We agreed that the approach for assessing materiality in regards to the global baseline should be focused on enterprise value, that is, an item would be material if it impacted the entity’s enterprise value. Enterprise value is defined by the standards as an entity’s total value, being the sum of the value of the entity’s equity (market capitalisation) and the value of the entity’s net debt. However, we also acknowledged that entities may wish to provide, or regulators may require, additional consideration beyond investor materiality.

Accordingly, we have also supported the ISSB’s collaboration with GRI (Global Reporting Initiative), acknowledging GRI’s broader perspective on materiality. Although not mandated, this memorandum of understanding will mean that the Boards of both bodies will work together when preparing standards. Within our recommendations to the ISSB, we proposed any information in excess of the global baseline (including following GRI standards) should be distinguished from information based on investor materiality to assist with the comparability of global baseline reporting.

As described above, we support the idea of using the impact on enterprise value as the materiality global baseline. However, we recommended that the final standard be explicit that enterprise value should be assessed from a market participant’s perspective (that is, using fair value concepts described in “IFRS 13 - Fair Value Measurement”).

We also recommended the use of a ‘management approach’ to identify and assess an entity’s significant sustainability risks and opportunities. A management approach would mean that entities identify risks by focusing on the information that management uses to make strategic decisions. Once such significant risks and opportunities are identified, we support using a fair value approach to determine what is “material” to report in respect of those risks.

We feel that these recommendations will help to mitigate boilerplate disclosures of potential risks and opportunities that are not material to enterprise value. Such an approach would also provide investors with relevant insights about what information management focuses on.

We acknowledged in our response letter that the Sustainability Accounting Standards Board (SASB) guidance provides a helpful starting point for entities when it comes to evaluating key metrics. However, we think the ISSB should continue to evaluate and make enhancements to the SASB industry guidance, as the current industry classification and industry metrics are very granular, and there are unnecessary inconsistencies across the industries. We believe that disclosure of key metrics should be focused on quality of metrics, rather than quantity, and that the cross-industry metrics that are required for all entities should be prioritised as being most critical for public disclosure.

As such, we recommended that the SASB industry guidance should not be mandated until it is further refined and subject to further due process. This will make sure that such guidance is robust and meets the standards’ objectives.

We believe that determining the appropriate reporting entity for sustainability reporting is important for relevance and comparability, particularly since some industries make significant use of investments such as associates and joint arrangements.

Currently, the exposure drafts suggest that individual thematic standards will mandate how entities should disclose or measure risks and opportunities related to associates, joint ventures and other such investments. This leaves the question of how to deal with these types of investments unanswered until such thematic standards are released. To improve clarity for preparers before the release of the other thematic standards, we recommend that the ISSB establishes a general principle in IFRS S1 that information should be provided for investments like joint ventures and associates where it is material to investors, but that this information should be clearly distinguished from information given about the consolidated group (that is, distinguished from controlled investments).

In order to encourage that the disclosures provided on sustainability-related risks and opportunities are cohesive and not repetitive, we believe there is a need for a clear linkage between the general and thematic standards. It should be clearer that the draft general standard is intended to be the framework for all the IFRS Sustainability Disclosure Standards, with the thematic standards providing specific disclosure requirements covering specific themes - that is, providing specific requirements and guidance relating to the key environmental, social and governance disclosures.

For example, linkage is likely to be necessary in relation to governance where the relevant governing body typically oversees all sustainability-related risks and opportunities, not only specific topics. In addition, with respect to resilience, we suggest that one analysis that encompasses all significant sustainability-related risks and opportunities should be performed.

We recommended that the standards should clearly articulate a principle detailing when preparers should look to guidance in IFRS (or equivalent GAAP) for issues or questions that are not directly addressed in the IFRS Sustainability Disclosure Standards (for example, non-controlling interests, changes in interest in subsidiaries or associates etc.).

We also encouraged the ISSB to work with the IASB on their IFRS reporting climate project outlined in the IASB’s Third Agenda Consultation to ensure consistency between requirements.

Currently, IFRS S1 contains a provision which permits an entity to omit disclosures which the standard requires, if local laws or regulations prohibit an entity from disclosing that information. Entities which omit disclosures in such situations would still be allowed to say that they were in full compliance with IFRS Sustainability Disclosure Standards.

