When the SEC issued a landmark disclosure proposal on climate change a month ago, there were tiered and complex requirements for assurance of greenhouse gas (GHG) emissions data.
This is part of the commission’s effort to provide not only decision-useful and consistent information to investors but also make sure that the data provided is reliable.
Moreover, companies can get assurance either from accounting firms or non-accounting firms. Thus, many have been asking questions about the assurance aspect of the proposal in Release No. 33-11042, The Enhancement and Standardization of Climate -Related Disclosures for Investors. Comments are Due May 20, 2022.
“We’ve been definitely getting a lot of questions about the assurance requirements,” Renee Jones, director of the SEC’s Division of Corporation Finance (CorpFin), said during a virtual event hosted by Ceres on April 12. “There’s evidence that shows that when there’s assurance provided over disclosure, investor confidence goes up. And that can be aiding in investor decision-making in capital formation.”
Scope 1 and Scope 2 are about a company’s direct emissions and indirect emissions from purchased energy. Scope 3 is about emissions of other companies in the issuer’s value chain.
Scope 1 and Scope 2 must be separately disclosed, expressed both by disaggregated constituent GHGs and in the aggregate, in absolute terms not including offsets, and in terms of intensity—per unit of economic value or production. For Scope 3, the company must report if it has set a GHG emissions target or goal that includes Scope 3 emissions. This must be in absolute terms, not including offsets, and in terms of intensity.
Accelerated filers and large accelerated filers must include an attestation report covering the disclosure of Scopes 1 and 2, according to Release No. 33-11042.
An accelerated filer has a public float of $75 million but less than $700 million. Companies that have more than $700 million in public float are classified as large accelerated filers.
Assurance on Scope 1 and 2 Emissions
The SEC proposed that for fiscal years 2 and 3 after Scopes 1 and 2 emissions compliance date, the minimum level of assurance companies must get is “limited” assurance. For fiscal years 4 and beyond, the level of assurance is upgraded to “reasonable.”
Limited assurance provides a lower level of assurance than reasonable assurance. But limited assurance is less costly, and this is the most common type of assurance that large companies that voluntarily get for ESG data, including climate-related information, the market regulator said.
In a limited assurance engagement, the service provider concludes whether it is aware of any material modifications that should be made to Scope 1 and 2 disclosures in order for it to be fairly stated or complies with the relevant criteria.
In contrast, in a reasonable assurance engagement, the service provider gives the same level of assurance provided in an audit of a company’s consolidated financial statements.
“Although a limited assurance engagement provides a lower level of assurance than a reasonable assurance engagement, studies of ESG-related assurance, which is typically provided at a limited assurance level, have found benefits such as credibility enhancement, lower cost of equity capital, and lower analyst forecast errors and dispersion,” the SEC stated in Release No. 33-11042.
No Assurance Requirement for Scope 3 ‘at this time’
The SEC is not proposing assurance over Scope 3 data “at this time” because getting the data presents unique challenges.
“Depending on the size and complexity of a company and its value chain, the task of calculating Scope 3 emissions could be relatively more burdensome and expensive than calculating Scope 1 and Scope 2 emissions,” stated the release. “In particular, it may be difficult to obtain activity data from suppliers, customers, and other third parties in a registrant’s value chain, or to verify the accuracy of that information compared to disclosures of Scope 1 and Scope 2 emissions data, which are more readily available to a registrant.”
Non-Accounting Firms Can Provide Assurance
CorpFin’s Jones said that the SEC deliberately proposed a requirement that allows specialists other than auditors to do the assurance. For example, companies can get assurance from an engineering firm, she said, because they may have more expertise.
Thus, the SEC does not prescribe a particular attestation standard, but standards developed by the PCAOB, the AICPA, and the International Auditing and Assurance Standards Board (IAASB) would meet certain due process requirement.
“By highlighting these standards, we do not mean to imply that other standards currently used in voluntary reporting would not be suitable for use under the proposed rules,” the release noted. Other types of service providers that meet due process requirement can provide assurance. “Our proposal intends to set minimum standards while acknowledging the current voluntary practices of registrants,” the SEC explained.
According to a study, 35 percent of Russell 1000 index companies, which are almost all large accelerated filers, got third-party assurance for their sustainability reports in 2020, compared to 24 percent in 2019.
A very small percentage of companies or 14 percent got assurance from accounting firms, while 31 percent got it from small consultancy or boutique firms, and 55 percent got it from engineering firms.
This article originally appeared in the April 22, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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