Energy and ESG: Leading in an evolving future

In response to the increased demand from internal and external stakeholders, energy companies are determining how to incorporate and document environmental, social and governance (ESG) efforts in their business. Being prepared to implement the SEC’s proposed climate disclosure rules is a key focus for energy companies.

Although the SEC’s proposed rules are not the only driver for increased emphasis on ESG performance and reporting, they have a large impact on energy companies because of their position in the business ecosystem.

Energy companies are, by definition, part of each of their customers’ Scope 2 greenhouse gas emissions inventories, which are included in the SEC’s proposed rules. The SEC proposal would require all companies to report the emissions from purchased electricity or other forms of energy.

As a result, there is an opportunity for energy companies that are offering or building offerings that include lower emissions options (from renewable energy certificates to biofuels) to calculate the reductions associated with these plans so that their customers that are setting climate goals can include this in their calculations. And there is a risk of nondisclosure as alternative energy providers who can and do provide this information may encourage customers to shift. 

The focus surrounding these objectives was described during a panel session on ESG and the energy sector at the recent Grant Thornton LLP 2022 Energy Symposium. During the panel discussion, Grant Thornton Audit Partner Andy Brown and John Friedman, Managing Director, ESG & Sustainability Services for the firm, addressed compliance requirements and opportunities for energy companies related to ESG.

Transparency is an imperative

ESG is more than a “compliance” topic. Many companies are under pressure from their customers, suppliers and even employees to more transparently share the ESG aspects of their business. Many topics discussed under the umbrella of ESG are, in reality, nothing new. Companies have been working to maximize efficiency and reduce the use of natural resources as well as air and water pollution for decades. In the social dimension, workplace safety, professional development, internal promotion objectives, and diversity, equity and inclusion efforts are familiar.

What has changed is the increasing emphasis on establishing long-range targets and providing consistent, comparable and decision-useful data, along with what have largely been qualitative disclosures. Today’s voluntary reporting has led to a myriad of different disclosures — and ratings and rankings — that have created an array of ways of looking at climate impacts, commitments, etc.

The SEC’s proposed “Rules to Enhance and Standardize Climate-Related Disclosures for Investors” are focused on making the disclosures more professional while limiting the data that companies are compelled to report. The SEC has received more than 14,000 comments, 90% of which were in favor of some form of rules. Disagreements were mostly around the timing of the disclosure, assurance requirements and the inclusion of supply chain (Scope 3) emissions in the proposed reporting requirements. 

What to expect from the SEC

The first thing to be aware of is that the proposal would require all registrants to include certain climate-related information in registration statements and periodic reports such as the annual report on Form 10-K. There are a number of companies already providing climate-related information to the public; but to date, this has been almost exclusively outside of the SEC filings — for example, on the company website in a sustainability section or in a separate corporate sustainability report.

The SEC proposed a phased-in approach — starting with large, accelerated filers in the first year, with others following. Assurance requirements were likewise phased in, covering Scope 1 (operational) and Scope 2 (purchased energy and steam), starting with limited and moving to reasonable assurance. Value chain (Scope 3 emissions) was not subject to assurance at any time.

The proposed rule includes a requirement to disclose financial statement metrics quantifying the impact of severe weather events, mitigating climate-related risks and climate-related assumptions that impact the financial statements. Financial statement footnote disclosures would be subject to existing ICFR and financial statement audit requirements. The SEC has received a lot of feedback on these disclosures. Of all the elements of the proposed rule, this is the most likely to change in any final rule.

Issuance of the final rule is likely to be delayed beyond the end of the year due to the SEC reopening the comment period for an additional two weeks due to a technical issue. Grant Thornton expects that the rules will not be announced before the end of 2022.

To prepare for compliance with the rules, Grant Thornton recommends that companies engage in a readiness assessment. This would be a “dry run” of data collection, analysis and preparation for reporting to identify any gaps that would need to be filled, or issues addressed prior to providing data to either the SEC or customers.

It’s important to note that many energy companies are already required to report certain data to various regulatory agencies, including the Environmental Protection Agency and state agencies, so that data collection may already be a “strength” that companies can leverage.

Companies seek clarity

The SEC rules represent a big change, but also do seek to limit the data that companies are asked to report. They largely fall in line with the framework created by the Task Force on Climate-Related Financial Disclosures, which includes a discussion of governance and risk evaluation as well as greenhouse gas (GHG) emissions inventory data.

The GHG inventory data would follow the GHG Protocol, calculating emissions in CO2 equivalents based on energy purchased and used by the company and amounts produced and distributed to customers.

Beyond climate change – other opportunities to differentiate yourself exist

The SEC has indicated that it is considering requiring additional ESG disclosures. Those align with investor interests such as cybersecurity, human capital management and board diversity. These metrics and programs are of keen interest to other stakeholders as well — particularly the security and reliability of energy.

Many energy companies have established impressive programs to safeguard against hackers and have built systems that can “take over” if computerized systems become compromised. This is an area of strength for energy companies, and they should consider voluntarily disclosing information about those efforts even in the absence of regulatory requirements.

Similarly, safety, water conservation and pollution reduction efforts are often “hidden strengths” that energy companies should consider sharing on a voluntary basis to demonstrate their commitment to the environment and employees.

Planning ahead

The Inflation Reduction Act — and other legislation — provide tax incentives and credits for environmental and social initiatives, including everything from charging stations for electric vehicles for your employees to charitable giving to specific organizations. Identifying and leveraging these opportunities can offset some of the costs and put you in good stead with your community (by redirecting rather than increasing your giving).

No matter when the SEC issues rules, or their content, Grant Thornton encourages companies to prepare now for the needs of tomorrow through assurance readiness.

Compliance will only keep you from falling behind and will not make you the investment, supplier or employer of choice. Finding additional areas of strength that matter to stakeholders is a way to continue to be favored. A materiality assessment can help you identify those areas that matter most to those who have the greatest impact on your future success.

For more information on these topics, listen to Grant Thornton’s on-demand webcast, ESG: Evolution, Challenges and Opportunities.

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