ICAEW has welcomed the proposed rule on climate-related disclosures for investors from the Securities and Exchange Commission (SEC), while urging the SEC and other policymakers to adhere to a number of high-level principles it has identified as underlying the success of the current raft of sustainability reporting proposals.
In a response letter submitted to the SEC last week, ICAEW emphasises that widely applied, high-quality international reporting standards are needed urgently. It also argues that global alignment is critical to meeting the increasing demand from investors and other users of company reports for consistent, comparable and reliable information on sustainability matters.
While acknowledging that the SEC’s proposal for sustainability reporting seeks to address this urgent need, the ICAEW letter suggests that the success of any proposals in this area hinges on adherence to six guiding principles, including: transparent and high-quality due process; connectivity between the new information and the financial statements; implementation dates that have due regard to company preparedness; appropriate third party assurance; and effective global alignment.
Dr Nigel Sleigh-Johnson, Director, Audit and Corporate Reporting, ICAEW, says: “This is a welcome initiative by the SEC. ICAEW has commented on the SEC’s proposals on this occasion in view of the urgent need for a global framework for the reporting of climate-related and other sustainability matters. Many entities will fall within the scope of two or more sets of climate-related disclosure rules, and absent a high degree of alignment, compliance could prove unduly costly and the risk of errors may increase.”
The letter, signed by Sleigh-Johnson on behalf of ICAEW, supports the SEC’s decision to base the proposal on the TCFD framework given the importance of global alignment and comparability. “Specifically, we support the proposed adoption by the SEC of an alternative reporting provision structured to encompass reports made pursuant to criteria developed by the ISSB,” it says.
ICAEW also highlights the challenges many will face in implementing additional climate-related disclosure requirements, especially in jurisdictions where TCFD reporting is not already well established: “These may extend to new governance arrangements, systems implementation, revised data collection requirements and, critically in our view, new and improved internal controls,” the letter warns.
Many organisations and boards will require additional expertise and capacity, but the fact that they are in short supply could impact the ability of investors to make use of the disclosures, the letter continues.
For that reason, ICAEW says that it would support a significant degree of phasing in of the reporting and related assurance requirements. It also argues that the need to extend the phasing arrangements after the disclosure requirements first become effective should be subject to ongoing review. “The need for speed in addressing the challenges of climate change needs to be carefully weighed against the importance of achieving a true and enduring step-change in the quality of reporting in this critical area,” ICAEW says.
Laura Woods, Technical Manager in ICAEW’s Financial Reporting Faculty, says: “We have heard time and again about the challenges companies are facing in the light of increased reporting requirements for sustainability information. Concerted efforts are now needed to build and develop expertise, systems and processes. At the same time, we encourage the SEC and others to allow adequate time for this implementation journey.”
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