On-Demand: SEC Rule on Climate-Related Disclosures

June 22, 2022

EisnerAmper conducts a fireside chat-style where they discuss what this proposed rule means, why it matters, and how to prepare.

 


Transcript

Lise Stewart: Great. Thanks, Bella. And as Bella said, yes, my name is Lise Stewart. I'm a partner here and I'm a coach to the ESG team, and I'm just so excited to be here with all of you and to be able to present on this very important topic.

Lise Stewart:  And I'm really lucky because I'm joined by two of my favorite colleagues, Charles and Lourenco. And I'd like to give them a chance maybe go into little bit more depth about their background. That'll give context as to why they're about the things they are. So, Lourenco, let me start with you. Could you please give our audience a little bit of background of who you are and what you do?

Lourenco Miranda: Thank you so much, Lise. Thank you so much for everyone for joining today's webinar. Thank you very much for the opportunity. My name is Lourenco Miranda. I've been with EisnerAmper for quite some time. And I am responsible for environmental and social governance here and all the practice that we have. I've been in the industry for over 20 years, always in financial institutions as a capital provider or worked in the world bank and the international financial institutions. And I'm happy to be here today with you all.

Lise Stewart: Great. Thank you, Lourenco. And, Charles, how about you? Give us a little bit of background.

Charles Waring: Thanks, Lise. Good morning, everyone, and thanks for joining us here. Charles Waring, I'm a Director here at EisnerAmper. I have over 17 years of performing audits and assurance work over public companies and other companies as well. And so my focus within our ESG team is around the reporting space here. So I'm very excited to be here with everyone. This is a hot topic and a big one to wrap your arms around. So I'm really excited to have the opportunity to have our dialogue today.

Lise Stewart: Great. Thanks, Charles. And just to give you all a little bit of a framework and agenda, I guess, for how we're going to run today, Charles is going to give us an overview of the proposed rules. So that'll help us to understand what it all really means. And then we're going to follow that up with a couple of very quick polling questions because we'd like to hear from you that allows us in our discussion to perhaps target some of the things that are really of interest to you. And we'll have a to and fro, we'll talk about a number of different things that are important. And then, of course, we're going to open it up to Q&A. Just before the Q&A, we'll also do another couple of quick polling questions so that we might be able to address that as we're answering your questions. So, with that, I'm going to turn it over to you, Charles, to kick us off and give us that overview of the proposed rule.

Charles Waring: Thanks, Lise. So, the proposed rule from the SEC was released back in the end of March. And the essence thereof is that it requires public companies to include climate-related disclosures as part of their either registration statements or their annual 10-K filings. It's really broken up into three different areas, climate-related risks, greenhouse gas emissions, and details related to publicly set climate goals here. So, I will go into each one of those areas here with kind of some content as far as what would be included there.

The first area and one of the bigger areas here is the climate-related risks. This really includes the oversight and governance piece, not in common to other disclosures that are made, but really the SEC's looking for the discussion or disclosure around what the company has at the board and senior management levels related to the governance process here. There's also the aspect, as far as what are the climate-related risks identified by the company that would have a material impact to its business. Now this also is both from short, medium, and long-term perspective. This is not something that is just what's in the docket for the current year. The SEC does speak to how they're looking for a multitude of ranges of terms here.

Then also, as it relates to those risks, how likely are they to affect the company's strategy and business model because that's an important part that the SECs looking to address is that these risks can have a significant impact to a company based upon their industry and how they run their business on their strategy and their business model there. And what's the overall risk management process that's the company has in place most. I mean, all public companies will have risk management and processes and maybe even groups how is that including the climate-related pieces as well here. So, what's the process for identifying, assessing, and managing those climate-related risks.

Then as far as what related to... I think another term that you'll hear is a transition plan. So, for a company that would have identified climate-related risks, what's part of that process to transition and address those risks, whether it's location bases, whether it's sourcing of material, sourcing of energy, et cetera. Has the company identified and created transition plan, and what does that include, including any sort of relevant metrics and targets being used to identify those areas there? Another aspect with transition plans and risk management here is scenario analysis. And there's a variety of things that go into that process there to check on the resiliency of the business model. And if there's any sort of assumptions, parameters, that sort of thing, the SEC's looking for that to be included in the disclosure as well.

