US accounting firms are urging their SEC-regulated clients to continue comprehensive assessments of the impact of climate change on their businesses and collect data on their own greenhouse emissions, despite a new Securities and Exchange Commission (SEC) climate-related disclosures rule being stayed. On 4 April the SEC announced that it would halt application of the rule, only released on 6 March, while courts debate its legality.
This follows lawsuits from companies, 25 Republican state attorneys general and the US Chamber of Commerce, alleging that the rule was too onerous and exceeded SEC powers. Environmentalists the Sierra Club and the Natural Resources Defense Council also launched claims, arguing that the rules are too weak after the SEC dropped plans to insist on value chain emissions reporting.
‘Companies should continue to move forward according to plan and carry out an interoperability analysis’
Continue to prepare
However, given that courts may rule in the SEC’s favour and that companies have other reasons – some regulatory – to collect and analyse climate change data, accounting firms are advising companies to continue preparing to report under the planned regime. According to Deloitte, in 2025 some major US companies will be subject to EU and California climate reporting legislation, which will mean they will have to disclose more sustainability data than under the SEC rule anyway.
‘Companies should consider their data, governance, processes, and controls over climate-related information given that they may need to disclose the same or similar information in future SEC filings,’ Deloitte said in an executive summary.
‘While the SEC’s stay pauses the need for calculating the impact of certain climate-related events or conditions on the financial statements, the remaining provisions of the rule are required for other reporting regimes,’ says Maura Hodge, KPMG US ESG audit leader. ‘Therefore, companies should continue to move forward according to plan and carry out an interoperability analysis,’ taking account of other sustainability reporting requirements.
‘While the rule may not take effect on 1 January 2025, other reporting regimes still require certain provisions’
Moreover, regardless of these additional reporting requirements, Deloitte stresses that the the stay does not impact 2010 SEC guidance, which states that companies had under ‘existing federal securities laws and regulations to consider climate change and its consequences as they prepare disclosure documents to be filed…and provided to investors’. In other words, with climate issues being a major issue affecting corporate performance, they cannot be ignored in regulatory filings. ‘The stay does not affect the SEC’s existing 2010 interpretive release on climate-change disclosures,’ Deloitte stressed.
SEC stands firm
Rob Fisher, KPMG US ESG leader, agrees that companies should continue preparing for compliance with the SEC climate rule, even though it has been paused. ‘While the rule may not take effect on 1 January 2025, other reporting regimes still require certain provisions of the rule,’ he says. ‘Therefore, organisations should not halt their preparations and should instead carry out an interoperability analysis to ensure compliance with other reporting requirements.’
The courts will now decide if the SEC has the authority to demand such sustainability reporting under its founding legislation, such as the Securities Act and the Securities Exchange Act. But the regulator insists that these powers exist. Its order staying the rule stated that it is ‘not departing from its view that the Final Rules are consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions’.
The SEC stressed that the rule largely follows ‘single materiality’ principles of measuring the impact of climate change on reporters, with filers having to report climate-related risks reasonably likely to have a material impact on business strategy, model, operations and finances. And should the rule stand, they would have to report their activities mitigating against these risks, including their cost.
Filers will also need to report how they have assessed their climate risk and whether these methods are integrated into general risk management. All of this could be argued to be well within the SEC’s remit of ensuring business transparency.
‘Be prepared for potential pressure from peers, suppliers or customers’
However, opponents of the March rule may highlight how certain companies will have to report double materiality data about their Scope 1 direct greenhouse gas emissions and Scope 2 energy purchase indirect emissions. These duties would apply to ‘large accelerated filers’ and ‘accelerated filers’ (with a public float exceeding US$700m and US$75m-US$700m respectively), which may be a focus of court challenges, even with the SEC dropping plans to insist on Scope 3 value chain emissions reporting.
A note from major Los Angeles-based law firm Latham & Watkins said that the commercial and Republican cases cited the US Administrative Procedure Act, which tells courts to annul agency action deemed ‘arbitrary, capricious [or] an abuse of discretion’.
Overturn risk
It also noted that the ongoing Chevron vs Natural Resources Defense Council Supreme Court case could undermine the SEC’s rule. This is challenging a 1984 ruling, which told courts to accept a government agency’s ‘reasonable interpretation of an ambiguous statute’. Should the Supreme Court overturn this precedent (as early as this summer), courts might ‘more stringently review the SEC’s final rules’, the law firm predicted.
While this regulatory and judicial uncertainty persists, Fisher advises companies to take ‘proactive steps to position oneself for reporting compliance and to be prepared for potential pressure from peers, suppliers or customers’.
This includes getting educated and understanding the rule’s components, ‘as the SEC may probe in these areas with comment letters even if the rule is not in effect’. He suggests that accountants revisit clients’ enterprise risk assessment to identify material climate-related risks.
Also, given this might be required in future within the US, and earlier in other jurisdictions, accountants and their clients should ‘assess the effort required to prepare a greenhouse gas inventory and understand what could be included in it’.
‘Even if you are not required to report for any other reason, there are some no-regrets moves you can be taking to both position yourself for reporting compliance and making sure that you are prepared to respond to pressure that will likely come from your peers, suppliers or customers,’ Fisher says.
