Implementation for Large Accelerated Filers

Introduction

As environmentally conscious investors gain prominence and the SEC's climate-related disclosure proposal emerges, companies face heightened scrutiny regarding their ESG reporting. Large accelerated filers (companies with a public float of $700 million or more) must start planning immediately to comply with upcoming SEC requirements. This article explores the proposed SEC requirements for large accelerated filers and outlines the steps companies should take between now and the required deadline to ensure readiness.

Proposed Requirements

The SEC's current proposal for climate-related disclosures mandates that all large accelerated filers adopt the new reporting requirements for fiscal year 2023. For all proposed disclosures, except Scope 3 emissions, large accelerated filers must comply by the fiscal year 2023. Large accelerated filers must comply with Scope 3 emission requirements by fiscal year 2024. These deadlines are rapidly approaching, and many large accelerated filers have already begun preparations to comply with the proposed disclosures.

Regulators will require companies to include a new footnote in their annual reports or registration statements that provides the following information: the total negative and positive environmental impacts for each line item in the financial statements, the 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 influence the development of accounting estimates used in preparing the financial statements. Large accelerated filers must also incorporate a separate section discussing Scope 1 and Scope 2 GHG emissions, while reporting Scope 3 GHG emissions by FY 2024. A third party will need to audit both sections.

The following table summarizes the requirements for large accelerated filers:

What You Should Do Now

Below are several steps that large accelerated filers should begin immediately to prepare for compliance:

• Conduct an “ESG Readiness Assessment” to determine which areas need improvement. A variety of accounting and financial-services firms have created ESG Readiness Assessments that companies can use, such as this by PricewaterhouseCoopers.
• 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. The SEC's website contains a summary fact sheet and the full text of the proposed rule. After looking through the proposed disclosures, companies may want to modify their ESG goals to meet the disclosure requirements.
• 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 doing this.
• Identify sources and types of GHG emissions (Scope 1, 2, 3). This holds particular importance for large accelerated filers because the SEC will mandate limited assurance on Scope 1 and 2 emissions in FY 2024, and specific disclosures related 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 for compliance with the proposed disclosures may be a hurdle for companies. By identifying sources of data early, your company will be in a strong position to prepare the required disclosures in a timely manner.
• Develop ESG recommendations, project plans, workstreams, timelines and cost estimates. Developing a timeline ensures that the company takes all necessary steps to achieve compliance when required.

What You Should Do 15 Months Before Initial Reporting

Large accelerated filers need to take concrete steps to be in compliance with the proposed standards. Starting 15 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. Determining which individuals or systems can provide different types of data will ensure that the accumulation and testing of data goes smoothly. 
• Establish or remediate data feeds and integrate them into relevant systems. After identifying relevant sources of information, integrate them into current reporting systems. If necessary, create new reporting systems to ensure the collection of all pertinent information.
• 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 serves as a dry run before submitting the required initial report. This process allows for the identification of issues and the implementation of corrective steps.

What You Should Do 6 Months Before Initial Reporting

Six months before initial reporting, your company should be finalizing the changes needed to be in compliance with the proposed disclosures. 

• 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 helping 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 controls 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 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 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”.

Conclusion

Achieving compliance with the proposed climate-related disclosures presents a significant challenge for any company. However, by preparing early, understanding your company's specific requirements, and staying up-to-date with any changes to the proposed disclosures, you can ensure readiness for the approaching reporting deadlines.

Resources Consulted

https://sites.duke.edu/thefinregblog/2022/01/06/on-the-real-effects-of-changes-in-definitions-of-materiality/#:~:text=The%20U.S.%20Supreme%20Court%20defines,as%20the%20legal%20standard%20of