Part 2: How ERM Professionals Can Help Prepare for both the Energy Transition and the SEC’s Mandatory Climate Disclosure Rules
In our previous (Part 1) blog, we used a few Clash references to introduce the quandary risk professionals are currently facing regarding taking action to prepare for the possibility of SEC mandated ESG reporting requirements.
This blog picks up where we left off.
Engagement Opportunities for Risk Pros & Management
The SEC’s proposed rulemaking addresses, among other things, certain climate-related risk management standards. For example, § 229.1503 (Item 1503) Risk Management, states that when describing any processes for identifying and assessing climate-related risks, registrants shall disclose, as applicable, how they determine the relative significance of climate-related risks compared to other risks, and the materiality of climate-related risks.
““Registrants shall disclose, as applicable, how they determine the relative significance of climate-related risks compared to other risks, and the materiality of climate-related risks.””
So, how should energy companies prepare for the specter of mandatory ESG reporting requirements given the lack of clear standards and reporting criteria? Simple - leverage your existing voluntary ESG reporting practices and further engage your managers, internal audit, and risk managers to mature these practices.
As explained in a thought-provoking paper - Environmental, Social and Governance (ESG) and the Roles of Management, Internal Audit, and Enterprise Risk Management, the authors suggest a number of important steps to be taken to address ESG-related reporting risks. For example, they recommend 18 distinct actions be taken by management, similar to other corporate risk management programs like reliability, cyber-security, disaster recovery, privacy, and regulatory risk. Below is a partial list:
Assess the need to recruit skills on ESG that may not be available internally.
Evaluate and decide which rating organization’s criteria are going to be used for reporting.
Identify the topics to be included in the ESG reporting process.
Obtain board approval for the topics and rating organization selected.
This paper also lists some key services that internal audit can provide, including:
Assess whether management has chosen the right standards to report on.
Perform audits of the ESG data collection and reporting processes.
Provide an opinion as to whether the processes to report on ESG KPIs are reliable and the numbers reported are fairly stated.
The paper also recommends numerous actions that risk professionals can take to contribute to company ESG reporting success. Of note - these actions do not suggest ERM own ESG risk. Rather, this list recommends that companies deploy their risk professionals, including their respective tools and techniques, to facilitate the management of this emerging risk area.
Here is a partial list of actions that risk professionals can take:
Research ESG issues and become a resource to assist management in choosing the right standards to report on.
Train ERM staff in ESG issues so that they can provide the necessary services to management.
Become familiar with how ESG issues are integrated with strategic planning and business planning.
Design risk criteria for ESG objectives in collaboration with management and ESG champions.
Consider adding to the ERM policy and framework to ensure that ESG issues will be included.
Facilitate risk workshops to help identify risks and prioritize actions and resources for meeting ESG KPIs.
Facilitate the reporting of the risks to achieving the ESG targets.
As the chorus in the Clash’s previously referenced anthem reminds us, we may be “down on our knees” in terms of uncertainty around the future of the energy transition and ESG reporting requirements. However, our aim with these panel discussions is not to predict the future and recommend a full-blown ESG risk management program. Rather, it is to help our fellow CCRO members, and their companies ask good questions, leverage existing experience, and help prepare for the transition toward a lower carbon energy resource future. By doing so, we will help ensure compliance with the evolving ESG reporting requirements in a transparent, proactive, and responsible manner.