Commentary: SEC's proposed climate change disclosures put CFOs under the spotlight

CFOs and executives across the country are on the clock. With the Securities and Exchange Commission's impending climate change regulations likely to be implemented, environmental, social and governance-related reporting requirements are an inevitability.

Now, it's just a matter of waiting to see what form they take.

Last March, the SEC revealed proposals to standardize climate-related disclosures for investors. These would require "a registrant to disclose information about its direct greenhouse gas emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant (company) would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3)."

The requirements will affect nearly all SEC registrants as well as the private companies they have relationships with, including subsidiaries, customers, supply chain partners and equity method investments.

Further, the requirements will impact both Regulation S-K (which governs the form and content of disclosures outside the financial statements and includes for example, management discussion and analysis, or MD&A, various qualitative disclosures, etc.) and Regulation S-X disclosures (which governs the form and content of financial statement disclosures and related notes). Therefore, CFOs will need to provide insights on a broad range of operations and performance, from the governance, oversight and management of climate-related risks and GHG emissions, to specific financial metrics, estimates and assumptions.

These new responsibilities will place additional strain on finance organizations already stretched thin by a continuing shortage of talent. Also, since the SEC proposal only represents the first step in what is sure to be additional ESG-related regulations and requirements in coming years, CFOs are facing a new paradigm for the reporting function, without much time to prepare and ramp up.

Given the vastness of information required to meet the proposed SEC disclosure rules, data collection and analysis will play critical roles throughout. However, unless senior leaders are willing to drastically increase labor costs by expanding their reporting teams, technology will be essential to success.

Although current financial reporting processes and systems may provide a welcome touchstone and sense of familiarity, the bulk of ESG-related data and reporting will be uncharted territory. Thus, an essential first step in developing effective, efficient ESG reporting will be determining the people, processes and technology needed to meet current and future requirements.

To identify what they will need, finance leaders should begin by engaging with the internal and external stakeholders involved to determine which ESG metrics they should initially focus on. These stakeholders will vary from company to company but are likely to include employees, board of directors, investors, customers, and suppliers.

From there, they can map those data metrics to their sources. For example, a human resources management system could be helpful in sourcing employee diversity data.

Similarly, Scope 3 disclosures are increasingly a focus of ESG reporting frameworks and regulations including those put forward by the SEC, which included them in the proposed disclosure requirements for certain public entities under particular circumstances. Scope 3 represents an even more complex data collection process since it relies on information from value chain partners that may or may not be proactively establishing their own ESG reporting capabilities.

Initially, interviewing stakeholders, mapping data sources and working with value chain partners for Scope 3 emissions data are vital to an organization's ability to meet ESG reporting requirements. After that initial step, CFOs and their teams should identify technologies that will help streamline the collection, analysis and reporting of those data streams.

Dedicated carbon accounting tools such as Persefoni, Net Zero Cloud and Greenly; supply chain management solutions; and specialized ESG reporting tools could all add significant value for companies, minimizing the head count involved in ESG reporting, and, thus, freeing their people to add value elsewhere in finance and accounting.

Companies are confronting a new sense of urgency over how to prepare and manage climate-related data from their supply chains. Ultimately, whether an organization is starting its ESG reporting from scratch or already has some of the foundational pieces in place, the proposed SEC disclosure requirements are bound to stretch even the well-prepared teams, at least in the short-term.

Adam Olsen is a financial accounting advisory practice leader and Robby Sundberg is a managing director for the ESG and sustainability practice at business advisory firm Embark. This content represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.