Guest Post: SEC Steps up Enforcement on ESG Reporting with Climate Disclosure Rules Looming
By Joe Donnelly, Partner, CPA – Baker Tilly and Patricia Wellmeyer, Director, CPA, CGMA, Ph.D. – Baker Tilly
With several recent high-profile enforcement actions and the creation of a new Climate and ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More Task Force, the Securities and Exchange Commission (SEC) has made it clear that it intends to proactively pursue companies for ESG-related reporting misconduct.
These actions send the message that the SEC’s focus on company ESG-related disclosures extend beyond those to be required in a soon anticipated final SEC climate disclosure rules. Given the increasingly wider SEC regulatory umbrella over ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More reporting, companies need to be taking steps to review their policies and controls around ESG-related disclosures to ensure they don’t fall prey to misleading statements, and consequently, public SEC scrutiny, regardless of the proposed rule.
What should companies know about the SEC Climate and ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More Task Force and Recent Enforcement Cases?
The SEC launched its Climate and ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More Task Force within the Division of Enforcement in 2021 to identify potential violations under existing disclosure rules of material gaps or misstatements in issuers’ disclosure of climate risks and ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More strategies; the latter being of special focus in the case of investment advisers and funds.
In 2022, the Task Force was involved in pursuing several high-profile enforcement actions, all charging companies with fraudulently misleading investors on ESG-related matters. Violations noted in these enforcement actions were primarily in three areas: (1) Exaggerated disclosures around company commitments to ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More goals, (2) failure to disclose material information relevant for assessing the reasonableness of and/or progress towards meeting publicly disclosed ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More targets, and (3) failure to establish effective controls around ESG-related policies and reporting.
The SEC contends these actions violate the antifraud, reporting, and internal controls provisions of the Securities and Exchange Acts and has remarked that it will continue to pursue companies for misleading ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More disclosures under these mandates[1].
What should companies be doing to ensure they don’t trigger an ESG-related SEC enforcement review?
Given the SEC’s increasing scrutiny on ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More disclosures and impending new climate disclosure rule, it is important that companies and investment advisors/funds prioritize the readiness and effectiveness of controls designed to ensure consistency in application of ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More policies/procedures firm-wide and the faithful representation of ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More claims and disclosures. In doing so, company management and boards of directors should consider the following:
Has the company assessed its ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More readiness? A recent study performed by the International Federation of Accountants and AICPA[2] show that over 95 percent of large companies now report on ESG-related matters in corporate reports, and 86 percent of these companies report using multiple frameworks and standards in tracking and reporting ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More data. This type of fragmentation can create significant risks to data quality and consistency, and importantly for SEC filing companies, impede preparedness for new climate disclosure requirements. For more information on preparing for the proposed SEC climate disclosure rule see https://www.bakertilly.com/insights/prepare-for-proposed-climate-disclosure.
Is the company’s internal audit function actively involved in assessing ESG-related risks and reviewing ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More governanceGovernance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights. More procedures and the accuracy, relevancy and consistency of ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More disclosures? As ESG-related considerations become more prevalent and significant in corporate decision-making, internal audit functions should incorporate ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More risk management and reporting into their audit plans. Internal audit can play an important part in the development of ESG-related controls and in providing assurance over the reliability of ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More disclosures.
In establishing ESG-related controls, has adequate attention been given to developing effective detective controls over ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More reporting? While robust preventative process controls are essential to ensuring proper data tracking and integrity, the importance of robust detective controls in ensuring that a company’s ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More claims and metrics are supportable and consistent across all public disclosures/reports cannot be overstated. Companies should make sure controls exist to monitor/review the consistency and reliability of ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More disclosures across the organization, especially in routine responses to requests for proposals and information, due diligence questionnaires, and any investor presentation materials. Given recent enforcement cases and SEC proposed rule amendments[3] seeking to enhance and standardize disclosures ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More factors considered by funds and advisers, investment advisors should be especially vigilant in ensuring effective controls exist that promote consistency between how ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More strategies are implemented and how they are marketed and described. Could the company benefit from third party assurance over ESG-related metrics and other disclosures? Assurance over ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More information from a third party can enhance confidence in the integrity of information provided in ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More disclosures as well provide perspective on the quality of a company’s ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More reporting and associated processes.
As the SEC continues to increase its focus on ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More reporting, it is likely that other regulatory bodies will follow suit. Impending regulation, however, is not the only reason companies need to worry about the consistency and supportability of their ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More disclosures. Investors, advocacy groups, and other stakeholders are all actively filing public complaints, lawsuits, and proxy battles alleging misleading reporting by companies on ESG-related matters. Pulled together, these forces can leave unprepared companies with a perfect storm of reputational and regulatory risks with which to contend.
Establishing an effective, cohesive, and sustainable organization wide ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More strategy and control framework will be key to successfully navigating through ESGEnvironmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. More reporting challenges.
About the authors:
Joe Donnelly, CPA is a Partner at Baker Tilly. Patricia Wellmeyer, CPA, CGMA, Ph.D. CPA is a Director at Baker Tilly and an Assistant Professor in Accounting – University of California-Irvine – Merage School of Business.
[1] (2023 Examination Priorities Report (sec.gov) and Commissioner Uyeda’s January 27, 2023 speech on ESG-related disclosures here (https://www.sec.gov/news/speech/uyeda-remarks-california-40-acts-group)
https://www.aicpa.org/professional-insights/download/global-benchmarking-study-state-of-play-in-sustainability-assurance
[2] https://www.aicpa.org/professional-insights/download/global-benchmarking-study-state-of-play-in-
[3] Proposed rules – https://www.sec.gov/rules/proposed/2022/ia-6034.pdf
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