Accounting and financial implications of ESG initiatives

Are ESG matters in the news these days? Yes, indeed! And companies know that ESG matters not only have become a fixture in mainstream and social media but also have become top-of-mind for investors, credit rating agencies, lenders, regulators, policy makers, and other interested parties.

In addition to developing environmental goals, companies are increasing their focus on the accounting and reporting considerations related to both the goals themselves and any transactions they will pursue to achieve those goals. This Heads Up takes a strategic look at some of the most common accounting and reporting considerations associated with climate-related matters in the current business environment along with relevant SEC developments.

SEC activities related to environmental matters

While the SEC is widely expected to provide updated reporting requirements regarding climate-related topics in the next several months, it has also publicly announced that it will increase its focus on climate-related disclosures when reviewing public company filings. In a manner consistent with this directive, the SEC has recently issued comments to several public companies in a variety of industries.

On September 22, 2021, the SEC publicly released a sample letter that highlights the types of comments it may issue to public companies regarding climate-related disclosures.
 

A recurring theme of the SEC comments is to ask what considerations companies gave to their environmental goals and related activities (which are typically communicated outside of the financial statements) for SEC reporting purposes (e.g., the business, MD&A, risk factors, and results of operations sections in SEC filings).
 

For more information about recent SEC communications regarding climate-related matters, see Deloitte’s September 27, 2021, Heads Up.

Plans to reduce carbon footprint

From a big-picture perspective, in most instances, companies will not be able to reduce their carbon footprint without taking action. Environmental objectives and financial reporting should be thought of together, rather than each topic considered in its own separate silo. By viewing them in tandem, companies will be better able to assess the potential implications of their actions on liabilities, assets, and disclosures related to environmental matters.

For instance, does the mere existence of an announcement or plan to reduce carbon emissions or achieve a certain target (e.g., carbon neutral by 2030) require a company to record a liability in its financial statements or have other impacts on the company’s financial statements or disclosures? No, not necessarily.

A company needs to carefully assess whether any of its activities— including announcements made, information provided in a sustainability report, and plans to reduce its carbon footprint—create a liability to be recorded currently or have other impacts on its financial statements and disclosures. To do so, the company must understand the specific public statements made and determine the details of any plans and actions intended to support those statements.

Below are some of the issues that companies should consider. For a more detailed discussion, see Deloitte’s September 30, 2021, Financial Reporting Alert.

Trending transactions

As companies take actions to reduce their carbon footprint and encourage others to do the same, new types of transactions are occurring frequently and they continue to evolve. Sustainability-linked debt and energy service agreements (ESAs) are but two such transactions that reflect a trend of incorporating environmental objectives into a company’s ongoing business strategy and operations. And while environmental objectives are typically and rightfully the impetus of such transactions, the transactions may also require specific accounting considerations.