The last piece here maybe some new terminology is the carbon pricing. So as part of those scenario analysis, transition plans, risk management analysis, if the company uses any sort of sets an internal price for carbon, what is that? And how is that being disclosed? And then the last piece here, and this is kind of where the rubber meets the road for many of us on the line here is what is the impact of this on the company's actual financial statements, as well as estimates or assumptions that go along with that too? So, kind of boil it all down. How does that impact the company's financial statements?

The second piece here, it relates to the greenhouse gas emissions. There's a number of these that you'll also hear about the kind of the industry terminology. Scope 1 is the emissions that are directly from the operations of the company. So, what are those things that just kind of keeping the lights on in the office, the operations, and plants, factories, whatever, what are those direct emissions that are being produced? The second one, Scope 2 are those indirect emissions. Those ones are from the sources of energy that's being used. Is the company using renewable energy sources for electricity? Are they using fossil fuels skills, it is a mixture, whatever that might be, but that boils into the Scope 2 here?

And one of the things that want to kind of articulate here is that in the proposed rule, this speaks to the aggregate or the absolute terms, not factoring in offsets. So, you might hear that people or companies will be buying carbon offsets and basically having a net number of a lesser number there. The proposed rule speaks to absolutes. And that's something that is clearly clarified here. The last piece, Scope 3, those are the emissions that are in the company's value chain. So, everything from sourcing materials and product to the actual output and delivery of the product to the end consumer. And the proposed rule right now says that if that is a material number for a company, then that needs to be disclosed just like for Scope 1 and 2. But it goes through a materiality assessment there.

The third piece here relates to publicly set climate-related goals. So, you might hear that companies have promoted saying, "Hey, we're going to be net-zero by 2040, 2050," whatever it might be. The, the SEC has said that, "If you are putting out a public goal there, then there needs to be a little bit more detail and information that goes along with that." So, one is to clarify, what emissions is that? Is that only applicable to Scope 1 and 2, or is that for all scope emissions there? Also, what's the time horizon? And is there any interim targets that go along with that? Because many times these public targets are multi-year items here. And so is there anything that needs to be articulated in an interim basis here? And then what is the details around that? What is the company put in place? Are they adjusting the sources of their energy and emissions, or are they changing up their operations, changing locations? What goes along with that plan to hit any of those publicly disclosed goals here?

And then as those goals are set and articulated, what's the progress against them? Is the company on track, or are they off track? What goes along with that? So those things need to be included in disclosure. And then the final point here is what I was mentioning on a previous slide. Again, does this factor in any sort of carbon offsets or renewable energy certificates known as RECs? And how is it being articulated here within the overall goals of the program? So that's kind of the very quick and dirty overview of the what's in the disclosures. A couple other slides here that talk about the kind of what is the nuts and bolts of this, and what's the timeline here. So the location of this would go into, as I mentioned, either registration statements, into the 10-K or if you're a foreign filer, the corresponding forms there.

So what this includes is that there would be a separate section in the annual report that would speak to these disclosures here, but then there's also an aspect in the footnotes to the financials, similar aspects that would be included into the footnotes as well, just like any other SEC filing that they would have to be tagged in XBRL. But then the last piece is that for a large accelerated or an accelerated filer, there's another requirement that they need to obtain a separate attestation report related to Scope 1 and 2 emissions. Those are kind of come in two flavors. The first one is related to a limited assurance report, which is from an auditor standpoint, we call those a review report. And then a couple of years later have a reasonable assurance report or an exam report there. That's a higher degree of assurance. So here's the timeline.

And I think that this is a timely discussion because the proposed rule came out in March and originally has 60-day public comment period, but that was extended for another month through last Friday, June 17th. So we are kind of in the midst of the SEC receiving and processing the public comments that have been submitted. And as one would expect for over 500-page proposed rule with multiple requests and questions that are built into that, the submissions that have been made are pretty lengthy. And so I think that the SEC is going through and processing them. I think that many of them have been coming in last week. And so it's something that is very on top of mind here. So this timeline here is based upon what the SEC's proposed rule is, if it would be adopted by the end of '22. So for a large accelerated filer, their first disclosures in their registration statements or 10-Ks would be related to their fiscal year '23, which that 10-K would be filed in early '24 here.

