Implementation for Companies Preparing to go Public

Introduction

With the rise of environmentally conscious investors and the emergence of the SEC’s climate-related disclosure proposal, companies face increasing scrutiny over their ESG reporting. Companies preparing to go public need to begin planning now to be in compliance with future SEC requirements. This article discusses the proposed SEC requirements for companies preparing and what companies should do between now and the required deadline to be ready.

The first step for companies preparing to go public is to identify whether the company will be considered a large accelerated filer after the initial public offering (IPO). The SEC’s definition of a large accelerated filer can be found here. The steps recommended in this article closely align with those of large accelerated filers. However, the guidance applies to companies of all sizes that are preparing to go public. The main adjustments to be made for smaller reporting companies, or non-accelerated filers, relate to greenhouse gas (GHG) emissions reporting. These differences arise in the recommendations for the period nine months before initial reporting.

Proposed Requirements

Companies preparing for an IPO are in a complicated position related to the SEC’s proposed rule on climate-related disclosures. For companies completing their IPO in 2023 or after, the first compliance deadlines will not occur prior to reporting the 2024 full year financial statements. For all proposed disclosures excluding Scope 3 emissions, large accelerated filers need to be in compliance by fiscal year 2023. For Scope 3 emissions disclosures, large accelerated filers must be in compliance by fiscal year 2024. These deadlines are approaching quickly, and companies of all sizes have already started preparing to be in compliance with the proposed disclosures. 

Under the proposal, large accelerated filers would be required to adopt new reporting requirements by their 2023 annual report. Companies would be required to include a new footnote in their annual reports or registration statement that includes the following information: total negative and positive environmental impacts for each line item in the financial statements, total ESG-related expenditures incurred and expensed or capitalized, a qualitative explanation of the two previous items, and exposures to risks and uncertainties associated with climate-related risks that impacted the development of accounting estimates used in preparing the financial statements. Large accelerated filers would also need to include a separate section discussing Scope 1 and Scope 2 GHG emissions (Scope 3 GHG emissions will need to be reported by FY 2024). Both of these sections will need to be audited by a third-party. 

The following table summarizes the requirements for large accelerated filers:

Again, companies preparing to go public that will not be considered large accelerated filers have similar actions to take but have more time before they must report under the proposed rule. 

What You Should Do Now

There are a number of steps that large accelerated filers should begin immediately to prepare for compliance. These include (in no particular order):

• Become familiar with the disclosure requirements proposed by the SEC. Our article on proposed disclosures gives an overview of the SEC’s proposal and highlights important areas. A summary fact sheet and the full text of the proposed rule can be found on the SEC’s website. After looking through the proposed disclosures, companies may want to modify their ESG goals to align with the disclosures to ensure that they address the disclosure requirements. 
• Conduct an “ESG Readiness Assessment” to determine which areas need improvement. A variety of accounting and other financial services firms have created ESG Readiness Assessments that companies can use, such as this one by PricewaterhouseCoopers.
• Understand expectations and requirements of underwriters and future street investors

If the company is likely to be a large accelerated filer in 2023, the following steps are recommended to prepare for compliance.

• Identify and assess climate risks and impacts (including physical and transition factors) on business and financial statements. One way to do this is through climate-related scenario analysis. Our article on this topic explains the current recommended processes for implementing climate-related scenario analysis and how companies are reporting data on climate risks to their business and financial statements. 
• Identify sources and types of GHG emissions (Scope 1, 2, 3). This is especially important for large accelerated filers as the SEC will require limited assurance on Scope 1 and 2 emissions in FY 2024, as well as specific disclosures relating to Scope 3 emissions in FY 2024. Our article on GHG emissions provides an overview of the three different scopes and how companies are currently reporting this information. 
• Identify data owners, sources and existing processes and systems. Knowing where to gather the data required to be in compliance with the proposed disclosures will likely be a hurdle for many companies. By identifying sources of data early on, your company will be in a strong position to prepare the required disclosures in a timely manner. 
• Develop ESG recommendations, project plan, workstreams, timelines and cost estimates. Having a plan and timeline will make sure that all necessary steps are taken to enable the company to be compliant when required.

What You Should Do 18 Months Before Initial Reporting

Large accelerated filers need to take concrete steps to be in compliance with the proposed standards. Starting 18 months prior to initial reporting, companies should do the following to begin implementation. This list is not exhaustive, and steps may be taken in any order. 

