As the United Nations convenes its COP27 climate change conference in Egypt, accountants are preparing for the advent of international sustainability standards.
SEC acting chief accountant Paul Munter discussed the SEC's own engagement with the International Sustainability Standards Board during a session Monday at Financial Executives International's Current Financial Reporting Insights conference in New York.
"We've spent a lot of time over the past year engaging with the ISSB process and we do it through a number of mechanisms," he said. "The SEC sits on the Monitoring Board, which oversees the IFRS Foundation trustees, so we've had a lot of engagement through our role on the Monitoring Board in looking at their changes in their governance structure to bring on the new board and engaging with them as they've been identifying and appointing candidates to the ISSB. We also are very actively involved with the International Organization of Securities Commissions, IOSCO, which has been very visible in this space and has been encouraging the ISSB to move forward as quickly as possible with an eye toward potentially endorsing ISSB standards once they have finalized those."
The ISSB formally launched during the UN's COP26 climate change conference in Scotland last year as a way to unite the different sustainability standard-setters, an effort encouraged by financial regulators from IOSCO and the SEC.
"We are having a lot of dialogue with our fellow regulators around the world on both a bilateral basis and a multilateral basis, and then also with the ISSB," said Munter. "Then we're having a lot of bilateral discussions with the ISSB, all of which is aimed at trying to achieve our own domestic priorities as we think about rulemaking here, but also trying to maximize the degree and the clarity of interoperability. I will say it is a bit challenging since all of these things are moving pieces. Most of the organizations and the individuals we deal with are very committed, both to achieving their standard setting and rulemaking objectives, but also to try and maximize interoperability. So I'm encouraged about that, while recognizing it is still a bit of a moving target that we're trying to manage."
Accountants who work at multinational companies need to be able to use both U.S. GAAP and International Financial Reporting Standards.
"Interoperability is so key for dual preparers, so it's really helpful to understand the Office of Chief Accountant's role in the international standard-setting landscape," said Jeff Karbowski, chief accounting officer at PayPal, who interviewed Munter during the conference.
Last week, the ISSB announced its progress on making its proposed standards for sustainable disclosures interoperable with other standards, including the ones it inherited from the Sustainability Accounting Standards Board and the Climate Disclosure Standards Board, which are both now part of the ISSB. During an ISSB meeting, it
Meanwhile the SEC has been sifting through the approximately 15,000 comments it received on its proposed rule for climate-related disclosures and is probably months away from finalizing it or more likely coming out with a revised proposal. But any final SEC rule is likely to face legal challenges before it takes effect.
"I think they will issue a final proposal and I think they will be mindful of the comments," said former Financial Accounting Standards Board chairman Bob Herz during a press briefing after a panel discussion at the FEI CFRI conference. "Just from talking with people in the know, particularly on the legal aspects, they do expect to be challenged on a number of grounds, but they're also mindful of that in how they construct the final proposal."
He believes companies will need to address climate disclosures, whatever the legal outcome. "Whether or not it goes through, investors are going to keep demanding the information," Hertz added. "I think that's pretty clear. Then there's also the issue of the ISSB. What do we do about that in this country? A lot of American companies may also have to consider the EU requirements, which go a lot further. This particular SEC proposal will address a lot of these issues. It probably will be thrown into the courts, but notwithstanding, the investor demand is just overwhelming."
KPMG report
A
"That 1% disclosure threshold is a new disclosure threshold that's been announced in the proposed rules," said Patrick Edgar, national audit leader for media and telecoms at KPMG, during a briefing in October. "When we look at most of our media and telecom clients in this space, events like hurricanes can occur that might knock out tens of millions of dollars of plants for a few days. In the overall scheme of things, these items and events have not traditionally been material in the context of a multibillion-dollar telecom company. Traditionally this is not an area of focus within the industry, but with this new 1% threshold, that's lowering the threshold down to specific line items in the financial statements and may now require some significant reporting where it would not in the past."
One of the biggest obstacles to meeting the SEC's proposed timeline for such disclosures is resourcing, since compliance could depend on a company's ability to rapidly scale up and strengthen its ESG functions to meet what could be wide-ranging reporting requirements. Under the current regulations, a large accelerated filer with a December 31 fiscal year-end is required to file its Form 10-K within 60 days of that year-end, but sustainability reports are typically filed long after that deadline.
"Even with a lot of resources, it's going to be challenging to meet those accelerated timelines," said Maura Hodge, ESG audit leader at KPMG. "Access to the information and the data is low, so there is the broader question that companies need to ask themselves, which is, are we comfortable with using estimates for a certain time period, how are we doing that estimation and is it going to be materially correct? The last thing a company wants to have is a restatement on the back end. The SEC rule allows for estimation and, if there's a material adjustment, to adjust for it, but I don't think anybody wants to be in that situation."