The Scope 3 piece, if that is material number, then that falls into the following year's requirement. Then there's the cascading piece here that for different size companies and filers over the coming years. The one thing to call out here is that for smaller reporting companies, they are exempt in the proposed rule related to the Scope 3 emissions here. They would only be required to include the Scope 1 and 2 pieces here. And then the last piece is, as I mentioned on the prior slide, those additional attestations that large accelerated and accelerated filers would need to obtain for Scope 1 and 2 emissions. Those trickle in is kind of the following year. So if their first 10-K filing is in over '23 and '24, their limit assurance report over their emission, their Scope 1 and 2 emissions come the following year. And then there's a two-year additional timeline until the greater level of assurance report is issued. And then a one-year lag for the accelerated filers.

Again, this is the current proposed timeline. I'll just claim it is that. There's a lot of comments that have coming in from companies, trade groups. I mean, variety investor groups, firms, attorneys, et cetera. So the SEC's got a busy summer to review and digest and consider those, but this is kind of what is on the docket for right now here. So, Lise, I think that's the overview I wanted to provide for the audience here.

Lise Stewart: Great. Thank you, Charles. That's really very useful. And we're going to dive into some of the details and talk about the practical application of all of this, which I think a lot of our, particularly our business owners are wondering, scratching their heads, and thinking, "How do we do this?" But before then, let's take a couple of minutes here and just do some quick polling questions. So here's our first question. You've only got about 45 seconds to answer. Please let us know if the SEC's proposal requiring mandatory disclosures of climate-related risk factors, audited financial statements, and GHG emissions for public companies goes into effect by the end of this year, would your company be prepared to disclose this information? So let us know, would you be ready?

This is when we need to have that little tune that comes on, on all the game shows. Right? Do-do-do... So either, yes, you have a team and infrastructure in place. If so, you would be pretty unique on the cutting edge. Somewhat prepared, we only have either team or infrastructure in place. Not prepared, but starting to focus on building proper team and infrastructure. And not at all prepared. So don't worry if you're coming in at that, not at all prepared, or not prepared very much at all, you would not be alone. This is catching a lot of people on the hops. So let us know what you think. All right. Just another few seconds here. We've got about 50% of you that have answered. Some of you are out there finding your coffee. I know. All right, let's see. Okay, here we go. Well, just as we suspected, most of us are pretty unprepared and that's really why we're here today is to be able to answer some of those questions.

However, there are a few, and gosh, I'm actually really interested over 16% said that they do have a team and infrastructure in place. Well done. Especially given so many questions about the topic. So that's great. Thank you so much. One more very quick question for you again, just seconds to answer. Are you actively looking to hire operations, compliance, and financial talent in anticipation of the proposed rule? Yes, or no? We do know that all of a sudden job advertisements for people who have some knowledge and expertise in this area just seem to be popping up everywhere. It's very popular. And yet just as we know, finding good talent to do anything, these days is tough, let alone expertise in this particular field. So I know it's tough for a lot of people. All right. Just a more seconds to tell us, are you looking for talent to help you to do this?

All right, we've got a few more submissions coming in. They're getting there. Couple more people hit that button. They're still answering. I think it takes time for people to think this through or they go back to their HR list and say, "Are we hiring?" All right. We've got most of you that have already answered here. Thank you. No. Okay. So about 32% are looking for talent and 67%, no or maybe not yet. Until we really figure out what it is that we need and what this is going to look like, it can be pretty difficult to be able to figure out what it is you actually need. We're going to leave it here. We've got a couple of other questions a little bit later, but what I'd like to do now is to let's look open it up and have a conversation.

Let's look at this one in a really practical perspective. What does this mean? Lourenco, I'd like to start with you. I want to know what's the process to actually get this done? What would be the level of effort for a company to prepare and maybe ultimately provide their disclosures and who from that company should be involved in the process. Can you give us a little bit of a bigger picture about how a company goes about this?

Lourenco Miranda: That's a very good question, Lise. Thank you so much for that. So the first thing that we need to understand, and I put myself in the shoes of the CFO, and I'm going to answer your question. CFO will be probably the person in the company be the one that will manage all these undertaking out. It can be a huge undertaking, it can be overwhelming. And I understand more than 400 pages of regulation to digest is difficult. It's not easy. So I put myself in the shoes of the CFO. Now what? So now what do I need to do? So I understand that most of you are not prepared and it's normal because this does not happen overnight. It's nothing that you just wake up in the morning and I'm compliant, and I am disclosing all the risks and opportunities and linking them to strategy. I have my board aware and knowledgeable of all the... So it's not that. It takes time. It's a process. And it goes from different steps of maturity. So it can go from very early stages and understand what the problem that we have at hand and to the end when you're fully compliant and you are in the leadership of this topic.

