With the SEC’s hotly anticipated climate disclosure rule still pending, mid-market CFOs can be forgiven for feeling unsettled about their regulatory future. But even if the upcoming rules won’t apply directly, as accounting adviser Michael Poveda points out, a globally interconnected value chain means regardless of your company’s size, it’s wise to track the emerging requirements and guidelines.
As 2023 comes to a close, ESG continues to be among the biggest buzzwords and priorities for C-suite decision-makers — particularly for chief financial officers and their teams. Of course, ESG pressure is not something new. Amidst a wave of activist investing, shifting stakeholder demands and an influx in conscious consumerism, businesses around the world have been pushing to live up to rising social and ethical standards. In addition, as expectations among these key constituencies have grown, the demands among the global regulatory community have risen as well.
Gone are the days when a blanket green pledge or vague ethical mission statement would meet stakeholder demands. Instead, businesses are now expected not just to have a clear ESG strategy but also a scientific and evidence-based process for measuring and reporting on their ESG performance. And while larger organizations are used to having to dig in and provide the in-depth insights regulators are looking for, many middle-market companies are vastly less experienced in doing so.
Moreover, with the amount of regulatory oversight scrutiny increasing by the day, it has become nearly impossible for even the most seasoned CFOs and accounting teams to make sense of their current compliance status, gaps and priorities, let alone the various ESG requirements and tasks they may need to meet in the future.
By focusing on the most pressing pieces of regulatory oversight, middle market CFOs can not only come to grips with their current ESG reporting infrastructure needs but build a workflow and operation that will enable them to become better equipped for future expectations.
With that in mind, here are three pieces of recent ESG rulemaking CFOs and accountants should keep an eye on as they plot their strategies for the year ahead.
SEC’s climate risk disclosure rule
Though the rule has yet to be finalized, the SEC is widely expected to require publicly traded companies to disclose annually how climate-related risks, including greenhouse gas (GHG) emissions, are assessed, measured and managed. The area causing the most chatter seems to be with GHG emissions, which the SEC divides into three scopes, the most discussed of which are Scope 3 emissions, or emissions that occur in the value chain of the reporting company, including both upstream and downstream emissions from the generation of purchased energy. With Scope 3 accounting for as much as 95% of emissions, that category represents a significant body of accounting work, much of which relies on difficult-to-assure data produced by vendors upstream and downstream.
Middle-market firms could be indirectly subject to reporting requirements if they are part of a publicly traded company’s supply and value chain. So, how to prepare for a rule that is yet to be finalized? Prepare with existing reporting requirements in mind, and with the right governance team on hand, an organization will be able to deftly pivot when evolving regulations come down the pike.
All Hands on Deck: Scope of Climate Change-Fueled Natural Disasters Calls for Companies to Prioritize CSR Initiatives
Global warming and climate change are fueling natural disasters at an increasingly frequent rate, and few locales are immune from the potentially devastating effects. It’s no longer enough for companies to claim they are doing their part; clear action is required, argues Octavio Sandoval of Illumen Capital.
Read moreISSB’s global sustainability disclosure standards
The International Sustainability Standards Board (ISSB) is a reputable standard setting body established by the IFRS Foundation, which has aimed to develop a global baseline that meets the needs of investors and enables companies to provide sustainability information. In 2022, the ISSB released two draft standards: IFRS S1, “General Requirements for Disclosure of Sustainability-related Financial Information,” and IFRS S2, “Climate-Related Disclosures.” As of June 2023, with considerable fanfare, those standards were confirmed with reporting periods on or after Jan. 1, 2024.
Going forward, the ISSB is also setting priorities for additional ESG standards in biodiversity, ecosystems and ecosystem services, human capital, human rights and connectivity in reporting. Different jurisdictions will choose whether they want to adopt the ISSB as a regulatory requirement, so it will be important to keep pace with which jurisdictions continue to adopt ISSB. At the very least, these rules can be referred to as a trusted guide when establishing a reporting framework.
EU’s CSRD
The Corporate Sustainability Reporting Directive (CSRD) is a European Union standard passed in late 2022. In addition to applying to European companies of certain thresholds, the rule also applies to all international and non-EU companies with more than €150 million annual revenue within the EU and that have at least one subsidiary or branch in the EU exceeding additional thresholds. Tracking on ESG targets, risks, environmental protection and anti-corruption practices (among other variables) will begin in 2024, with disclosure reports due for some large companies in early 2025 and smaller ones in 2026.
Any U.S. companies that have a presence in the European Union and fall within the purview of the directive, including any middle-market company working with a covered organization, may also be subject to the CSRD’s reporting requirements. As such, it will be imperative for an organization to determine whether they fall under the threshold directly or indirectly and incorporate the requirements into their reporting framework accordingly.
Michael Poveda is a partner at UHY and managing director of UHY Advisors based in Albany, N.Y. He has more than 24 years of professional experience providing accounting, assurance and advisory services to clients in various industries. He advises clients on important issues and trends impacting businesses, including complex financial reporting matters, structured transactions, risk management and performance improvement.