We disagreed with this approach because it would essentially allow “reservations” by local regulators, which would not be consistent with the intention to establish IFRS S1 and S2 as global baseline standards. Similar to the requirement for IFRS, we recommended that entities should be required to make an explicit and unreserved statement of compliance with the standards. If material disclosures have been omitted, regardless of the reason, then only a qualified statement of compliance should be permitted.

Certain risks may be monitored regularly by management as part of strategic planning, but such risks may not have a material impact on enterprise value at the reporting date. We refer to these as “emerging” risks. As of yet, there is no consensus about how different parties might factor emerging risks into valuations of businesses.

Disclosure of emerging risks, and how management monitors them, would provide useful information to investors about an entity’s long term prospects and resiliency. We therefore recommend that for emerging risks of this nature, there should be a presumption that such risks are material to enterprise value, unless this presumption can be overcome by clear evidence.

We acknowledged that there are inherent challenges in verifying and assuring non-financial information which generally cannot be addressed through a reporting standard alone.

In order to meet the expectations of investors and other stakeholders, the ultimate ambition must be reasonable assurance over the entirety of an entity’s disclosures on significant sustainability related risks and opportunities, taken as a whole. The ability to provide such an opinion will require a collaborative effort between accounting and assurance standardsetters, preparers and practitioners, in order to establish the framework, standards, guidance and reporting needed to deliver on this ambition.

In order to further support this effort, we recommended that the standards require entities to disclose information about underlying judgements and assumptions made when determining materiality and provide more clarity on specific terms used within the standards.

Our response letter supports the need for mandated climate disclosures; however, we recommend changes to improve operability for preparers while also meeting the following objectives:

We highlight effective implementation as a critical factor in the ultimate success of the new disclosure regime. To that end, we advocate for the establishment of a transparent, inclusive climate disclosure implementation group, under the leadership of the SEC staff, to support quality in disclosures through the timely identification, discussion and resolution of application matters both prior to and after the effective date of the proposed rules. We believe this group would improve disclosure comparability and usefulness, while reducing the cost of the compliance process.

The proposed rules would scope in foreign private issuers (FPIs), with no provision for application of an alternative reporting regime. There are however a number of other active climate proposals — including the development of new European reporting requirements under the Corporate Sustainability Reporting Directive (CSRD), proposed standards from the International Sustainability Standards Board (ISSB) and mandates to apply the Task Force on Climate-related Financial Disclosures (TCFD) in a number of countries — and various constituencies responded to the SEC proposal advocating an alternative reporting provision for FPIs. Further, many letters expressed support for the ISSB’s potential role in developing a global framework and suggested looking to those standards as a reporting alternative. We agree that an alternative reporting regime would enhance the operability of the proposed rules for FPIs, and potentially US multinationals.

We support alignment among global frameworks as we believe alignment will decrease costs of compliance, improve information quality and comparability, and enhance disclosure effectiveness.

We support the proposed inclusion of the climatechange disclosures in annual Exchange Act filings as well as the proposed periodic update requirements. We believe however that the time and cost of preparing this information may be viewed as onerous and a barrier to entry to the capital markets by a company whose resources are already stretched by the compliance obligations of an initial public offering or acquisition.

We recommend excluding registration statements from the proposed climate disclosure requirements (specifically, Forms S-1, F-1, S-4, F-4, S-11), except as incorporated by reference from another filing (for example, a Form 10-K incorporated in a Form S-3). The initial exemption would allow more time to focus on the preparation of the financial information included in the filing. Further, we recommend the SEC provide transition relief for newly public companies (including de-SPAC transactions) as well as newly acquired entities. A transition period would reduce the burden on these companies by allowing them to defer implementation or integration until after a successful offering, or acquisition, respectively.

Investors expect quality data and are entitled to the same confidence in climate information as they currently expect from financial disclosures. Our comment letter encourages the SEC to make changes we believe would enhance data quality.

We support the phased approach to adoption and agree with the suggested phasing. Nonetheless, although large accelerated filers may be better equipped to adopt these new requirements, they may also have additional challenges given the scope of their operations. We recommend a delay in the adoption date of the standard by one year to provide time for companies to develop appropriate processes and procedures. Although many companies provide voluntary sustainability reporting in some form, climate disclosure processes and controls are often nascent and may not be applied with the same rigour as those related to the production of financial information. Companies may need to develop or enhance their systems, processes and controls to produce information of the scope required by the proposed disclosures at a level of quality commensurate with that expected in an SEC filing.