My first advice for the CFO, now I put myself in the shoes of the CFO is leverage everything that you already have. In our 10-Ks, the second session of your 10-K is risks. So you already have a process, an internal process to identify and assess risks that impact your strategy and your business. And you do a very well job putting those in your 10-Ks. So you already have that. So the next extension, the next step is to add one more risk event or risk type or a risk factor, which is a climate-related risk. So you look at your business and your strategy and all the products that you develop and your consumers, your clients, all your business and your strategy, and you see what could go wrong, what are the risks that will impact my ability as a business to deliver to my consumers, to my clients, and to my shareholders?

So I look at all my stakeholders, internal and external... Sorry. Look at the shareholders. I look at the regulators' internal as well, my staff, the suppliers. I look at all this value chain and all the stakeholders that I have. And I start to identifying, "Okay, what could go wrong in terms of climate-related risks?"

So we have to, again, go one step ahead and say, "What is a climate-related risk? What is it we're talking about?" So suppose that we are in a manufacturing industry, which is very clear to give an example. If you're in a manufacturing industry, you have plants across the United States or you have in different locations. And these plants could be susceptible or could be exposed to a severe weather risk. It could be chronic. Something that happens in... Or acute happens in one moment in time that something that is hurricane or drought or something that is more chronic, it takes time to impact you like a sea level. So if you are real state in Florida, for instance, in the near the coastal areas of... You are exposed to sea levels, that could rise if the temperatures of the planet increase.

So all of these elements are climate-related risks that will impact your business, and you start identifying those. So I have a what's called technically speaking, physical risk, or if I'm in a business that I am too much dependent on carbon, some carbon-intensive industry could be a manufacturing, could be pharmaceutical, could be life sciences, whatever industry that you are, you have to think about, "Am I dependent on carbon?" If there is a transition in legislation, if there is any change in my ability to buy this energy, that Charles mentioned in Scope 2, when buying this energy from a utility company, if the prices go up and down, am I impacted? If there is going to be a carbon tax on me because I have a huge dependence on emissions... So all of these elements I have to start thinking about.

And where do you start? You start by identifying those risks, identifying those risks that will impact your strategy, not any risks on anything but goals that will impact your strategy, and leverage the process that you already have to identify the risk that will impact your business, but you already have in your 10-K and you listed there in a very nice descriptions of the risks that will impact your business. The CFOs are already used to that. So that's something that you can leverage. And so that's nothing that needs new identifying, assessing risks that will impact your business it's nothing new. It's been around since you have to disclose risks in the 10-Ks. So that's where you start. The second thing is now you have the ton on the top.

The first thing to get the tone on the top, you have to talk to your board. You have to educate your board. You have to appoint one board member as the person, the go-to person for climate-related risks. This person has to be trained, has to be the appointed person. You have to identify one person or one committee in the company that will be responsible for climate-related risks. And then also all the committees of the board have to change their charters into, I start including climate-related topics that will impact their decisions and will impact the strategy and impact the business. Again, in the governance part, the second level is your management, executive management. You have to be trained. You have to understand what climate-related risks are. And also the committees that they participate or the management committees, they should also get introduced to the climate-related risk concept, and the decisions that they make should show that they're taking into account climate-related risks.

Now the second step is now I understand the risks, my board understands the risks, management understands the risks. So I understand what I need to do. The second step is the SEC is asking you have to identify opportunities to mitigate those risks, but that's where the fun starts because that's where you start identifying a climate-related risk, a physical risk that is going to impact my plant in California. There's wildfire in California, drought in the Midwest. So all of these elements, and you start, "How do I mitigate that? How do I adapt to this?" So I have to start creating plans to mitigate and adapt to those climate-related risks that will impact my business. So that's a second thing. So it's a pure classic risk management process. So you start putting your hat as a risk manager. I have this bunch of risks that will impact my strategy. What is there I need to do in order to mitigate those? What kind of controls that I have to put in place? What are the opportunities that I have in terms of sustainability, energy efficiency that will mitigate my exposure to carbon, my exposure to a specific physical risk.

