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SEC Commissioner highlights risk of ‘stranded assets,’ takes aim at internal climate accounting

Commissioner at powerful US regulator says it is 'particularly important' for public firms to assess whether internal accounting controls are 'sufficient' when it comes to climate risk.

SEC commissioner Caroline Crenshaw suggested that companies should look at the risk they face from “stranded” assets, and hinted that internal accounting practices will find themselves under scrutiny as the US turns its attention to climate risk.

Crenshaw, one of five commissioners at the powerful US securities regulator, was speaking on internal accounting and controls in her personal capacity at the PepsiCo-PwC CPE Conference on November 16.

She highlighted climate change and cybersecurity as specific ESG risks where internal corporate accounting controls play a “critical role.” For both, she said it is “particularly important” that companies assess whether existing internal accounting controls are “sufficient to provide reasonable assurances that each business and its assets are, in fact, adequately controlled.”

Crenshaw’s intervention comes just a week after Gurbir Grewal, the SEC’s Enforcement Division director, stated that companies must ensure that they do not mislead the markets by omitting material ESG information in SEC filings or “elsewhere.”

Crenshaw said she thought companies would be considering “whether assets are at risk of depreciating more quickly or becoming ‘stranded’ in response to climate change; whether supply chain or transportation networks are at greater risk of being impacted by extreme weather events; or whether existing revenue streams depend on the status quo, such that new regulations pertaining to deforestation or carbon emission could potentially reduce income.”

She also told attendees that she would like to understand the “underlying internal accounting controls that guide decision making” at public firms irrespective of where they think they “come out on these topics – or how they assess climate risk.”

For companies where climate change clearly “presents risks to a company, or at least requires disclosure,” Crenshaw said that she was “interested in understanding how that company evaluates climate change risk.”

She raised the question of whether companies rely on third-party service providers to undertake such evaluations and if so, “do they evaluate the controls that the service providers have in place over information and disclose to investors the identity of the service provider, in the same way you disclose your auditors and underwriters?”

The SEC is currently drafting dedicated sustainability-related disclosure requirements for companies, which are expected to be published before the end of the year.

During the public consultation on this, which ended in June, some of the big tech firms, including Alphabet and Microsoft, pushed back against including ESG disclosures in companies’ financial filings, citing concerns about litigation if information submitted in 10k reports was found to be incorrect.

In the conclusion of her speech, Crenshaw stated that ESG risks “serve as a good reminder of the need to be vigilant about regularly reexamining and reconsidering the risks to public companies and their financial statements.”

This story first appeared in affiliate publication Responsible Investor.