• Using ASC 842 Excel Templates
• How to Create Customized ASC 842 Excel Templates
• Best Practices for Data Entry and Formula Setup
• Best Practices for Document Organization
• Common Challenges with ASC 842 Excel Templates
• ASC 842 Excel Templates vs Lease Accounting Software
• Leaving Cumbersome Spreadsheets for a Purpose-Built Platform

The ASC 842 lease accounting standard represents a significant shift in how organizations report their leases. Before ASC 842, operating leases were not included on the balance sheet, which neglected to provide a full picture of cash flows from leases. This meant companies and investors were unable to identify how much debt was carried within a business’ lease obligations.

The new lease accounting standard requires organizations to include operating leases and financial leases on the balance sheet, which increases visibility into leasing costs and arrangements. This ensures an accurate depiction of company financials. Compliance with ASC 842 is essential for transparency, accuracy, and financial accountability.

The calculations that are involved in staying compliant are extremely susceptible to error – particularly if done without automation.  However, many individuals and organizations initially turn to Excel templates for managing their lease accounting needs. In this blog post, we will explore both Excel templates and technology options for ASC 842 compliance.

Using ASC 842 Excel Templates

Excel templates can seem like a convenient and cost-effective solution for ASC 842 lease accounting. They offer flexibility in customization and can be tailored to an organization’s specific needs. However, setting up and managing Excel templates for ASC 842 compliance comes with its own set of challenges.

How to Create Customized ASC 842 Excel Templates

Setting up Excel templates for ASC 842 can be a time-consuming process. You’ll need to design templates that accurately capture all lease data, including lease terms, payments, and commitments. Creating these templates from scratch can be complex, and errors in template design can lead to inaccuracies down the line. That said, here are some tips to get you started:

Step 1: Define Your Lease Data Categories

Before you start building the template, it’s crucial to identify the data categories you need to track to comply with ASC 842. Common categories include:

• Lease Details: Lease ID, lease term, commencement date, termination date, etc.
• Payment Information: Monthly/quarterly/yearly lease payments, initial direct costs, etc.
• Lease Modifications: Any changes or modifications to the lease terms.
• Discount Rate: The rate used to calculate the present value of lease payments.
• Lease Liability and Right-of-Use (ROU) Asset: Calculations of these values over time.
• Lease Classification: Operating or finance lease classification criteria.
• Lease Documents: Attachments for lease agreements, amendments, disclosures, etc.

Step 2: Create a New Excel Spreadsheet

Open Excel and create a new blank spreadsheet. You can start with a clean sheet or use Excel’s pre-designed templates as a starting point.

Step 3: Set Up Columns and Headers

In your spreadsheet, create columns for each data category identified in Step 1. Label each column with appropriate headers, such as “Lease ID,” “Commencement Date,” “Lease Term (Years),” “Monthly Payments,” and so on. You can also add headers for any additional information, such as lessor details, lease modifications, and classification criteria.

Step 4: Format and Customize the Template

Format the columns to ensure that data is displayed correctly. You may want to adjust column widths, apply cell formatting (e.g., date format, currency format), and add borders for clarity.

Customize the template further by adding dropdown lists, data validation, or conditional formatting to enforce data consistency and accuracy. For example, you can create dropdown lists for lease classification options or lease modification types.

Step 5: Add Formulas

Incorporate Excel formulas to calculate values automatically. For ASC 842 compliance, you’ll need to calculate the present value of lease payments, lease liability, and ROU asset. These calculations involve using the discount rate and the lease payment schedule.

For instance, you can use the NPV (Net Present Value) function to calculate the present value of lease payments over time.

Step 6: Set Up Tabs and Document Management

Create separate tabs or sheets within the Excel file for lease documents and attachments. Each document should be appropriately labeled and organized for easy reference.

Step 7: Testing and Validation

Before using the template for actual lease accounting, thoroughly test it with sample data to ensure that calculations and formulas work correctly. Validate the template’s accuracy against known lease scenarios.

Step 8: User Training

Provide training to the relevant personnel on how to use the template effectively and input data accurately.

Remember that while this basic Excel template can help you get started with ASC 842 lease accounting, as your organization’s lease portfolio grows, and complexity increases, you may want to consider transitioning to specialized lease accounting software to streamline the process and ensure compliance more efficiently. Such software offers automation, audit trails, and advanced reporting capabilities, reducing the risk of errors and enhancing accuracy.

Best Practices for Data Entry and Formula Setup

When using Excel for ASC 842 lease accounting, implementing best practices for data entry and formula setup is crucial to ensure accuracy, compliance, and efficient lease management. Here are some best practices to consider:

• Consistent Data Input: Ensure that lease data is entered consistently and uniformly throughout the spreadsheet. Use standardized naming conventions and units (e.g., dollars, square feet, months).
• Data Validation: Implement data validation rules to prevent incorrect or inconsistent data entry. Use dropdown lists, date validation, and other data validation features to guide users.
• Data Review: Periodically review and audit the data entered into the spreadsheet for accuracy and completeness. Regularly check for errors, missing information, or discrepancies.
• User Training: Provide training to the individuals responsible for data entry. Ensure they understand the ASC 842 requirements and how to accurately input lease data into the spreadsheet.
• Documentation: Document data sources, assumptions, and any changes made to lease agreements or data. This documentation is crucial for audit purposes and maintaining a clear audit trail.