And then I need to link this to the strategy. And the natural thought process of the CFOs is to ask, "How much would that cost for me? How much that will impact my bottom line?" That's the natural link between or identify those risks. I have this opportunities that will mitigate those risk. I have a residual risk now that will impact my bottom line. So what is the impact in my earnings, what's impacted my future cash flows. And to Charles point, Charles mentioned that it does not happen in the short-term, but climate-related risks, they don't happen overnight, they don't happen next week. There's a process. There's a things that will can happen in 10 years from now, 20 years from now, 25 years from now. If you have a real estate business in the coastal areas of the United States, you're probably not going to feel the impact, or probably already feeling the impact of sea levels rising, now but you're going to feel them 25 years from now, 20 years from now.

So we have to make sure that you understand these risks and opportunities today, how they impact your business today, how they impact your business in the medium term and in the long term because climate-related risks are long term as well. So they have to understand the impact of those risks in different time horizons. So what's the cherry on the top of the ice cream is now I've done all this. It's a process again, does not happen overnight. It's a process. In the end, I have to disclose to my investors, how much dependency I still have in carbon. And the natural metric for that is greenhouse gas emissions. So Scope 1, Scope 2, and Scope 3. So we have to start disclosing to the general public, to my shareholders, to anyone that is interested to the market, how much dependency I still have in carbon. So that's how we do it is through disclosing Scope 1, Scope 2, and Scope 3.

It's a natural process. It goes from the understanding of risks and opportunities, talking to the board, getting the tone of the top, by cascading this down to management. CFO will think about, "Okay. How much that will cost me? What's the impact in my bottom line, in my cash flows, EBITDA?" So talking about earnings. How do that impact in earnings then carbon disclosures, which would be the end game at the end objective. So to show it everyone I've done all this, I have all these plans that I'm doing a great job in terms of identifying and assessing this climate-related risks. Now this is my exposure to carbon.

Lise Stewart: Right-

Lourenco Miranda: Yeah. So I want to stop here.

Lise Stewart: Right. Well, I think it's just so interesting, Lourenco, that you talk about and now this is when the fun starts. So you go through this very complex sort of game plan, and you can tell where your passions lie. So I just wanted to check to see, Charles, any comments on all of that. There's a lot involved. And, of course, you recognize that many of our companies are at different stages of this process.

Charles Waring: Right. I think the one thing I just wanted to tack on here is that some companies have been producing CSR or sustainability reports on their own kind of voluntary basis. I think that the one thing that those companies need to keep in mind as it relates to what's the level of effort for this new rule is that sometimes those reports have been issued on an ad hoc basis every other year, but this new requirement would be... This is an annual reporting, and it needs to have information that would go into the 10-K and be subject to auditor procedures related to that. Again, when management has done kind of self-reporting it's up to them as far as what they want to include, not include et cetera, that the SEC is pretty specific on at least the minimum requirements on what they're looking to have in that 10-K filing there.

So there is additional effort on an annual basis, even for those companies that have been producing their own CSR sustainability reports to date.

Lise Stewart: Right. Okay. Well, let's go into a little bit more detail then about some of the different Scope 1, Scope 2, Scope 3, and then I'd like to come back and talk to you both about some of the longer-term benefits of doing this like what else might be a benefit to these companies. But before we do that, Charles, what would be included in the Scope 1 and Scope 2 attestation reports? How is that developed? And could you also just explain what's the difference between limited and reasonable assurance? I know that's been a question that's come up several times.

Charles Waring: Sure. A little auditor ease there, but it shouldn't be something that people shy away from. So first off, what's included and just to refresh Scope 1 is those emissions that go along with the direct operations of a company Scope 2 are those emissions that are associated with the energy or the utilities that are being brought in to support the company there. What would be in those attestation reports? There are separate reports that would be standalone that follows the GHG protocols.

And as far as what is being calculated, I mean, obviously, it's dependent upon the nature of the company and what their operations are, are they manufacturer, are they financial services, or real estate. Whatever that kind of goes along with that, but then the breakout of those various emissions. As I mentioned before, it needs to be on the absolute terms, not just what is being offset by any sort of credits or carbon offsets there. So that needs to be included. And it gets broken out. I think that would also be included based upon key sites and locations there. What goes into what constitutes a limited assurance versus a reasonable assurance report is predicated upon the auditor's report, the opinion piece there.

And that is directly tied to the amount of procedures that go along with it. So the limited scope, that's one where the auditor says, "We're not aware of anything that would materially change what management has provided to us." There's no red flags that standouts to us. It's there to kind of do that initial cut. There's the auditor has come in and kicked the tires on some capacity, and that they have their report. The reasonable assurance one that's kind of what we're more held to with relates to the level of procedures that would be in an audited financials, audited 10-K, or also many of the folks online might be accustomed to SOC reports. So it's that higher level of assurance the auditor needs to perform a more in-depth procedures to ensure that what's presented by management is reasonably free of material misstatement. So it goes along with the level of detail that would be included in the report then.

