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In a recent speech, SEC Commissioner Crenshaw, one of the Democrats appointed to the Commission, focused on the role internal controls play in assessing and monitoring ESG risks. Specifically, after noting that the SEC received “[a]n overwhelming number of comment letters stat[ing] that investors view ESG information as important to financial performance and that investors need consistent and reliable disclosures of ESG information to inform their investment decisions,” Commissioner Crenshaw noted that she “encourages[d]”his audience to ‘think’ about ‘ESG risks’ ‘in the context of your internal accounting controls and audit functions.” In other words, Commissioner Crenshaw stressed that companies should start developing procedures to generate the information needed to properly respond to regulatory disclosures that the SEC will promulgate regarding ESG risks, and to implement policy changes to adapt to those risks.

In particular, Commissioner Crenshaw highlighted “a few specific ESG risks where companies’ internal accounting controls play a critical role.” With respect to “climate change risk,” these questions included: (1) “whether assets are likely to depreciate more rapidly or become ‘locked in’ in response to climate change”; (2) “whether the supply chain or transportation networks are more at risk of being affected by extreme weather events”; and (3) “whether existing revenue streams depend on the status quo, such that new regulations relating to deforestation or carbon emissions could potentially reduce revenue.” Of course, these are just a few examples of “the impact of climate change risk on revenues and expenses”.

Overall, Commissioner Crenshaw noted that “[n]o no matter where public companies speak out on these topics – or how they assess climate risk -[she] would like to understand the underlying internal accounting controls that guide decision-making.” (emphasis added). In particular, Commissioner Crenshaw noted the need to provide information on “how companies determine if and how financial statements are affected by climate change risk; how the assumptions used to arrive at these determinations are established, tested and re-evaluated over time; and how existing disclosures are worded. In other words, the SEC’s interest will likely extend beyond the climate change disclosures themselves (e.g., the extent of emissions) to the processes and analysis that led to the final disclosure on climate change. , in order to properly respond to this regulatory information, companies must begin to develop such processes and internal controls.

This speech by Commissioner Crenshaw serves to warn businesses that they must “identify[ing] and evaluate[ing] ESG risks that could impact [them] . . . not only this year, but also in future reporting periods,” because “investors are [not only] assess the potential impact of ESG risks on their investments in companies. . . [but] also assessing companies’ readiness to manage new and emerging risks. Indeed, Commissioner Crenshaw identifies “ESG risks” as an issue that companies need to manage, and that companies’ internal accounting controls need to be in place to properly address this issue. implementing proper controls takes time, companies should start doing so to the extent that they are not already engaged in such efforts.

{ With ESG now at the center of concerns, the reliability of information on companies’ ESG risks, as well as their potential impact and their connectivity with financial statements, is essential. As you know, companies’ internal controls play a crucial role in ensuring that this risk information is consistent and reliable. The term “internal accounting controls” refers to an organization’s plan, methods, and procedures related to the safeguarding of a company’s assets and the reliability of a company’s financial records.[6]

©1994-2022 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC All rights reserved.National Law Review, Volume XI, Number 337