HomeBlogInvestmentThe wrinkles with the SEC’s third-party assurance for emissions

The wrinkles with the SEC’s third-party assurance for emissions

Many companies will have to start reporting their greenhouse gas emissions when a pending SEC rule goes into effect — and most will need an independent third-party sign off on those numbers.

The latter requirement is what the Securities and Exchange Commission in its recent climate disclosure rule proposal called “attestation.” It’s a more formal version of validation, something that at least half of the biggest businesses in the country currently don’t do at all for their climate data.

For investors, this will eventually mean much more data will be available to help them assess climate risks in their portfolios. That data will also be more reliable than what many corporations report today, as the methods they use to measure carbon emissions can differ.

Under the proposed rule, big companies will have to start reporting Scope 1 and 2 emissions data by 2024, with “limited assurance” from a third-party verifier beginning in 2025 and a higher standard of “reasonable assurance” by 2027. Smaller companies have a slightly extended timeline for compliance.

Analysts and climate-data specialists agree that the new requirements will lead to more reliable information about companies’ greenhouse gas emissions. But there is a lot that will need to happen to get to that point.

“It’s obviously challenging. There’s lack of standardization in the data that’s out there,” said Dan Carreno, director of business development at Ethos ESG, which was recently acquired by ACA Group.

“Somewhere between only 10% and 15% of companies in our database are providing greenhouse gas emission data that has attestation. It’s not a large number,” he said. “We’re going to prefer to use that data when it exists … Then we can assign a larger weighting to that data.”

Just over 16% of U.S. companies that report ESG data used third-party assurance services to validate it as of 2020, up from about 11% in 2019, according to data cited by the Journal of Accountancy. That compares to much broader coverage globally, with 58% of all companies having some verification of their reported ESG data in 2020, up from 51% a year prior.

Having verified data across the board could help improve the public’s perception of ESG data, as the current lack of rules around reporting leads many to the conclusion that it is all “smoke and mirrors,” Carreno said.

“Ultimately, it is impossible to know if a company is being entirely truthful in its disclosures if it does not use an independent attestation or audit,” Ethos ESG CEO Luke Wilcox said.


Big accounting firms such as Ernst & Young, PwC and KPMG have taken interest in ESG data assurance and stand to see an increase in demand for those services when the SEC’s rule takes effect. There are also smaller groups that specialize in ESG data verification — but whether will be enough firms and resources overall to provide attestation amid that rise in demand is a significant question.

One nonprofit, the Carbon Disclosure Project (CDP), provides accreditation for firms with emissions reporting verification. Currently, there are six U.S. companies that CDP accredits.

“We have seen an increased interest in entities wanting to the get the CDP accreditation as a provider,” said Simon Fischweicher, head of corporations and supply chains for CDP North America.

Groups can provide greenhouse gas disclosure through CDP as well — there are about 14,000 companies, cities, states and regions that currently do so, Fischweicher added. Additionally, there are 680 institutional investors that are signatories to that disclosure framework.

The verification services that their accredited firms provide is essentially the same work as the attestation the SEC is likely to require, with a big technical difference.

“Attestation is more like a financial audit, where a company and the provider can be held legally liable,” Fischweicher said.

However, there is no official certification or training requirements for firms that would provide attestation for greenhouse gas emissions under the SEC’s proposed rule. A firm would need to be “an expert in GHG emissions” with “significant experience” necessary to issue reports and be independent of the businesses they evaluate, according to the proposal.

“As the rule becomes formalized, I envision there will be additional requirements to provide attestation,” Fischweicher said.


There are not many firms that have experience with greenhouse gas emissions and SEC reporting, said Jennifer Smokelin, partner at law firm Reed Smith.

“There could be a ‘free for all for aptitude,’ because I am not sure adequate talent necessary exists in market currently,” Smokelin said.

Without certifications or specific standards governing attestation, there will be variation in services, which would not help investors, she added.

“This is a new field, and like anything new at first, few companies are likely to have the requisite environmental knowledge and industry experience needed to perform the attestation demand,” she said. “It is likely the attestation requirements in the proposed rules if passed will drive a major expansion in the marketplace, with the likely result that at first at least here will be a shortage of attestation providers.”

One firm that provides such services, Apex Companies, has about 200 clients for which it provides attestation, said Nicole Bouquet, its executive director of ESG.

“Our verification business has doubled in less than 12 months,” she said.


The potential crunch on the small industry is not lost on big companies that will have to comply with the SEC’s rule, she noted.

“Kellogg to Ebay have very different profiles as a company, operationally. They’re all saying the same thing: ‘How are you — Apex — or any other vendor in the space going to meet demand?’”

Apex, which is a middle-market player, has been scaling up, hiring and training personnel in anticipation, as have the big accounting firms.

Those firms “can staff up as much as they want over a year or two, but that won’t mean they’ll be able to meet that market demand. It’s going to be a collective effort,” Bouquet said.

Apex, for example, has been bringing on accounting staff to work with the science team, she said.

“We can say we’ve got both bases covered,” she said.

“The science behind greenhouse gas emissions calculations is not something accountants are familiar with, nor should they be.”

Some of the company’s major clients have brought it in to become part of their inside audit processes, providing assurance on data. Those clients already work with major accounting firms but have not had them take over the sustainability data oversight, Bouquet said.

Meanwhile, companies have been asking for assurance on a wider range of data, including waster, water, energy use, renewables and human capital factors, she said. That is in part due to more demand from private equity firms for their portfolio companies to provide such information.

Longstanding clients have also increasingly bumped up the level of assurance they want to “reasonable,” the higher standard than “limited,” requiring a greater number of data points to be sampled, she noted.

“You take a much deeper dive. You have to go on site.”

That only covers Scope 1 and 2 emissions, though, as there isn’t consensus in the industry on how to treat the wider-ranging Scope 3 emissions with reasonable assurance.

But the wider application of assurance on emissions means that funds, intelligence providers and investors will have more reliable information to work with, she said.

“If an investor can say, ‘We are using quality data to make smart decisions,’ … It is actually a value creation lever.”

This story was originally published on ESG Clarity.

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