Comment: SEC climate-related disclosures

Background

On June 17, Grant Thornton LLP issued a comment letter regarding the SEC’s proposal on climate-related disclosures. Our comments are informed by our experience serving public companies as independent accountants, interacting with boards and executives, providing advisory and assurance services over climate-related disclosures, and developing our own report with such information.

Summary of comments

We appreciate the SEC’s efforts to enhance and standardize climate-related information for investors. In particular, we support certain proposed elements that will ease the implementation and compliance burden for issuers, such as the phased-in reporting and assurance dates and accommodations for smaller reporting companies. In addition, we support elements of the proposed greenhouse gas (GHG) emissions disclosure requirement, including its:

• location outside of the notes to the financial statements
• lack of a requirement to disclose the effectiveness of internal control over GHG emissions and a related auditor attestation
• the proposed approach to Scope 3 GHG emissions, in particular, the liability safe harbor and the conditional requirement to disclose GHG emissions only when material or when a stated target includes Scope 3.

We also noted potential implementation challenges that we believe warrant additional guidance or reporting accommodations.

In particular, our commentary included feedback with respect to the disclosures that would be required in the notes to the audited financial statements. We referenced practical examples where the proposed disclosure requirements might pose a significant implementation challenge or result in inconsistent application across preparers. Thematically, our commentary addressed areas like how issuers would identify climate-related events and conditions for disclosure or quantify the related financial impact. For example, issuers might have different interpretations of terms like “severe weather event,” which could result in inconsistent identification of items for disclosure across issuers. Similarly, additional guidance might help issuers understand the relevant data points to measure the financial statement impact of climate-related events, for example, should the impact be measured based on the year-over-year change in a financial statement line item or the difference between an expected amount of revenue or expense and the actual amount. In addition, our commentary also highlighted practical implementation challenges for issuers and auditors regarding the SEC’s proposed disclosure threshold of 1% of a financial statement line item.

We also encouraged the SEC to consider whether investors would be better served by the disclosure of material climate-related information in Management’s Discussion and Analysis as opposed to the notes to the financial statements and suggest referring this topic simultaneously to the Financial Accounting Standards Board for its consideration.

With respect to the proposed disclosure of GHG emissions metrics, we noted challenges that might arise from the SEC’s proposed usage of financial control as the organizational boundary for GHG emissions metrics as opposed to operational control, which is more commonly used in voluntary disclosures today. We also provided practical suggestions to ease the compliance burden for issuers and to improve the reliability of disclosed GHG emissions metrics, including:

• For the initial year of compliance, require metrics for the current year only and permit issuers to exclude immaterial components from Scope 1 and Scope 2 emissions, if accompanied by disclosure of the omission(s) and rationale.
• Provide flexibility over the period used to report GHG emissions, such as using a period that does not align with the financial statement periods, to avoid an overload of reported data as of specific time periods.
• Permit disclosure of GHG emissions metrics outside Form 10-K or on an extended reporting period, as is available for the information in Part III of Form 10-K, for a defined transition period.

Additionally, our comments highlight potential additional opportunities for scaled disclosure accommodations for certain other entities, such as emerging growth companies and nonpublic entities whose financial statements are included in an SEC filing, such as an acquired business or equity method investee.