Standards and the SEC's Proposed Climate Disclosure Rules
The U.S. Securities and Exchange Commission (SEC) recently proposed a major overhaul to their 2010 climate disclosure rules. The overhaul will require all non-federal governments and businesses – including small- and medium-sized businesses – to include certain climate-related disclosures in their registration statements and periodic reports when raising money from investors and creditors. This would include information about “climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.” It would potentially also require businesses to track and disclose their greenhouse gas emissions.
“The impact of this proposed rulemaking, if and when implemented, places an expanded burden directly onto publicly traded companies that issue 10-K reports to do something they haven't quite done yet,” says John Rosengard, president of Environmental Risk Communications and member of the subcommittee on environmental risk management (E50.05). “That would be to align the official SEC required 10-K report with their non-standard, non-SEC-required environmental, social and governance (ESG) report.”
These proposed changes are based on similar rules passed in recent years by the European Union, the Task Force on Climate Disclosures, the Commodity Futures Trading Commission, and several other organizations around the importance of climate disclosures. The issue is that coalescing all of these different guidelines into updated SEC rules is a big project – there are currently over 180 proposed disclosure metrics spread across all of these and other organizations that need to be consolidated, Rosengard says. And there is no unanimity about who gets to decide what to keep or not. The situation has led to some confusion.
That’s where the committee on environmental assessment, risk management and corrective action (E50) comes in.
“Technically, our audience is the people preparing financial statements, the 10-K reports and ESG reports,” Rosengard says of his committee’s focus. “What ASTM standards do is help employees at the companies writing these filings – who are trying to make heads or tails out of it all – understand what information they're developing and how to take long-term custody over the analysis and statements that their CPA firms and their attorneys are reviewing on their behalf.”
It is a way to help companies remain compliant from the bottom up instead of the top down, he says, by ensuring that the people who are more intimately connected with the finances and the operations of the company understand the information they're developing and how to disclose it in a trustworthy and reliable process.
Among the standards that are helping companies prepare for these proposed changes are:
1) Standard guide for disclosure of environmental liabilities (E2173): As ASTM’s general environmental disclosure standard, E2173 and E2718 (below) are the two standards most directly impacted by the SEC’s proposed actions. E2173 establishes a structure for environmental liability disclosures that accompany audited and unaudited financial statements, as would be required by the SEC. It is a guide for maintaining consistency with generally accepted accounting principles (GAAP) and other reporting standards while incorporating ESG data.
2) Standard guide for financial disclosures attributed to climate change (E2718): Like E2173, this standard establishes a reporting structure to enable companies to include ESG disclosures alongside their traditional financial statements, this time with a focus on climate change-related reporting. Says Rosengard: “When and if these new rules are finalized, we'll have to revise E2718 and E2173 accordingly. The current standards conform to what’s already out there but we'll need to keep moving our work forward as the SEC moves its own requirements.”
3) Standard guide for recognition and derecognition of environmental liabilities (E3123): This standard helps companies determine if a given type of environmental liability exists within their business and provides a way to report on how those liabilities subsequently have been settled, consistent with standard accounting definitions. It offers a set of instructions for the recognition of environmental liabilities and a reporting structure for when those liabilities have been settled.
4) Standard guide for environmental knowledge management (E3228): It’s a fact of business life that the management of environmental liabilities can span very long timeframes, often longer than individual careers. This standard establishes a set of guidelines for preserving key findings, decisions, obligations, commitments, and guarantees for coming generations of project teams related to environmental assets and liabilities.
5) Standard guide for estimating monetary costs and liabilities for environmental matter (E2137): The financial impact of an environmental risk factor can be very difficult to estimate, especially when the range of potential outcomes stretches all the way from remediation to outright loss of the business. E2137 provides a standard guide to estimating potential costs and liabilities for environmental risks including regulatory requirements, third-party lawsuits, insurance premiums, claim settlements, and more.
“The recent updates to E2173 and E2718 reflect our ASTM workgroup expectations that principles and goals from a dozen different organizations left a space for sound capital stewardship, prioritization, and reliable cost forecasting,” Rosengard says. “We think these newest guides uniquely prepare companies and local governments to explain the environmental risks and control the costs involved.”