The IMA® (Institute of Management Accountants) Financial Reporting Committee (FRC or Committee) issued a comment letter in response to the U.S. Securities and Exchange Commission (SEC) Release No. 33-11042, Proposed Rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors (Proposed Rule).
The SEC proposed these amendments to its rules under the Securities Act of 1933 and Securities Exchange Act of 1934 to require registrants to provide certain climate-related information that is reasonably likely to materially affect a registrant’s reported results. If adopted, the new rule would also require registrants to provide disclosure of their greenhouse gas (GHG) emissions. Thirdly, if adopted, the rules would require registrants to include certain climate-related metrics in their audited financial statements.
In its comment letter, the FRC raises the following:
- Many registrants lack the requisite systems, controls, and infrastructure to report on climate-related events and transition activities in the financial statements in compliance with Sarbanes-Oxley.
- As a practical matter, Committee members observe that currently available third-party solutions for collecting and reporting on climate change data are not yet adequate.
- Prospective implementation is more feasible than the full retrospective transition approach in the Proposed Rule.
- The Proposal’s requirement regarding the financial statement disclosure of costs incurred for climate-related transition activities appears inoperable in that it may be difficult?or impossible?for registrants to identify expenditures that are specifically related to climate-related transition activities. The Committee recommends that these disclosures, instead, be part of the newly proposed MD&A section, “Climate-Related Disclosure.”
- The SEC should apply the U.S. Supreme Court definition of materiality, as further supported by SEC Staff Accounting Bulletin No. 99, Materiality, which does not adopt bright-line materiality thresholds. As a result, the FRC disagrees with the Proposed Rule that would require disclosure, in the notes to the financial statements, of the effects of climate-related events and transition activities based on a measure of 1% of a financial statement line item.
- The FRC disagrees with the proposal that would require new disclosures, in the registration statements and annual reports, that identify directors with expertise in climate-related risks. First, information on directors’ areas of expertise is detailed in a registrant’s proxy. Additionally, the Committee notes that proposed SEC rules on cybersecurity differ from the Proposed Rule by providing a safe harbor that a named director is not acting as an expert.
- Registrants will have significant challenges in obtaining Scope 2 and Scope 3 information from third parties. Therefore, it would be beneficial for the final rule to allow registrants to disclose GHG emissions based on the most current, readily available information, including best estimates. The Committee further notes that timing delays for information, as a practical matter, may make the proposed requirement to report Q1 to Q3 along with an estimate of Q4 infeasible.
- To promote comparability, it would be beneficial for the rule, if adopted, to provide guidelines to define “short-term,” “medium-term,” and “long-term” for the required disclosures regarding strategy, business model, and outlook. In addition, for disclosures regarding long-term expectations, it may be beneficial for companies to provide best- and worst-case scenarios.
- The Committee agrees with the Proposed Rule regarding the use of organizational boundaries as defined in current accounting guidance, but it recommends eliminating the disclosure of properties subject to physical risks by zip code.
- If the SEC allows experts other than public accounting firms to provide attestation of GHG emissions reporting, it should consider how existing independence rules apply to these service entities. In addition, the Committee recommends deferral of attestation requirements for at least two years to promote effectiveness.
- As the Proposed Rule, if adopted, incorporates the Greenhouse Gas Protocol, the Committee recommends that the SEC review amendments to these standards as well as other GHG reporting methodologies that may develop.
- The Committee encourages the SEC to continue to work with other regulators and standard setters, globally, to reduce fragmentation in reporting on climate and other ESG matters.