Lise Stewart: Great. Good. Thank you. Well, Lourenco, I asked Charles to address Scope 1 and Scope 2. Let's talk about Scope 3 for just a minute. The proposed rule requires Scope 3 is included only if they are material. So what's the process for determining that? What should a company do to determine whether or not the emissions are material or not material?

Lourenco Miranda: So materiality, it's an excellent question. That's a question that we hear all the time. Materiality is defined here in the US by the Supreme Court. So that's went to the Supreme Court, and then it's decision that if that information when not disclosed could have changed the opinion or the decision of an investor in your company. So if you don't disclose that information, would that be material enough to change the opinion or my investment opinion or my investment decision on this company? That's the definition of materiality according to the Supreme Court. So that's the kind of information that will change the decision, the investment decision. Now if you think about Scope 3 materiality, we have to go back one step back and think about what are we talking about? When we put ourselves, again, in the shoes of the company, in the shoes of the CFO, the CFO has many stakeholders.

And one of the stakeholders of this, you have suppliers, people that will supply is external stakeholders to supply you with the goods that you need in order to run your business. And then we have people that are going to depend on. So that's upstream and downstream in your value chain. Scope 3 will capture all this value chain emissions, meaning that if your business is consuming a lot of upstream and generating downstream emissions, you're on a hook so you have to disclose that. How do you decide whether this is material or not? You have to think about your value chain and how much you depend on heavily carbon-intensive suppliers and if your downstream chain is also heavily dependent on carbon.

So now you think about manufacturing again. So we go back to the classic manufacturing example. You depend on raw materials upstream. And if these raw materials are coming from carbon-intensive production, then for you because it depend on those heavily for your bottom line, if you do not include those in your disclosures, if don't disclose them, it could change the opinion of an investor on you. So then you have to include that because you have a huge dependence, a significant dependence, the material dependence on this upstream suppliers. And if you have a downstream that people that you're providing your goods or selling your goods or distributing, it's also heavily dependent on carbon, you have to disclose as well.

So we have to start assessing your dependence on your supply chain, on your value chain. And if your value chain is heavily carbon-dependent, carbon-intensive. So this does not happen overnight. And it's extremely complex in a globalized world that we live in today. Take, for instance, a auto manufacturing of electric vehicles, huge dependency on rare metals. Rare metals, they do not show up on surface. They have to be mined. So if you're going to mine rare metals, you have to think about how much water is being used, how much energy is been used for mining, that rare metal that's going to be used in your lithium battery, because a lithium battery needs anode and cathode, the anode is lithium and the other one could be cadmium, could be nickel. All these rare metals. Cobalt. They come from mines that require a lot of energy. So we don't think about that in the first place. It's something that you don't just pop up.

I'm driving my electric car and you don't think about the value chain to build that car and to build the battery of that car. So all of this is what we're talking about. We're talking about the value chain and why it's important. It's important because, and I'm putting myself in the shoes of the CFO again, gives the CFO the opportunity to revisit the value chain. One thing that could be an outcome of this is my vendor risk or my procurement policies, good enough or sustainable enough that I could manage my dependency on carbon. But that's a good way of thinking about opportunities in order to mitigate the value chain. Because if it's material for you, you have to disclose, but at the same time, remember the risks and opportunities. Again, it's an opportunity for you to start rethinking about your value chain, your suppliers.

Should I change my suppliers? Should I be less dependent on carbon? Should I be procuring different sorts of suppliers that are more socially responsible or they are less carbon-intensive? I see this as an opportunity for the business to start to be rethinking about how they manage the value chain. And of course, it's important because it is carbon-intensive, it's going to impact the environment. It is about climate risks. Again, if you don't mitigate those, you're going to live in, what's called a hot house scenario, which we don't want to. See levels rising, ice melting, and we don't want that. We don't want to avoid this. But it's a good opportunity for business to take some time and then rethink the value chain.

