• Wed. Apr 24th, 2024

SEC Climate Rules Create Lighter-Than-Feared Auditor To-Do List

Accountants and auditors got a break this week when the US Securities and Exchange Commission stripped out some of the most onerous financial reporting requirements in its landmark climate reporting rules.

But there’s still plenty of new audited financial details public companies will have to reveal under the sweeping new requirements, which means lots of numbers for accountants to compile, and then auditors to vet.

Blowback from auditors, trade groups, and companies themselves convinced the regulator to nix part of its 2022 plan to make publicly traded businesses go through every line in their financial statements and tally the financial impact of floods, droughts and other climate risks on every item. The 2022 proposal would have affected everything from revenue to inventory and cost of goods sold, and at a threshold—1%—considered much lower than what the market thinks of as “material.”

“They got some relief from the proposal, that much is certain,” said Steve Soter, vice president and industry principal at Workiva Inc. “There still is some fairly significant effort.”

Accountants and auditors will have a key role in helping companies implement the SEC’s final rules, which are designed to make companies reveal how they address climate risks as well as certain details about greenhouse gas emissions. Companies will have to include in their audited footnotes information about carbon offsets or renewable energy credits if they use them to meet climate-related goals and they’ll have to describe whether severe weather materially affected any estimates and assumptions in their financial statements.

They also will have to calculate capitalized costs, expenses, charges, and losses related to severe weather if the costs total more than 1% of income before taxes or shareholder equity, which is the difference between assets and liabilities on the balance sheet. They won’t have to calculate in this footnote costs and expenses related to moving to greener energy sources, such buying a fleet of electric vehicles. The agency reasoned that it’s hard to distinguish between making business decisions with climate in mind versus trying to save money.

The balance sheet and income statement items covered by the rules will be “far fewer in number” compared to the financial impact metrics outlined in the original proposal, the SEC said in the 886-page rule document, noting that the 2022 plan would have required information about changes in revenues due to disruptions in business operations, for example. Anything less than $100,000 in the income statement or $500,000 on the balance sheet would be exempt from disclosure, according to the rule.

“The SEC was clearly listening to a lot of feedback provided about landing on an information package,” said Wes Bricker, PwC LLP vice chair and co-leader of the firm’s US Trust Solutions.

A Lighter Reporting Load

Dropping the pervasive financial impact metrics from the proposal “will reduce costs and ease many of the burdens that commenters stated would arise as a result of a requirement to disclose financial impacts on a line item basis,” the SEC said.

Given the pushback, the SEC move was anticipated, said Christopher McClure, partner and ESG services leader at Crowe LLP.

“I don’t think anybody was surprised, really,” McClure said.

The SEC could have dropped the financial disclosures altogether, as some groups told the agency, and delegated climate accounting disclosure development to the US accounting standard-setter, the Financial Accounting Standards Board. The SEC resisted that suggestion in the final rule, flatly saying “we do not agree.” The SEC has the “ultimate responsibility and broad authority” to set accounting standards, it said.

The regulator finalizing financial disclosures—even scaled-back ones—shows the SEC views climate risk, including severe weather events and how companies plan to meet their goals, as fundamentally a financial issue, said Kristina Wyatt, chief sustainability officer at Persefoni, a climate data management platform.

They completely dispel any notion that this is something nice to do or this is a social agenda,” said Wyatt, who is a former SEC attorney. “This is a numerical, financial issue.”

— With assistance from Amanda Iacone.

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