Additionally, we recommend that reporting of historical periods be phased-in, with only the current fiscal year reported in the initial year of adoption, with comparative information phased in over subsequent years.

Confidence in the financial and non-financial information disclosed by registrants is a critical component of efficient capital markets. Consistent with this perspective, in our global investor survey completed in fall 2021, 79% of respondents reported having more trust in ESG information if it has been assured. ² Further, almost three-quarters (73%) of investors surveyed think ESG metrics should be assured at the same level as the financial statement audit. ³

For large accelerated and accelerated filers, the SEC proposes that scope 1 and scope 2 information would initially be provided with no assurance, followed by limited assurance, with reasonable assurance in the fourth year and thereafter. Some argue that the additional time between initial reporting and reasonable assurance is needed for registrants to implement processes and procedures necessary to prepare data of the quality commensurate with an SEC filing. Others suggest that the delay in reasonable assurance would provide time for conventions to develop around the approach to these audits.

We have concerns that investors will not appreciate the difference in the confidence provided by the different levels of assurance, especially when presented in the same filing as the audited financial statements. Investors may place disproportionate reliance on disclosures subject only to the review procedures of a limited assurance engagement, creating an expectations gap.

Hence, as long as the adoption date is extended (as discussed previously), we believe reasonable assurance should be required over scope 1 and scope 2 emissions information beginning in the first year of disclosure for impacted filers.

Some of what we heard from preparers during the comment letter process included questions about how to determine the scope of the climate risks, concerns about what is in scope, concerns that transition risks are too broad and difficult to delineate from business as usual, and other objections in the same vein. We also had concerns that a broad requirement to disclose all climate-related risks that are “reasonably likely to have a material impact on the registrant” may trigger a long list of boilerplate disclosures — particularly given the uncertainty surrounding climate change over the long term.

To address many of these concerns, we recommend an approach that leverages the principle of allowing investors to look at a company “through the eyes of management,” tailoring disclosure of risks through the application of a management lens. Focusing disclosures on the climate information that the registrant’s management uses to make strategic decisions would improve its usefulness, while simultaneously reducing the burden on registrants.

The SEC proposal would require financial and expenditure impact disclosures of severe weather events and other natural conditions and transition activities in the financial statement footnotes if the absolute value impact on a financial statement line item is greater than a 1% bright-line threshold.

Opposition to the 1% “bright-line” threshold is one of the most — if not the most — universal criticisms of the SEC proposal. We agree that the 1% threshold (or any bright-line threshold) is inoperable and inconsistent with the concepts of materiality applied to the financial statements. In our view, the proposed 1% bright-line threshold for financial statement line item disclosure may elicit a volume of information that is not meaningful to investors.

To address these issues, we believe the SEC should consider an alternative approach, requiring disclosure of only those climate events or risks that materially impact the financial statements. Alignment with existing materiality concepts would provide more cohesive disclosures and greater focus on information that would be meaningful to investors.

The proposal would require a registrant (except smaller reporting companies) to disclose total scope 3 emissions — across all categories — if material or if the registrant has a target or goal that includes scope 3 emissions. We recognize that investors may benefit from some information about GHG disclosures associated with a company’s value chain, especially in circumstances when the value chain includes emissions intensive activities. We agree however with concerns that these disclosures may be onerous to prepare and yield information that is not meaningful. Further, there is currently no framework for determining the materiality of emissions disclosures, and it is unclear how investors would view these disclosures through a traditional materiality lens.

We recommend that the Commission require all registrants - including smaller reporting companies - to disclose scope 3 emissions if the registrant has announced a target or goal; however, we believe those disclosures should be limited to only those scope 3 categories included within the stated target or goal. When the registrant has not set a target or goal, the Commission should refine the required disclosure to narrow the number of categories required to be reported.

For more information about PwC’s response and feedback from other respondents, listen to our ESG podcasts, PwC: Our comments on the SEC’s climate disclosure proposal and SEC climate disclosure proposal: What did respondents say?.

For more information on the proposed rules, refer to PwC’s In the loop, The SEC wants me to disclose what?.

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