Implementation for Non-accelerated Filers

Introduction

Sustainability reporting is quickly becoming a reality for non-accelerated filers (companies with a public float of less than $75 million and annual revenues of $100 million or less). As mentioned in our article on the SEC’s proposed disclosures, non-accelerated filers will soon face reporting requirements for climate-related disclosures. This article will outline some recommended steps that non-accelerated filers can take to be ready for the fiscal year 2024 and 2025 deadlines. The recommended steps outlined in this article are not exhaustive.

Proposed Requirements

The SEC’s current proposal for climate-related disclosures requires all non-accelerated filers to adopt the new reporting requirements for fiscal year 2024. For all proposed disclosures excluding Scope 3 emissions, non-accelerated filers need to be in compliance by fiscal year 2024. For Scope 3 emissions disclosures, non-accelerated filers must be in compliance by fiscal year 2025. These deadlines are approaching quickly, and many non-accelerated filers have already started preparing to be in compliance with the proposed disclosures.

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. Non-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 2025). Both of these sections will need to be audited by a third-party.

The following table summarizes the requirements for non-accelerated filers:

What You Should Do Now

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

• 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.
• Become familiar with the disclosure requirements proposed by the SEC. Our article on the proposed disclosures gives an overview of the SEC’s proposal and highlights the 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 ensure they address 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 reporting data on climate risks to their business and in financial statements.
• Identify sources and types of GHG emissions (Scope 1, 2, 3). This is especially important for non-accelerated filers as the SEC will require limited assurance on Scope 1 and 2 emissions in FY 2025, as well as specific disclosures relating to Scope 3 emissions in FY 2025. 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 comply 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 good position to report the required disclosures in a timely manner.
• Develop ESG recommendations, project plans, 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 15 Months Before Initial Reporting

Non-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. 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 6 Months Before Initial Reporting

Six months before initial reporting, non-accelerated filers 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 non-accelerated filers reporting on Scope 3 emissions will be for FY 2025. 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. Several firms currently offer assurance services for GHG emissions. Identifying firms that are a good fit for your company will make complying with the FY 2025 limited assurance requirement easier.

Next Steps After The Initial Reporting Is Complete

Upon successfully reporting the information required for FY 2024, 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 2024 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.
• 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

Meeting the requirements for the SEC’s proposed climate-related disclosures will be a difficult undertaking for any company. By preparing early, understanding what is required of your company, and staying informed of any changes to the proposed disclosures, non-accelerated filers will be ready for the upcoming reporting deadlines.