private issuers, must report in S-K (nonfinancial statement) and S-X (financial statement) disclosures, including what a subset of registrants must report related to greenhouse gas (GHG) emissions.
The new disclosure requirements under Regulation S-K state that companies must report climate-related risks, targets, and goals if they are determined to be "material." From page 105 of the rule:
"A matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available."
The new disclosure requirements under Regulation S-X say that companies must report, among other things, the effects of "severe weather events and other natural conditions" if they meet a certain threshold of financial impact.
What's not included?
Much of the delay related to adoption of the rule was attributed to the great GHG debate. In the end, the passage of time led to the passage of a rule that lightened GHG disclosures across the board.
Gone are Scope 3 disclosures altogether. Reporting and assurance of Scope 1 and 2 disclosures remain in the requirements under Regulation S-K, but only for large accelerated filers and most accelerated filers. Small reporting companies, emerging growth companies, and nonaccelerated filers are exempt from GHG disclosures.
While Scope 1 and 2 emissions cover activities under control of reporting organizations, Scope 3 emissions primarily cover the emissions of their business partners up and down the supply chain and are more difficult to collect.
What's the timeline?
Large accelerated filers will kick off climate reporting requirements with most non-GHG disclosures in the rule due FYB 2025; followed a year later by the same for most accelerated filers; then capped by small reporting companies, emerging growth companies, and nonaccelerated filers due FYB 2027. The AICPA and CAQ summary has more details regarding disclosures not included in the first round of the climate disclosures.
For GHG disclosures, large accelerated filers will report FYB 2026, followed by included accelerated filers two years later.
What's the role of assurance?
Of particular note to CPAs, GHG disclosures will require attestation as early as FYB 2029. Large accelerated filers must obtain limited assurance FYB 2029 and reasonable assurance FYB 2033. Included accelerated filers must obtain limited assurance FYB 2031 but won't be subject to reasonable assurance.
"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," said Julie Bell Lindsay, CEO of the CAQ, which is affiliated with the AICPA.
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