• Identify and procure relevant resources (people and systems) for the implementation. Some of the proposed disclosures are quantitative, while others are qualitative. Understanding which individuals or systems will be able to provide different types of data will ensure that the accumulation and testing of data goes smoothly. 
• Establish or remediate data feeds and integrate into relevant systems. Once relevant sources of information have been identified, steps should be taken to integrate them into current reporting systems. If needed, new systems of reporting should be created to ensure all relevant information is gathered. 
• Establish, document and stress-test processes and controls around GHG emissions data (Scope 1-2) and financial statement impacts. Due to the number of disclosures surrounding GHG emissions, it is crucial that the sources of GHG information are tested and prepared for implementation.
• Develop policies, assumptions and estimates for financial statement purposes. It is possible that the data required for all the proposed disclosures may not be currently available. Creating new policies that outline strategies and procedures for creating ESG related estimates will be beneficial in the long term. Estimates should be reasonable and the assumptions behind them should be documented for review.
• Engage auditors for SOX controls and reported data testing. Strong controls are critical for making sure that ESG data is reliable. Management should identify areas of risk and implement controls. Auditors should determine how data should be tested. 
• Accumulate interim period data and report internally. An interim report can be seen as a dry run before the required initial report. Issues can be identified, and steps can be taken to rectify them. 

What You Should Do 9 Months Before Initial Reporting

Nine months before initial reporting, your company should be finalizing the changes needed to be in compliance with the proposed disclosures. Companies may do the following in any order starting nine months prior to initial reporting:

• Consider reporting experiences by Large Accelerated Filer peers 
• Assess findings and report to the Board on ESG readiness. Any concerns with the process thus far should be addressed, and material findings should be discussed. Ideally, a Sustainability Committee has been working with your team to ensure proper implementation and coordinate efforts with the Board.
• Conduct the final remediation of errors and gaps. Errors and gaps identified during the interim report should be addressed, and those uncovered by auditors should be fixed. This will likely be a continuous process in conjunction with the refinement of processes and controls surrounding the required information. 
• Accumulate, test, and prepare year-end data for the annual report. Doing this several months before the initial report will ensure that all necessary data is collected and any errors are corrected in a timely manner.
• Facilitate audits of reported data and related SOX control as well as auditor review of other ESG information. Working to make sure that all data is protected by strong controls will ensure that information presented is reliable and useful to investors. 
• Initiate materiality assessment and start preparing to report material Scope 3 GHG emission data for the following year. The phase-in period for large accelerated filers reporting on Scope 3 emissions will be for FY 2024. Our article on GHG emissions can help you understand what Scope 3 emissions are and how other companies are accounting for that information.
• Begin engaging with third parties for limited assurance over Scope 1-2 GHG emissions for the following year. Currently there are several firms that offer assurance services for GHG emissions. Identifying firms that are a good fit for your company will make complying with the FY 2024 requirements easier. 

Next Steps After the Initial Reporting is Complete

Upon successfully reporting the information required for FY 2023, companies that will be considered large accelerated filers must ensure their processes for gathering and reporting information are maintained and improved with the following steps:

• Debrief on initial reporting experiences. Understanding what went well for implementation and what did not is important for identifying which processes need further refinement.
• Refine the policies, processes, controls, assumptions and other inputs and outputs as needed. The initial reporting of FY 2023 information is only the beginning, and companies should find ways to improve their ESG reporting as investor’s needs and regulator guidance change.
• Maintain ongoing GHG data aggregation, accounting, and reporting. This is critical, as limited assurance will need to be provided for Scope 1-2 GHG emission in FY 2024, and reasonable assurance will need to be provided for this information in FY 2026. Maintaining the systems that account for this data will make facilitating third-party assurance much easier.
• Implement reporting of material Scope 3 GHG emissions data and those that are included in ESG targets and/or goals. The definition of material in the context of Scope 3 GHG emissions is the same as other financial statement information: there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available”¹.

Conclusion

Becoming compliant with the proposed climate-related disclosures will be a difficult undertaking for companies of all sizes preparing to go public. By preparing early, understanding what will be required of your company, and staying informed of any changes to the proposed disclosures, you will be ready for the upcoming reporting deadlines. '