CPAFOCUS Self-study CPE: 1 article, 5 questions, 1 hour of credit

October 28, 2021

By Josef Rashty, CPA, Ph.D. (candidate)

This self-study CPE's exam questions and submission instructions are located at the end of this article. 

Humans have had an impressive mastery over the natural environment, but they still rely heavily upon earth’s resources to survive. The two primary drivers of climate change since the Industrial Revolution have been fossil fuel use and land alteration, which have been intensified by a surge in population growth in recent years. The increase in the amount of energy and greenhouse gases in the atmosphere have resulted in global warming, rising global sea level, ocean acidification, melting glaciers, lessened crop yields and an increase in the frequency and severity of extreme weather events: including heat waves, droughts, floods, cyclones and wildfires.

Some law makers and environmentalists have pushed companies to pledge to achieve net-zero carbon emissions, and companies have been trying to convince investors and consumers that they can reduce their environmental footprints. However, many high-emitting companies (e.g., oil and gas companies, transportation, steelmaking industries and cement manufacturers) face an especially tough challenge technologically and financially to achieve this objective. The challenge is especially daunting for sectors where emission cuts entail radical, expensive—and often unproven—changes to their technical processes.  

Time has come for many investors to think about greenhouse-gas emissions separately from other environmental, social and governmental (ESG) issues. SEC has periodically evaluated its promulgations for climate-change disclosures. Pursuant to this objective, in March 2021, SEC asked for comments from public to initiate a new guidance for climate-change disclosures. This paper explicates the background that led to the initiation of SEC’s public statement on climate-change disclosures and what the registrants should expect from SEC’s final guidance on climate-change.

EPA and legislative actions

Climate-change has potential material effects on companies—since it may not only directly impact their business processes, but also may require them to comply with a series of related regulations and legislative actions. For example, the Environmental Protection Agency (EPA) is one of the agencies that has taken steps to regulate greenhouse gas emissions by issuing certain legislative actions. In January 2010, the EPA began, for the first time, to require large emitters of greenhouse gases to collect and report their greenhouse gas emissions to the agency. Additionally, there have been several initiatives in the Congress to pass legislations for climate-change disclosures—these initiatives are all currently pending.

International accords

There have been two significant international accords: the Kyoto Protocol (KP) and the European Union Emissions Trading Systems (EU ETS). The EU ETS goal is to limit the emission of carbon dioxide and other greenhouse gases based on the provisions of the KP. Although the United States (U.S.) has never ratified the KP, many U.S. registrants with international operations are subject to its standards.

Additionally, the Global Reporting Initiative (GRI) has developed a widely used sustainability reporting framework. The GRI framework sets out principles and indicators that companies use to measure and report their economic, environmental and social performance, including issues involving climate-change. Furthermore, the IFRS Foundation (the international financial accounting standard board) aims to establish a “Sustainability Standards Board” this fall to develop international sustainability standards for its members. (U.S. follows the U.S. GAAP rather than the IFRS’ standards, but nevertheless IFRS guidance carries some weight for the U.S. companies.)

Sustainability Accounting Standards Board (SASB)

SASB aims to facilitate more effective communication between companies and investors on the environmental, social and governance (ESG) topics most relevant to long-term enterprise value creation. In September 2020, SASB issued its, Greenhouse Gas Emissions, standard. The objective of this standard (albeit being non-authoritative) is to provide an overview of SASB’s approach to greenhouse emissions.

The Task Force on Climate-Related Financial Disclosures (TCFD) recommends that companies disclose material and relevant climate-control risks and opportunities. The standard provides a practical overview on risks and opportunities related to greenhouse gas (GHG) emissions:

  • Direct GHG emissions are those emitted by sources owned or under the control of the companies. They require disclosure as Scope 1 emissions.
  • Indirect GHG emissions are those emitted by sources not owned or under control of the companies. Indirect GHG emissions consist of the following:
  • Scope 2 emissions, such as energy directly purchased by a company.
  • Scope 3 emissions, such as emissions due to the use of products and services provided by the company or transportation services.

Biden Administration

President Biden nominated John Kerry, the top diplomat under the second term of Obama administration, early on to serve as the first United States Special Presidential Envoy for Climate. He also elected Gary Gensler, a former investment banker, as the new SEC Chairman. President Biden has taken a series of steps to reestablish the United States as a climate leader, from hosting the “Summit on Climate Change”, to rejoining the “Paris Agreement”, and taking steps to curb fossil fuel production and environment degradation.

 In May 2021, he issued the Executive Order (EO) 14030 to emphasize the risks that climate change poses to financial markets and stakeholders and called upon the federal government to factor these risks into their investments and fiscal management decisions. As part of this EO on climate-related financial risk, President Biden instructed the Department of Labor (DOL) to reassess and possibly repeal its final financial factors in selecting plan investments rule. Biden’s EO also asks the Labor Secretary to identify the actions that the DOL should take under the Employee Retirement Income Security Act (ERISA) and the Federal Employees’ Retirement System Act to protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk.

Recent developments

Exxon Mobil Corp. and Royal Dutch Shell PLC suffered significant defeats recently as environmental groups and activist investors stepped up pressure on the oil industry to address concerns about climate change. In a first-of-its-kind ruling, a Dutch court found that Shell is partially responsible for global climate-change, and thereby it ordered the company to sharply reduce its carbon emissions. Shell said that it would appeal the court ruling, but it would accelerate its efforts to cut down its carbon emissions (The WSJ June 10, 2021).

