Time for CFOs to Influence the SEC’s Climate Effort

Corporate sustainability is an increasingly big tent containing a broad spectrum of views and practices. In recent years, talk of “corporate purpose” and “stakeholder capitalism” has grown in importance and garnered the most attention.

Ironically, however, behind the headlines, the most meaningful evolution has been a growing focus on what sustainability means for investors and other providers of capital. There’s a growing recognition that many of the risks and opportunities that drive enterprise value don’t show up in financial statements. For this reason, corporate executives have begun to take notice — and their timing couldn’t be better.

Something important is happening at the Securities and Exchange Commission (SEC) that will affect the corporate disclosure program at every U.S. public company. The SEC is preparing to issue new rules that will likely establish mandatory disclosure on climate change, human capital, and broader environmental, social, and governance (ESG) issues.

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The opportunity to help the SEC craft efficient and responsive disclosure rules is worthy of a CFO’s attention.

The good news is they have asked for public company input on how to do it. This will have implications for the substance of corporate reporting and the process surrounding it. Therefore, the opportunity to help the SEC craft efficient and responsive disclosure rules is worthy of a CFO’s attention.

Let me explain. In March, the SEC issued an extensive series of questions for public input that, among other things, address:

• The type of climate-related disclosure that should be required of companies, including metrics (e.g., Scope 1, 2, and 3 greenhouse gas emissions) and narrative-based information (e.g., internal governance of climate-related risks and opportunities);
• Whether there should be different reporting standards for different industries;
• Whether disclosure requirements should be limited to climate change or be part of a broader framework of ESG-related disclosure;
• Whether any new disclosure requirements should include a “comply or explain” provision;
• The advantages and disadvantages of existing, voluntary frameworks and standards (e.g., the Task Force on Climate-related Financial Disclosure, Sustainability Accounting Standards Board, Global Reporting Initiative, and others); and
• Whether to require independent, third-party assurance or certifications of such disclosure.

Although it is fair to cast a skeptical eye toward many regulatory efforts, the SEC’s current effort, if done right, could have tangible benefits.

Standardizing disclosure on the subset of sustainability factors that are financially relevant to companies in specific industries could address several market pain points. Among them, it could help improve the increasingly chaotic “alphabet soup” of ESG disclosure demands. It could also improve the consistency and comparability of disclosed ESG information, enabling useful benchmarking for both companies and investors. Further, these developments could improve the accuracy and reliability of the third-party ESG ratings and scores that increasingly influence valuations.

The current system of voluntary sustainability reporting has increased the burden on companies and investors and left many companies uncertain about whether they are, in practice, providing decision-useful sustainability information. Given the escalating importance of ESG risks to investors, this burden — and uncertainty — is only likely to increase.

Companies should seize the opportunity to meaningfully engage with the SEC on this issue to ensure that critical legal and operational aspects of the forthcoming rules avoid creating problems. For example, it will be key that the new disclosure requirements:

• are premised on financial materiality;
• provide legal safe harbors;
• are reasonably cost-effective to implement;
• accommodate important timing challenges;
• allow a reasonable transition period, particularly for small and mid-cap firms;
• and evolve through due process alongside market realities (perhaps through a third-party standard-setter similar to the Financial Accounting Standards Board).

A positive outcome for companies is possible, but if the SEC is to effectively address these and other priorities, individual company engagement will be essential.

Since my time in the C-suite, there has been a sea change concerning corporate sustainability. Over the past year, especially, markets have become acutely aware of the need for business models to be resilient. Management has broadened its aperture on risk and opportunity accordingly.

Today’s transportation companies don’t think twice about measuring and managing the carbon intensity of their fleets and facilities, and similar long-term thinking has taken root across every sector. For example, utilities recognize that more frequent, severe, and longer heatwaves can present risks from increased energy loads. Beverage manufacturers understand the importance of effective water management — especially in certain regions — to ensure the availability and cost-stability of a critical input.

Since my retirement, I’ve worked to build a bridge between ESG and financial markets. I joined the Sustainability Accounting Standards Board (SASB) in 2018 because I believe that standardized sustainability disclosure is essential to investors and companies. I also believe that to truly move the needle in a mutually beneficial way, such standards must be focused on financially material issues (see above).

As the SEC consultation winds down (the deadline for comments is June 13), the direction of travel is clear: New rules are coming. Whether they improve the ESG reporting landscape — through a focus on financial materiality, a reasonable legal liability framework, and other key priorities — is to a great extent in the hands of the corporate community. I urge you to engage.

Kurt Kuehn was chief financial officer for United Parcel Service from 2008 to 2015 and now serves on the Sustainability Accounting Standards Board and on the board of directors for multiple public and private companies.