By Rich Goode and Marie Hache
When having your businesses greenhouse gas (GHG) emissions assured, the last thing you want is any surprises. That’s why companies employ sometimes hundreds of people in their finance function. However, very soon companies will also have their GHG emissions assured (limited assurance and eventually reasonable assurance) and presented alongside their financials. It’s a development that brings major implications for companies across the technology, media and telecoms (TMT) industry and beyond.
We started this series of articles on TMT businesses’ GHG emissions by explaining why it’s now imperative for TMT companies to take climate reporting seriously. In the second post, we looked closer at the SEC’s proposed new rules for mandatory GHG reporting in the US, and discussed the pitfalls that TMT organizations should be aware of when getting ready to comply with them.
In this third installment, we turn the spotlight onto the requirement under the SEC rules for companies to have their GHG emissions assured. We map out how companies can prepare now to ensure there are no surprises later when it comes time for this information to be assured.
Laying down a bedrock of trust
Let’s start with a closer look at the SEC proposal. Since being published in spring 2022, our TMT clients have been poring over the proposal to work out what the new rules mean for their business. For many clients, the top item on their list of concerns is how to meet the SEC’s GHG attestation requirement. In many cases, these companies are quite advanced in terms of ESG reporting, including measuring, reporting, reducing and even receiving limited assurance over GHG emissions. However, most CFOs, controllers and chief accounting officers that we speak with say they plan to use their financial statement auditor going forward, simply because the GHG information will now be part of the company’s SEC filing and they want the level of trust they have come to expect from their independent financial statement auditor.
This decision triggers a further question: what does having an accounting firm carry out the GHG attestation engagement mean in practical terms? Even companies that received certificates of compliance with ISO or other standards in the past may not be prepared for the level of rigor that comes with AICPA attestation standards. This is partly because engineering firms do not use attestation standards to conduct GHG-related engagements. By contrast, PwC applies attestation standards such as those from the AICPA, which often involves additional procedures. For example, in addition to inquiries, sample testing and analytics, this will typically include procedures to obtain comfort that the sources of data are complete, the assumptions and estimation methodologies are reasonable, the process in place is consistent and repeatable, the process and criteria used to prepare the metrics are publicly available, and that when errors are identified those are not likely to lead the metric to be materially misstated. This level of rigor is what large institutional investors, and now the SEC, have been asking companies to provide: Trusted, reliable information that is investment grade.
Creating an Inventory Management Plan – and a Process Narrative and Flowchart
Once a TMT company has engaged its chosen attestation provider for GHG emissions, what information will it need to provide to that firm? In our previous article in this series, we highlighted the need to create – and keep up-to-date – an “Inventory Management Plan” (IMP) that details a company’s GHG inventory across scopes 1, 2 and 3 (for a definition of these, click here). This set of information is key to the attestation process.
Sometimes termed the GHG accounting manual or Standard Operating Procedure (SOP), the IMP is – in simple terms – the “who, what, when, where, why and how” book. What emissions are you measuring? Where from? Who’s measuring them? Where do you get the data? Why are you doing it this way? And how are you going to improve the quality of your emissions calculations over time? Not surprisingly, this document is one of the most important pieces of information for the GHG assurance provider.
Companies should also expect to show a complete description of each category of emissions – often called a process narrative – along with a flowchart. This is a visual diagram typically developed in a tool such as Visio to show the whole process flow from beginning to end. That means from the point where the data collection starts, and then following through how the emissions are calculated, to how the information is recorded and uploaded to the GHG accounting tool, and finally how the emissions are consolidated and reported.
A flowchart is a good practice for companies to develop for each GHG category, and including Scope 3, even though that’s not yet in scope for the attestation. Taken together, the IMP, a robust process map and complete narrative, along with selected supporting documents such as invoices, will give your assurance provider the information they need to conduct their engagement and render conclusions on the accuracy and completeness of the data.
Putting robust risk and risk and controls in place
The other – again business-critical – piece of the jigsaw for attestation preparedness is implementing controls (and documenting them in a risk and controls matrix) over the key elements of the GHG accounting program. When working effectively, this helps the assurance provider gain comfort that the information is indeed complete and accurate. Examples of those controls include manual and/or automated analysis and review, segregation of duties, user access management (e.g., only the people who need access to the data have access), and change management (e.g., underlying formulas cannot be changed or deleted with a single unintentional keystroke).
Here it’s important to appreciate the assurance firm's mindset – which is founded on being naturally skeptical. What could go wrong? What's the risk of errors? Is this data complete? Is it accurate? We’ve seen many cases where companies maintain their entire GHG inventory in an Excel spreadsheet on one employee’s laptop – meaning any issues or non-compliance with backup procedures could have catastrophic impacts. An effective control environment will address such risks.
Tech-enabled reporting
With the elements this article has highlighted all in place, the last thing to mention is the challenge around timing. The way the proposed SEC rules are written, a company’s GHG and climate-related information will need to be reported in conjunction with its financial figures.
For many companies, this can be an issue. Financial accounting has been around for over a hundred years, and there are myriad of technology tools available to facilitate rapid financial reporting. By contrast, GHG reporting in most companies is still an overwhelmingly manual process, largely carried out on spreadsheets, or by manually transferring data from one system to another. As a result, while large accelerated filers have 60 days to report their financials, GHG reporting can often take five to six months.
Given the SEC requirements, that’s clearly no longer good enough. We’re helping a lot of TMT clients shore up their GHG accounting programs by identifying and plugging gaps and helping to get their GHG accounting process ready for timely investment grade reporting. Ultimately, virtually every business will likely need to adopt a dedicated GHG accounting tool, of which there are a growing number on the market – offered by vendors ranging from the global cloud providers to niche specialists like Persefoni, Sphera and Salesforce. In our view, all SEC registrants should start thinking about how to transition this overwhelmingly manual process into one that leverages technology to improve the speed and accuracy of GHG reporting.
Time to prepare
The overall message is that there’s no question the SEC’s GHG attestation requirements present challenges to many TMT companies. But the good news is that the support, tools and expertise to meet them are available now – and evolving all the time. The key is to be ready when the rules become effective.
With this in mind, we’d suggest companies act now, bearing three points of best practice:
- Choose your GHG attestation provider with care: while higher rigor in the review may initially appear more expensive, it’ll save cost and effort in the long run.
- Be sure to capture every source and category of emissions in your Inventory Management Plan – and to put in place robust, comprehensive controls over your GHG accounting.
- Evaluate and consider the various dedicated GHG accounting tools available on the market.
And the time to start preparing? Today.