Shortly thereafter, in the United States, an activist investor won two seats on Exxon’s board. It is likely that this activist investor may pick up an additional third seat on the board of Exxon Mobil Corp. (The WSJ June 3, 2021).  This will give the activist additional leverage to press the oil giant to address investor discontent about company’s fossil focused strategy amid concerns about climate change. (This is a historic defeat for the oil giant that will likely require the company to alter its fossil-fuel focused strategy.)

These are both watershed events that demonstrate how dramatically the landscape is shifting for oil-and-gas companies as they face increasing pressure from environmentalists, investors, lenders, politicians and regulators to transition to cleaner forms of energy.

SEC and environmental disclosures

In February 2010, SEC issued Release No. 33-9106; 34-61469 (FR-82), Commission Guidance Regarding Disclosure Related to Climate Change. The following are the highlights of public business entities (PBEs) disclosure requirements under this guidance:

Description of Business

Item 101 of Regulation S-K requires a registrant to describe its business and that of its subsidiaries. Item 101 (c)(1)(xii) expressly requires disclosures regarding certain costs of complying with federal, state, and local environmental laws.

Legal proceedings

Item 103 of Regulation S-K requires a registrant to briefly describe any material pending legal proceedings to which it or any of its subsidiaries is a party. Instruction 5 to Item 103 provides some specific requirements for disclosure of certain environmental litigation.

Risk factors

Item 503(c) of Regulation S-K requires that registrants provide a discussion of the most significant factors that make an investment in the company speculative or risky. (This includes the risks involved in climate-change.)

Management Discussion and Analysis (MD&A)

Item 303 of Regulation S-K explicates the MD&A disclosure requirements. Among other things, registrants should address the effect of the amount and timing of uncertain events, such as uncertainty regarding climate-change.

SEC and climate risk

In April 2021, SEC unveiled a new Climate and ESG Task Force. The Task Force will develop initiatives to proactively identify ESG violations. SEC has been under pressure from Democratic lawmakers, environmentalists, and advocates to toughen its financial rules to boost security of climate disclosure compliance. U.S. Chamber of Commerce urged SEC to proceed cautiously on climate risk disclosures arguing that they may discourage companies from going public as the economy started to recover from the effects of pandemic.

On March 15, 2021, SEC initiated a request for public input on climate-change disclosures. In this inquiry, SEC posed 16 questions for considerations; such as, how can the Commission best regulate and monitor climate change disclosures? What type of disclosures can be quantified or measured? What are the advantages and disadvantages of permitting investors and registrants to participate in the development of disclosure standards? SEC requested submission of comments within 90 days of the date of this statement.

Many respondents have acknowledged that humans face a global climate emergency, as it is evidenced by occurrence of extreme weather events—from heatwaves to droughts, and wildfires to floods and storms. Investors have increasingly focused on climate-related issues, and that has far outpaced the development of disclosure standards on this matter. This group of respondents advocated the need for some disclosure standards. However, many expressed concerns that these disclosures would be applicable only to public and not private companies. (FASB has so far eschewed from addressing the issue.)           

Some respondents thought that such standards are not necessary since they do not have a direct financial impact and excessive disclosures is a burden to many companies. However, SEC has precedence for promulgations similar to this; for example, in August 2012, the SEC after several delays and postponements adopted the conflict minerals rule (Section 1502 of the Dodd-Frank Act) by a two-one vote. This SEC rule applies to all issuers that file under Section 13(a) or Section 15(d) of the Securities and Exchange Act of 1934.

Nevertheless, a project like this is unlike anything the SEC has ever undertaken, and it requires a significant amount of outreach and expertise. Furthermore, as the article discussed earlier, this guidance may have some significant financial impacts on some companies and industries.


ESG investing has become increasingly popular but remains hamstrung by its breath of scope. Investors often do not agree on the multiple metrics that they can use, and sometimes the three prongs of ESG point to conflicting priorities. Therefore, it makes sense to split the greenhouse gas emissions from the rest of the wider pack. The author believes that SEC has taken a sanguine approach to focus only on climate-change disclosures for the time being.

A court decision ordering Royal Dutch Shell PLC to cut its carbon emissions has emboldened litigants across the globe to pursue similar court cases. President Biden decision to reestablish the United States as a climate leader, has certainly put the regulatory authorities, such as SEC, in dissonance. It appears to be that there is a strong sentiment that SEC should mandate climate-change disclosures to reflect the actions the companies have taken to fully align themselves with the goals of the Paris agreement.

The author believes that, despite some oppositions expressed by constituents, SEC will proceed with climate disclosures standards. However, considering the contentious issues involved, it may take several months before SEC issues a proposal, and it may take even a year or longer before SEC issues its climate control standards. Chances are that within the next few years, at least during the Biden administration, we will have a plethora of promulgations dealing with environmental issues in one form or the other.

Please complete and mail a copy of this exam along with your payment information to: Oklahoma Society of CPAs / CPAFOCUS Self-Study / 1900 NW Expressway, Ste. 910 / Oklahoma City, OK 73118-1898 by October 31.