Source:Deloitte. The Wall Street Journal
Ahead of the Securities and Exchange Commission’s (SEC) highly anticipated final ruling on its proposed climate disclosure rules, many U.S. companies appear hesitant to fully implement steps to prepare to disclose greenhouse gas (GHG) emissions and climate-related risks through the annual financial reporting process. Controversy around the impending rules, which received a record 15,000 comments, followed by indications that proposed Scope 3 GHG emissions reporting requirements may be revised, has created uncertainty on the content of final climate disclosure rules. But according to Robert G. Eccles, Visiting Professor at Oxford University’s Saïd Business School and founding Chairman of the Sustainability Accounting Standards Board (SASB), companies should put aside the wait-and-see approach on enhancing their sustainability disclosure strategy because of the increasing financial materiality of their climate-related risks and actions.
“Climate-related impacts that can have a material impact on enterprise value should be the priority focus for companies in their decision-making about taking action to get ahead of final climate-related reporting standards,” says Eccles in a conversation with Kristen Sullivan, Audit & Assurance partner at Deloitte & Touche LLP and Global Audit & Assurance Sustainability and Climate Services leader.
They discuss the latest developments in climate reporting regulation affecting U.S. companies, market forces behind fast-evolving understanding of materiality in ESG issues, and how companies can use the market accountability mechanisms of sustainability reporting standards and assurance to integrate climate materiality considerations more systematically in their enterprise risk management (ERM), business strategy, and governance and controls environment.
Companies are having to sort through new and proposed climate reporting rules, guidance from multiple jurisdictions, and ongoing uncertainty over what will be included in the SEC’s proposed climate rule. What sustainability reporting developments do you consider to be most important for U.S. companies?
Eccles: I think it’s important for companies to understand the evolution in how the concept of materiality applies to ESG reporting and disclosure. And with the expected finalization of disclosure rules from the SEC and of the International Sustainability Standards Board (ISSB) standards, that understanding will likely be further enhanced. This trend has played a part in another important development, too: the politicization of ESG and what it means to use ESG as an investment criteria to evaluate company value.
ESG disclosure is about risks and opportunities that matter to investors, which is captured under the concept of “materiality.” ESG is about enterprise value creation, and is therefore important to investors, making it a focus of risk management. What is material is something that is determined by conversations between companies and investors, not by others. Of course, companies may be doing things that have a positive or negative impact on society, which may not be effectively captured from a value creation point of view. ESG materiality, which is about risks related to a company’s operations and activities, is different. In my view, it is the role of politicians to address these externalities when they are negative. How best to do this can be resolved through elections, laws, and regulations.
It’s important to note that the climate disclosure focus of both the SEC and the ISSB is grounded in materiality and how companies are managing the risks related to climate change and other sustainability issues.