Impacts of climate-related risk and reporting requirements

At the Institute of Internal Auditors (IIA) Great Audit Minds (GAM) conference, Baker Tilly risk advisory partner Mallory Thomas discusses the business impacts of climate-related risk and reporting requirements for environmental, social and governance (ESG) and sustainability.

ESG and sustainability-related pressures 

ESG and sustainability-related regulations ramp up the pressures many organizations face today. Regulations such as the U.S. Securities and Exchange Commission (SEC), California Climate Corporate Data Accountability Act, Federal Supplier Climate Risks and Resilience Proposed Rule, and the Corporate Sustainability Reporting Directive (CSRD) have resulted in new reporting requirements and processes that organizations are only now beginning to address. 

Importance of disclosure 

Whether companies and organizations are subject to ESG and sustainability-related regulations or not, disclosure is important for both internal and external stakeholders. ESG and sustainability-related disclosures assist organizations in identifying and managing risk, fostering transparency and accountability throughout the organization, ensuring compliance with regulations and supplier code of conducts and enhancing the organization’s positioning in the market. 

Differentiating regulatory requirements 

Two ESG and sustainability frameworks are emerging as the leaders for disclosure guidance, which include the greenhouse gas (GHG) protocol and Task Force on Climate-related Financial Disclosures (TCFD). These frameworks assist organizations in gathering the appropriate data and information that various stakeholders request. 

For companies subject to the SEC’s rules for climate-related disclosures, adherence to the TCFD will aid in complying with the non-financial statement disclosures (Regulation S-K) but will fall short in complying with the financial statement disclosures (Regulation S-X). 

Another key component of the SEC’s rules for climate-related disclosures is GHG emissions reporting. Scope 1 and 2 GHG emissions reporting is required for specific publicly listed companies under the SEC ruling. However, for those companies and organizations not subject to the SEC rules, GHG emissions will likely become a disclosure that various stakeholders are inquiring about, if they haven’t already. 

Preparing for sustainability compliance 

Conducting a climate risk assessment is a great next step for any organization ready to move forward with its disclosures, whether subject to the SEC’s rules for climate-related disclosures or not. This assessment allows an organization to systematically identify, evaluate and quantify climate-related risks. The internal audit function has the skills, knowledge and experience to assist with the development and enhancement of governance and risk identification processes, quantification of potential impacts and strategies for risk management. As a leading practice, climate risk assessments should be integrated into the organization’s enterprise risk management processes to ensure the identification, evaluation and quantification of risks is coherent and streamlined.   

Get started now 

Remember that reporting on ESG and sustainability is a journey and will yield continuous improvement year over year. For that reason, it is important for organizations to get started now to identify the data sources, develop the reporting processes and identify and solve the gaps and pain points. With each reporting cycle, companies and organizations learn more about their internal processes and their reporting requirements, further maturing their disclosures.