And also gives a competitive advantage. I've been working in Europe for quite some time with European banks, with European companies. And there people do not even think about Scope 1 and Scope 2 anymore as a competitive advantage. It's already given. So of course, Scope 3 becomes the competitive advantage. If you can figure out a way to identify, disclose, and manage Scope 3, that's where you're going to be more attractive to investors. You're going to be more attractive to you get to have more access to capital for instance. So if you're a company that needs financing, the banks will look at you with a better eyes. You're going to be okay.

You are managing your value chain, you know your business, and know how to manage your risks and opportunities, you know how this will impact your bottom line and your cash flow. It'll be more attractive to me as a capital provider, the same thing for investors. So in Europe, Scope 3 is becoming the differentiator. Hopefully, here in the US will happen the same thing so that we start thinking about risks and opportunities also in our supply chain.

Lise Stewart: Right. It is complex. And it's a whole new opportunity to take your strategic analysis to a different level. I know that some companies certainly are, but I think that this does give us really the impetus for expanding the way in which we think about the greater, the global impacts of our companies. Charles, tell me the SEC ruling really applies to public companies, but why should nonpublic companies really take this into account and pay attention to this ruling?

Charles Waring: It's a great question. And one of the big discussion points with our clients as we're talking about this. And it goes into what Lourenco just mentioned. So if a company, a non-public company is within that value chain of a public company, then they should be expected to get those questions from that public company around what's their process for to address climate-related risk? What's their emissions? Because I think that one of the things that Lourenco was speaking to is a lot of the large public companies are going to have, excuse me, Scope 3 as material item, and based upon the nature of their business, et cetera. And if you are a company that is selling to or servicing or is a logistical provider or source or delivery, or any aspect that is providing a key resource in that value chain for a public company, they should be prepared to get that question.

I mean, then it's just a matter of, do you want to wait for one of your key customers to come to you and say, "Hey, what's your process in place? What's your emissions? Do you have any sort of reporting around that? Has it been validated by a third party, et cetera?" So that's something that a non-public company should be considering if they sell or service to a public entity.

Lise Stewart: Right. I think that we could run a whole separate webinar on all of the other advantages of paying attention to this really important issue, whether that be some of the financial advantages, the way in which we manage our companies more effectively, the reputational advantages, trying to attract and retain talent these days. And we could go on and on. And I know that it's a topic that everybody on our ESG team is really passionate about. So that gives us a nice setup for another webinar on another day. Given that I would like to both allow a bit time for questions. And also, we've got two more very quick polling questions. Let me pull those up really quickly.

Let's see. Here we go. Do you believe your company is doing enough to address its climate footprint? And again, knowing how important this is today. So, yes, I'm confident that they're doing everything available and possible. Yes, I'm generally confident, but I think they could be doing more. And, no, they're not doing enough. What do you think? What's your company doing today? And do you believe it's enough? Oh, wow. Answers are popping up really quickly. Obviously, I think in our conversation to date Charles and Lourenco, we've stimulated some people's thinking here. As I said, it is very important. I think, as I'm waiting for these answers to come through, one of the things that's just very evident to me is that Lourenco and Charles and everybody else on the team is so passionate about the subject and has a lot of energy around it, as well as a lot of experience to be able to share.

So for all of you out there that are beginning to tackle this, please feel free to send in any questions that we have. I've got a couple of comments that have come in so far, but we're going to take a little bit of time to answer some questions. And we'd really like to be able to hear from you. We're only just scraping the surface here. There's so much more that we could really talk about. And we'd be curious to know what's truly important to you as we talk about this subject. Let's see. Let me give it just another couple of seconds and see if we can get most of the people to have responded here. Almost there. Okay. Let's take a look and see. Wow, this is great. Almost 43% think that their company is doing something and that they could be doing more.

Well, I think that could be said of most of us, a few people believe that they're doing everything possible. Fantastic. And as we would suspected almost 40%, not quite doing enough, I want to assure you that we're certainly here to help you no matter where you are in your journey whether you're just getting started, whether you're just thinking about it, and whether this is absolutely new to you. One other very quick question for you. Which of the below elements of the proposal will present the biggest challenge to your organization. And again, right now you may not necessarily know, but take a guess. Is it the governance aspect, the risk assessment, and management, the GHG emission disclosure, or the third party independent assurance and attestation? What do you think? What's going to be the hardest thing for you and your company to be able to really tackle here? We'd be really curious.

