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SEC Proposed Rule on Climate Disclosures May Affect Private Companies

By:
S.J. Steinhardt
Published Date:
Jan 20, 2023

Private companies may have to conduct environmental, social and corporate governance (ESG) reporting as part of the Securities and Exchange Commission (SEC)'s proposed rule on climate-related disclosures, Accounting Today reported.

Under the proposal, which the SEC released in March 2022, publicly traded companies would be required to include certain climate-related disclosures in their registration statements and periodic reports. That includes emissions produced directly by the company (known as Scope 1 emissions), but also the indirect emissions from their purchases (Scope 2) and others produced in their value chains (Scope 3).

That mandate has the potential for requiring private companies responsible for Scope 3 emissions in their business dealings with public companies to disclose them, too. The specter of such disclosures has prompted the threat of lawsuits, Accounting Today reported.

In a survey conducted by the Institute of Management Accountants (IMA), about half of the respondents, three-quarters of whom were from private companies, said that sustainability information is not used by management for any purpose. About one quarter indicated that their organizations were producing some form of sustainable business reports.

Most of the survey respondents, 73 percent, were from the United States, followed by India, Canada, China, the Netherlands, and Germany.

"Small-size companies may think that this is not going to affect them, but we are observing movement that will affect them, even if it's not disclosure," Shari Littan, the IMA’s director of corporate reporting research and policy, told Accounting Today. "If they're supplying to a larger company, those buyers are starting to demand information because it's supply chain information to them.”

The ESG approach to business has fervent supporters and detractors. The International Sustainability Standards Board (ISSB) issued its exposure draft on climate-related disclosures last year, and the concept is being accepted more readily by Europeans than Americans, the New York Times reported.

“We're now seeing incredible acceleration from voluntary reporting for ESG or sustainable business to mandatory, and the standard-setters are quite active," said Littan. "You have the SEC with their proposed rule, on which they got feedback last year. We have a new exposure draft from the ISSB. We have an enormous number of expected regulations from EFRAG [European Financial Reporting Advisory Group] in the E.U. and other jurisdictions around the world, particularly out of Japan. But as the world moves from voluntary reporting to one of mandatory reporting, that carries regulatory weight and oversight, there's a need for precision, to be very careful about what we're putting out there, making sure that we achieve our goals.”

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