FASB Begins Process of Setting Accounting Standards for Environmental Reporting

Summer is the season for projects. As day-to-day life slows down for a few months, the most industrious among us often use the break to knock out nagging tasks that have been sitting on to-do lists. DIYers – those fanatics who spend their downtime on do-it-yourself home improvements – might finally build that new deck in the backyard or re-tile a bathroom floor, for example.

The Financial Accounting Standards Board is starting its own fixer-upper this summer. The board announced following its May 25 meeting that it’s working on “the recognition, measurement, presentation, and disclosure requirements for participants in compliance and voluntary programs that result in the creation of environmental credits.”

To be fair, FASB isn’t starting this project on a lark. The board last year identified “ESG-related transactions,” including renewable energy credits and emissions allowances, as an emerging financial reporting area to address. It has subsequently solicited feedback from stakeholders on the issue. In comment letters to FASB, leaders of several public companies had been clamoring for the board to adopt accounting rules for a range of issues, including climate-related transactions.

Types of credits covered by the new guidance would include those created by compliance programs and carbon offsets. On the other hand, FASB excluded “accounting for tax credits, tax incentives, or investments in renewable energy structures or entities” from the project.

The news from the standard-setting body comes as the Biden administration is making environmental reporting a cornerstone of its agenda for the Securities and Exchange Commission. Companies began reporting this year in accordance with new rules requiring issuers to disclose information about environmental performance in their public filings. Naturally, offsets and credits will factor into those disclosures as corporations ramp up efforts to cut their emissions and invest in energy-efficient technologies. The SEC also indicated recently it plans to alter rules and reporting forms to “promote consistent, comparable and reliable information” for evaluating how investment funds and financial advisors incorporate environmental, social and governance factors into their products and services.

In the bigger picture, projects like this – constructing definitions, creating standards and the like – represent the kind of foundation-laying work required to make government regulation function. While we tend to think of regulation in terms of dictating what can and can’t be done, it also entails a tedious process of listening to stakeholders to help establish universal ways of conveying information. How would companies and investors even begin to do business involving environmental credits without FASB doing this kind of legwork first?

In other words, checking this project off FASB’s to-do list is a necessary step towards incorporating climate-related concerns into the essential regulatory framework of business in the United States.

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