Editor's note: This is the second of a two-part series about the U.S. Securities and Exchange Commission's (SEC) plan to issue a final rule on climate risk disclosure. In the first part, CFO Dive analyzed in detailwhy the agency may still push forward with stricter regulation despite facing opposition.

Critics have called efforts to promote environmental, social, and governance (ESG) best practices a left-wing "virtue signaling" campaign aimed at imposing "woke capitalism" on American businesses. However, for some CFOs, the biggest drawback of embracing ESG may simply be the cost.

The U.S. Securities and Exchange Commission (SEC) estimates that a large company would need tospend an additional $530,000 annuallyto comply with its proposed detailed climate risk disclosure rules. But lawyers and former regulators say this estimate may be too low.

"Most people think this significantly underestimates the amount companies will need to spend to comply with these rules," said David Brown, a partner at Alston & Bird.

Under the rule, CFOs would need to describe their strategies for addressing climate risks in their 10-K filings, including plans to achieve risk mitigation targets they have set. Companies would also need to disclose their greenhouse gas (GHG) emissions data—whether from their own facilities or through energy purchases—and obtain independent assurance on that data.

Lawyers and former regulators point out that if CFOs delay integrating the personnel, technology, and processes needed for compliance, they may face higher costs in the future. As companies rush to meet the final rule (which the SEC may issue by January next year), demand for accountants, data analysts, and consultants with ESG expertise will rise, driving up compliance costs.

"There aren't enough accountants and other people with the right skills" to help ensure compliance, Brown said in an interview.

Rather than waiting for the SEC to issue the final rule, CFOs should proactively take seven steps to prepare for climate risk disclosure, lawyers and former regulators suggest:

1. Establish an ESG steering committee

Lawyers and former regulators say CFOs should push to form a steering committee with representatives from various departments within the company. Such groups are particularly good at identifying weak points and needed changes.

"Make sure that as CFO you have formed a steering committee with cross-functional experts from within the company to address climate change," said Elizabeth Saunders, a partner at Clermont Partners. The group could meet weekly or biweekly to discuss data collection and set benchmarks for the disclosure process.

"Ensuring everyone is aligned is one of the biggest challenges," Brown said. Compliance will involve many parts of the company, from risk management and real estate to supply chain management and the general counsel's office.

2. Ensure adequate board oversight

Proxy advisory firms such as Glass Lewis and Institutional Shareholder Services track the activities of board committees that oversee ESG programs, including risk analysis, Brown said. "There is an expectation of board oversight and risk management, so you don't want the board to be insulated from information."

A board that closely tracks climate risk disclosure will provide a buffer for CFOs and other executives from criticism, Saunders said in an interview. "The best way to communicate with institutions that are unhappy because you haven't released the right data is to describe the board's oversight."

3. Consider hiring experts

A complex new set of SEC regulations often triggers disagreements over interpretation and speculation about enforcement intensity, said Kai Liekefett, a partner at Sidley Austin and co-chair of the shareholder activism practice. "When a new set of rules comes out, you enter uncharted territory for a while, and you can only guess and interpret how to apply the new rules."

If a CFO's company lacks SEC expertise, they should consider hiring someone with a thorough understanding of corporate governance and the agency's climate risk disclosure plans, Liekefett said in an interview. "You need someone who knows the rules deeply."

4. Lead investor communications

The SEC's climate risk disclosure rule "will be an opportunity for activist hedge funds to increase shareholder activity and embarrass companies," Liekefett said. "That's the bad news."

CFOs can avoid hostile activism triggered by the SEC rule by maintaining ongoing communication with the most vocal investor groups and the company's largest shareholders, said Nell Minow, vice chair of ValueEdge Advisors, which advises institutional investors on corporate governance.

Minow said the adoption of the climate risk disclosure rule could evolve like Section 404 of the Sarbanes-Oxley Act of 2002, which requires public companies to create, document, and test internal controls over financial reporting. Regularly updating investors on compliance progress is crucial, she said.

"I would work closely with the investor relations office and the corporate secretary to ensure they manage shareholder expectations," Minow said in an interview. "You need to be proactive."

5. Carefully verify data integrity

To comply with SEC rules, companies need to measure their internal greenhouse gas emissions (Scope 1) as well as emissions from their energy suppliers (Scope 2).

"What you need to do this year is work with operations people to create a blueprint for how to collect Scope 1 and Scope 2 data," Saunders said, adding that the SEC is unlikely to change such disclosure requirements.

The task is daunting and the stakes are high, Liekefett said. "It's a huge challenge, and it's complicated by the fact that everyone expects the SEC to enforce strictly—they want to send a message to corporate America."

Companies would also need to report Scope 3 emissions from suppliers and vendors in their supply chain, provided the company deems such data material to investors and has committed to disclosing it, SEC Chair Gary Gensler testified before the Senate Banking Committee on September 15. "We must ensure that public companies that make statements on Scope 3 issues do not mislead the public," he said.

Requiring companies to assess Scope 3 emissions across their entire supply chain would be particularly challenging, critics of the SEC rule point out.

"This really goes beyond reasonable bounds," Republican Senator Steve Daines of Montana told Gensler at the hearing. "Do you really think it's reasonable to require companies to collect, analyze, verify, and report on things like whether employee company vehicles are Teslas or pickup trucks?" Daines asked Gensler.

6. Set aside funds before a recession

Asrecession forecasts increase, CFOs should act before budget tightening becomes necessary to budget for the technology, processes, and hiring needed to support climate risk disclosure, including ESG experts and carbon measurement systems, Brown said.

"If we're heading toward a recession, you don't want to be the person trying to build an ESG program during a company-wide tightening," he said. "Make sure you implement SEC requirements to reduce costs, rather than rushing at the last minute."

7. Combine greenhouse gas measurement with cost reduction

CFOs should view climate risk measurement as an opportunity to better understand their business and find opportunities for efficiency and savings, said Fernando Tennenbaum, CFO of AB InBev.

When measuring carbon emissions and climate risk, "I feel I need to ensure this makes business sense and is an area where the company can make a difference," he said in an interview.

For example, AB InBev has made progress in measuring Scope 3 emissions from its suppliers, especially growers of barley, corn, and other grains, by working with them to find ways to streamline production, he said.

"The most important thing is to ensure that everything you do has a material impact on your business," Tennenbaum said. "Hopefully, soon reporting ESG will be as straightforward as reporting net income."