In the first post in this series, we overviewed the three main areas addressed in the SEC’s Proposed Rule for climate-related disclosures:
- Governance, strategy, risk and related disclosures outside the financial statements
- Greenhouse gas emission disclosures and attestation requirements
- Financial statement disclosures
As you may have heard and can read about in this Press Release, the comment period for this proposal ended June 17, 2022.
Subsequent posts in this series have addressed proposed disclosures for:
- Governance
- Risks, strategy, business model and outlook
- Risk management processes
- Targets, goals and interactive data
- Scopes 1 and 2 greenhouse gas disclosures
- Scope 3 greenhouse gas disclosures
- Greenhouse gas intensity and methodology disclosures
This post explores the proposed attestation requirements for greenhouse gas emission disclosures. As a reminder, greenhouse gas disclosures would be required for all companies in their annual reports on Forms 10-K and 20-F, with updates on Forms 10-Q and 6-K. Smaller reporting companies would not be subject to the Scope 3 disclosure requirements. The related attestation requirements would apply to accelerated and large accelerated filers. The attestation requirements fall into the following categories:
- Attestation
- Attestation provider
- Attestation report requirements
- Additional disclosures
- Voluntary attestation reporting
Attestation
For companies that are accelerated or large accelerated filers and are required to disclose Scope 1 and Scope 2 emissions the proposed rule would require an attestation report for those disclosures. The specific requirements concerning the provider of the attestation report and the form of the report are described below.
The attestation requirement would not apply to the first year that Scope 1 and Scope 2 disclosures are required. For the second and third years where Scope 1 and Scope 2 disclosures are provided, an attestation report providing “limited assurance” would be required. For the fourth and following years a “reasonable assurance” report would be required.
The attestation report would be prepared using standards that are:
- Publicly available at no cost;
- Established by a body or group that has followed due process procedures; and
- Broadly distributed for public comment.
A limited assurance report for years two and three would include words to the effect that “nothing came to their attention” of the attestation report provider that the information presented was not prepared in accordance with a chosen set of standards. The process and procedures underlying this limited assurance report would be based on those standards.
If you would like to see an example of limited assurance on ESG information check out page 77 of Coke’s ESG report. The last paragraph has the limited assurance report, which includes this language:
“Based on our review, we are not aware of any material modifications that should be made to the Schedule of Selected Sustainability Indicators for the year ended December 31, 2020, in order for it to be in accordance with the Criteria.”
In subsequent years when a reasonable assurance report would be required the provider would do more work and their report would say words to the effect that “in their opinion” the information presented has been prepared in accordance with the chosen set of standards. This would be more like the report companies receive on their financial statements:
We have audited the accompanying consolidated balance sheets of The Coca-Cola Company and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareowners’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
If a company provides voluntary assurance before the required transition date, it must comply with the requirements described below.
Attestation provider
The attestation report must be provided by a “GHG emissions attestation provider.” The proposed rule provides a list of required characteristics that make a person or firm a “GHG emissions attestation provider.” The list includes criteria to determine if a provider is an “expert” in GHG emissions by virtue of possessing significant experience and sufficient competence and capabilities and to determine if the person or firm is independent. You can read more in the details of proposed S-K Item 1505 below.
Attestation report requirements
The attestation report would be included in the proposed “Climate-Related Disclosure” section in the filing. The form and content of the report would follow the reporting standards in the standards used by the attestation provider. The proposed rule includes a lengthy list of minimum requirements for the report including identification of the standards used, the level of assurance provided and a statement about independence.
Additional disclosures
In addition to the attestation report, disclosures would include:
- Whether the attestation provider has a relevant license from any relevant licensing or accreditation body;
- If applicable, identification of the licensing or accreditation body;
- Whether the attestation provider is a member in good standing of the licensing or accreditation body;
- Whether the attestation engagement is subject to any oversight inspection program(s);
- If applicable which oversight inspection program(s);
- Whether the attestation provider is subject to record-keeping requirements; and
- If applicable, identify the record-keeping requirements and the duration of those requirements.
Voluntary attestation reporting
If a company that is not required to provide an attestation report does in fact provide such a report it must make several disclosures, including the identity of the provider, the standards used, the level of attestation, any relationship with the attestation provider and whether the provider is subject to an oversight program.
Summary
The complexity of the attestation process and the related costs have been the subject of comments in the SEC’s rulemaking process. Our next post will explore the proposed S-X financial statement disclosure requirements.
As always, your thoughts and comments are welcome!
For reference here is proposed S-K Item 1505.
1505 Attestation of Scope 1 and Scope 2 emissions disclosure.
(a) Attestation.
(1) A registrant that is required to provide Scope 1 and Scope 2 emissions disclosure pursuant to § 229.1504 and that is an accelerated filer or a large accelerated filer must include an attestation report covering such disclosure in the relevant filing. For filings made by an accelerated filer or a large accelerated filer for the second and third fiscal years after the compliance date for § 229.1504, the attestation engagement must, at a minimum, be at a limited assurance level and cover the registrant’s Scope 1 and Scope 2 emissions disclosure. For filings made by an accelerated filer or large accelerated filer for the fourth fiscal year after the compliance date for § 229.1504 and thereafter, the attestation engagement must be at a reasonable assurance level and, at a minimum, cover the registrant’s Scope 1 and Scope 2 emissions disclosures.