We presented some of this information internally just recently, and it was interesting to see what our own people thought about this. Here at EisnerAmper just like you, we're really paying attention to our environmental footprint and what we can do to be even better. So it's kind of nice to compare notes. Let me give it just another couple of minutes. And while we're doing this, please think about any questions that you might have of Charles or Lourenco or anybody else on the team. Any questions that we're not able to get to today, or perhaps we don't have the information that you really need at our fingertips, we will absolutely circle back. Staying connected about this topic is important to us. Okay. Just a couple more seconds here and we'll sort see what's most important to you.

All right. Oh, we're almost there. Another couple of people. All right. Let's take a look. Well, governance and the emissions disclosures are just about neck and neck there, a little less on the risk assurance and the third party. So that's interesting. I have to say a lot of the work that I personally do is in the governance area. And I will say working with boards, they really are trying to figure out what is their role in all of this? How do they play? How do they play their part? What can they do to ensure that the organization is compliant and also just doing the right things and operating in alignment with the company's values? So this makes perfect sense.

Charles Waring: Lise, just one comment on that. I think that this also aligns with a lot of the discussions that a lot of these things related to ESG or climate-related disclosures... If a company's been doing something to date, it's typically what we find is that each company, it depends on just whoever's taking up that mantle. And now with the SEC weighing in saying that this needs to be at the board level of senior management and have a defined governance process in place, it's not just a certain group in either operations that might have more insight into it, that this definitely needs to have that overarching piece here. So that aligns with a lot of the dialogues we've been having.

Lise Stewart: Right. Thank you. That makes sense. So let me just push forward here. I'd like to open it up for any questions that you might have, any comments that you've got. I do have one comment that's come through here, team. And that is that the SEC, this has just come out and there's likely to be some challenges to this rule who knows what it's going to look like? Is it maybe weaves its way through the courts at some point? What's the advantage of going ahead and rolling up your sleeves and getting started on this, given that there may still be some changes to this or challenges in the future? Charles, do you want to start and then I'll pass it over to Lourenco?

Charles Waring: Sure. So I think that, as I mentioned before that the thought is that this is both either a requirement or also can be used as a competitive advantage. And whether this is an aspect that you look to establish for your various stakeholders, whether it's your customers, your employees, your community, the investors as a whole having getting out in front of this, as well as the level of effort to go and do the actual reporting is one thing. But what Lourenco, in his earlier comments, was saying that this is not something that is done overnight. And also that if you haven't had a process or program in place to date, just like anything that's new, there might be some things that are a little ugly, and you want to clean up and enhance. And so getting out in front of that, to do that enhancement before it is required to report or before your key customer or stakeholders are asking for this is an important step and will be an advantage for a company that does that.

Lourenco Miranda: Yeah, the companies will be more attractive to investors, attractive to bankers, and then the access to finance. You can argue that you can have advantages in terms of your cost of capital. Your cost of capital can reduce because you're managing risks more effectively. There are examples and there are evidence that's managing risks and opportunities will lead to better performance. So that's very basic objective of a company. So it will be profitable, generate profits for shareholders, be responsible and corporate responsible for all the stakeholders not only now but also in the future. So it becomes a win-win situation. It's an investment that companies should make today for the future. They will be better bankable, more access to finance, reduced cost of capital, and more attractive to investors is shareholder value sensitive.

Lise Stewart: That's a nice wrap-up. That's a perfect way to put a bow on it. So thank you so much, Lourenco. I know, Bella, you've got some closeout comments for us today, but just before we go, I want to say to everybody who joined us in the conversation, thank you so much. It's really important that we get a chance to connect with you and learn a little bit more about what your issues are and to share some of our knowledge and expertise. For more information, please be sure and check out our website. You can find information on our ESG page eisneramper.com/environmentalsocialgovernanceservices. We'd really love to hear from you. So with that, thank you, Lourenco. Thank you, Charles. Let me turn it over to you, Bella, and you can take us home.

 

About Lourenco Miranda

Lourenco Miranda is Managing Director of ESG and Sustainability Solutions. He has experience in the financial industry covering various segments, industries, geographies, including small, middle, and large companies.

About Lisë Stewart

Lisë Stewart is Partner-in-Charge of the Center for Individual and Organizational Performance and the Center for Family Business Excellence Group, as well as a leader of the firm’s Environmental, Social and Governance Services (“ESG”) practice. Lisë has experience in organizational development, strategic planning and training, and human performance management.

About R. Charles Waring

Charles Waring is a Director in the Assurance and Technology Control Services Practice within the Audit Group. He leads the ESG Reporting Practice.

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