Between a couple news items, recently published reports and a handful of LinkedIn discussions, I realized confusion abounds concerning whether international accounting standards/guidance relating to climate matters (as well as ESG in general) apply in the US right now, or are pending for the the immediate future. With yesterday’s news that SEC issued comment letters in accordance with their 11 year old climate disclosure guidance, it seems a very timely matter. I had to dig a bit to get the answer. Here is what I found – in one place and plain language. For clarification, this discussion is focused on US-based publicly-traded companies and does not address U.S. financial reports filed by foreign publicly-held companies that use IFRS in their home country.
International Accounting Standards in the US
Organizations like IOSCO, the International Accounting Standards Board’s (IASB) International Financial Reporting Standards (IFRS) and the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD) are not empowered to enact, codify, require or implement their standards on their own in sovereign jurisdictions, including the US. Such guidance and standards must go through rulemaking processes before they are mandatory and enforceable in individual countries.
The Securities and Exchange Commission has statutory authority over accounting standards used by companies whose shares are publicly traded on U.S. exchanges, although the heavy lifting of standards development is performed by the Financial Accounting Standards Board (FASB). FASB is
… recognized by the U.S. Securities and Exchange Commission as the designated accounting standard setter for public companies. FASB standards are recognized as authoritative by many other organizations, including state Boards of Accountancy and the American Institute of CPAs (AICPA). The FASB develops and issues financial accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information to investors and others who use financial reports.
FASB explains their standards development process here and has not adopted IOSCO, IFRS or TCFD climate accounting/disclosure standards as yet. Indeed, FASB issued an Invitation to Comment – Agenda Consultation seeking investor input on adding ESG disclosures to US accounting standards (Generally-Accepted Accounting Principles, or “GAAP”) in June 2021 (the comment period ends September 22, 2021). That Invitation references FASB’s March 2021 Staff Educational Paper on the intersection of ESG and GAAP which explicitly states that the Paper is “not intended to convey additional requirements beyond those in current GAAP.”
AICPA states that IFRS accounting principles are not adopted in the US. A 2019 announcement from U.S. Securities and Exchange Commission gave no timeline for US adoption and has not been updated. Public statements from some sitting Commissioners indicate they don’t fully support doing so, although earlier this year they directed Staff to undertake new efforts related to climate disclosure conformance with the 2010 Guidance.
Another data point: a September 2021 paper from the International Swaps and Derivatives Association (ISDA) “examines the issues under current US GAAP accounting guidance for ESG features.” ISDA found that ESG accounting as a standalone concept is not explicitly within the scope of current GAAP.
Until and unless applicable administrative processes are complete, international ESG/climate accounting and disclosure standards or guidance are not mandatory in the the US and regulators have not established timelines for adopting them.
CAQ Report on Climate Disclosures
The US-based Center for Audit Quality (part of the AICPA) recently published guidance on auditing climate matters under current GAAP. If you haven’t seen the report, I recommend it. The discussion of Critical Audit Matters (CAMs) is especially interesting – CAMs only apply to financial statement accounts and therefore do not automatically cover climate matters. An excerpt from CAQ’s press release says it well:
The current [climate] disclosure system is market-driven rather than based on regulatory action, so it is important for investors to both consider what public companies voluntarily report as well as to understand what they are required to report in the financial statements under US GAAP.Dennis McGowan, Vice President, Professional Practice at the CAQ
What This Means
Down and dirty – right now, climate and ESG disclosure standards and/or guidance from international accounting organizations are not mandatory for US-based companies subject to SEC financial reporting. Don’t be swayed by claims to the contrary. US companies concerned about regulatory risks for climate disclosure in the near term should look to the SEC’s 2010 Guidance Regarding Disclosure Related To Climate Change, the FASB Staff Educational Paper and the CAQ report.
Although international reporting guidelines are not required from a US regulatory point of view, companies may have other reasons to disclose. There may be pressure from investors, customers or other stakeholders, or companies may operate in countries subject to other requirements that formally adopted such standards/guidance. Of course, companies can simply choose to voluntarily follow a framework or apply them as part of an industry program, certification process (such as ISO) or other non-regulatory initiatives.
It is prudent for companies to monitor the status of international standards/guidance as they develop prior to becoming effective and enforceable in the US. Advance understanding of actions you might need to take if – or when – such disclosure is required will speed implementation.