(2) Any attestation report required under this section must be provided pursuant to standards that are publicly available at no cost and are established by a body or group that has followed due process procedures, including the broad distribution of the framework for public comment. An accelerated filer or a large accelerated filer obtaining voluntary assurance prior to the first required fiscal year must comply with subparagraph (e) of this section. Voluntary assurance obtained by an accelerated filer or a large accelerated filer thereafter must follow the requirements of paragraphs (b) through (d) of this section and must use the same attestation standard as the required assurance over Scope 1 and Scope 2.
(b) GHG emissions attestation provider. The GHG emissions attestation report required by paragraph (a) of this section must be prepared and signed by a GHG emissions attestation provider. A GHG emissions attestation provider means a person or a firm that has all of the following characteristics:
(1) Is an expert in GHG emissions by virtue of having significant experience in measuring, analyzing, reporting, or attesting to GHG emissions. Significant experience means having sufficient competence and capabilities necessary to:
(i) Perform engagements in accordance with professional standards and applicable legal and regulatory requirements; and
(ii) Enable the service provider to issue reports that are appropriate under the circumstances.
(2) Is independent with respect to the registrant, and any of its affiliates, for whom it is providing the attestation report, during the attestation and professional engagement period.
(i) A GHG emissions attestation provider is not independent if such attestation provider is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that such attestation provider is not, capable of exercising objective and impartial judgment on all issues encompassed within the attestation provider’s engagement.
(ii) In determining whether a GHG emissions attestation provider is independent, the Commission will consider:
(A) Whether a relationship or the provision of a service creates a mutual or conflicting interest between the attestation provider and the registrant (or any of its affiliates), places the attestation provider in the position of attesting such attestation provider’s own work, results in the attestation provider acting as management or an employee of the registrant (or any of its affiliates), or places the attestation provider in a position of being an advocate for the registrant (or any of its affiliates); and
(B) All relevant circumstances, including all financial or other relationships between the attestation provider and the registrant (or any of its affiliates), and not just those relating to reports filed with the Commission.
(iii) The term “affiliates” as used in this section has the meaning provided in 17 CFR 210.2-01, except that references to “audit” are deemed to be references to the attestation services provided pursuant to this section.
(iv) The term “attestation and professional engagement period” as used in this section means both:
(A) The period covered by the attestation report; and
(B) The period of the engagement to attest to the registrant’s GHG emissions or to prepare a report filed with the Commission (“the professional engagement period”). The professional engagement period begins when the GHG attestation service provider either signs an initial engagement letter (or other agreement to attest a registrant’s GHG emissions) or begins attest procedures, whichever is earlier.
(c) Attestation report requirements. The GHG emissions attestation report required by paragraph (a) of this section must be included in the separately captioned “Climate-Related Disclosure” section in the filing. The form and content of the attestation report must follow the requirements set forth by the attestation standard (or standards) used by the GHG emissions attestation provider. Notwithstanding the foregoing, at a minimum the report must include the following:
(1) An identification or description of the subject matter or assertion being reported on, including the point in time or period of time to which the measurement or evaluation of the subject matter or assertion relates;
(2) An identification of the criteria against which the subject matter was measured or evaluated;
(3) A statement that identifies the level of assurance provided and describes the nature of the engagement;
(4) A statement that identifies the attestation standard (or standards) used;
(5) A statement that describes the registrant’s responsibility to report on the subject matter or assertion being reported on;
(6) A statement that describes the attestation provider’s responsibilities in connection with the preparation of the attestation report;
(7) A statement that the attestation provider is independent, as required by paragraph (a) of this section;
(8) For a limited assurance engagement, a description of the work performed as a basis for the attestation provider’s conclusion;
(9) A statement that describes significant inherent limitations, if any, associated with the measurement or evaluation of the subject matter against the criteria;
(10) The GHG emissions attestation provider’s conclusion or opinion, based on the applicable attestation standard(s) used;
(11) The signature of the attestation provider (whether by an individual or a person signing on behalf of the attestation provider’s firm);
(12) The city and state where the attestation report has been issued; and
(13) The date of the report.
(d) Additional disclosures by the registrant. In addition to including the GHG emissions attestation report required by paragraph (a) of this section, a large accelerated filer and an accelerated filer must disclose the following information within the separately captioned “Climate-Related Disclosure” section in the filing, after requesting relevant information from any GHG emissions attestation provider as necessary:
(1) Whether the attestation provider has a license from any licensing or accreditation body to provide assurance, and if so, identify the licensing or accreditation body, and whether the attestation provider is a member in good standing of that licensing or accreditation body;
(2) Whether the GHG emissions attestation engagement is subject to any oversight inspection program, and if so, which program (or programs); and
(3) Whether the attestation provider is subject to record-keeping requirements with respect to the work performed for the GHG emissions attestation engagement and, if so, identify the record-keeping requirements and the duration of those requirements.
(e) Disclosure of voluntary attestation. A registrant that is not required to include a GHG emissions attestation report pursuant to paragraph (a) of this section must disclose within the separately captioned “Climate-Related Disclosure” section in the filing the following information if the registrant’s GHG emissions disclosures were subject to third-party attestation or verification:
(1) Identify the provider of such attestation or verification;
(2) Describe the attestation or verification standard used;
(3) Describe the level and scope of attestation or verification provided;
(4) Briefly describe the results of the attestation or verification;
(5) Disclose whether the third-party service provider has any other business relationships with or has provided any other professional services to the registrant that may lead to an impairment of the service provider’s independence with respect to the registrant; and
(6) Disclose any oversight inspection program to which the service provider is subject (e.g., the AICPA’s peer review program).