Formula Setup Best Practices:

Excel templates require meticulous data entry to ensure accuracy. Formula setup can also be prone to human error. Mistakes in data entry or formulae can lead to incorrect calculations, potentially resulting in non-compliance with ASC 842. Keep these tips in mind:

• Consistent Formulas: Use consistent formulas throughout the spreadsheet to calculate values like the present value of lease payments, lease liability, and ROU asset. Avoid mixing different formulas or calculation methods.
• Cell References: Use cell references (e.g., cell names or structured references) instead of hardcoding values within formulas. This makes it easier to update data without having to modify the formulas manually.
• Check Formulas for Accuracy: Double-check all formulas for accuracy and ensure that they are correctly referencing the appropriate cells and ranges.
• Use Named Ranges: Define named ranges for critical data ranges or input cells. Named ranges make formulas more readable and easier to manage.
• Separate Calculations: If your spreadsheet includes complex calculations, consider separating them into different worksheets or sections. This enhances the clarity of the workbook and makes it easier to troubleshoot issues.
• Formula Auditing Tools: Excel offers built-in auditing tools such as the “Trace Precedents” and “Trace Dependents” functions. Use these tools to trace the flow of data and formulas within your spreadsheet.
• Error Handling: Implement error handling in your formulas, such as IFERROR or IF statements, to provide meaningful error messages or alternative calculations in case of errors.
• Documentation: Document complex formulas and calculations for reference and troubleshooting. Include explanations of how the formulas work and any assumptions made.
• Regular Review: Regularly review and validate the accuracy of your formulas, especially if there are changes to lease agreements or data inputs. Ensure that formulas remain up-to-date and compliant with ASC 842 requirements.
• Version Control: Implement version control practices to keep track of changes made to formulas. Clearly document when and why changes were made.

Best Practices for Document Organization

Keeping track of lease documents within Excel templates can be challenging. Without a centralized repository, it becomes easy to misplace or lose critical documents, which can create audit complications and compliance issues. Here are some best practices for document organization for ASC 842 excel sheets:

1. Use Separate Tabs or Worksheets: Create separate tabs or worksheets within your Excel workbook to store different types of lease documents. For example:

• One tab for lease agreements
• Another for lease amendments
• A tab for disclosures and correspondence
• A separate tab for audit documentation

2. Clear and Consistent Naming Conventions: Develop a clear and consistent naming convention for your documents. Include relevant information such as the lease ID, document type, and date. For example: “LeaseID_Agreement_2023-10-24.pdf.”
3. Folder Structure: Consider creating a folder structure outside of Excel to complement your organization. Store actual documents in folders based on lease ID or categories (e.g., active leases, terminated leases, amendments). Excel can reference these documents using hyperlinks or file paths.
4. Hyperlinks: Use hyperlinks within your Excel spreadsheet to directly link to the corresponding documents stored in your folder structure. This allows easy access to documents with a single click.
5. Document Tracker: Create a document tracking table or list within Excel that includes columns for document name, document type, lease ID, location (file path or hyperlink), and any additional notes or comments.
6. Version Control: If you have multiple versions of lease documents (e.g., lease agreements with amendments), clearly indicate the version number or date in the document name. Keep the most recent version easily accessible.
7. Document Index: Consider creating an index sheet within your Excel workbook that lists all lease documents with their associated lease IDs and types. This can serve as a quick reference guide to locate documents.
8. Color Coding and Formatting: Use color coding or formatting to highlight critical information or identify document status. For example, you could use different colors to distinguish between active leases and terminated leases.
9. Document Metadata: Include metadata in your Excel spreadsheet, such as lease start and end dates, lessor information, and lease classification. This allows you to quickly filter and sort documents based on key criteria.
10. Regular Auditing: Periodically review your document organization system to ensure that it remains up-to-date and compliant with ASC 842 requirements. Remove obsolete documents and update document links if necessary.
11. Backup and Security: Ensure that you have appropriate backup and security measures in place for your document storage system, especially if it contains sensitive lease information.
12. Training: Train your team members on the document organization system to ensure everyone understands how to access and manage lease documents effectively.

Common Challenges with ASC 842 Excel Templates

While Excel templates offer a degree of flexibility, they come with several inherent disadvantages. This is especially important when documenting lease agreements because it can cause financial metrics to be incorrect, leading to penalties. Here are some of the common challenges when using excel templates:

1. Data Accuracy

Human errors in data entry and formula setup can lead to inaccuracies in financial reporting, potentially resulting in compliance violations and financial penalties.

2. Security Risks

Excel files are susceptible to security breaches. Sensitive lease data may be at risk if proper security measures are not in place, jeopardizing data privacy and compliance.

3. Version Control

Managing multiple versions of Excel templates can be confusing and prone to errors. Ensuring that everyone is working on the latest version can be challenging, leading to data inconsistencies.

4. Audit Complications

During audits, Excel templates can complicate the process. Auditors may spend significant time verifying data accuracy and formulae, which can lead to additional audit costs and delays.

Excel Templates vs Lease Accounting Software for ASC 842

Transitioning to specialized lease accounting software like Visual Lease offers several advantages over Excel templates:

1. Data Accuracy and Automation

Lease accounting software automates data entry and calculations, reducing the risk of errors and ensuring compliance with ASC 842.

2. Enhanced Security

Lease accounting software typically comes with robust security measures, safeguarding sensitive lease data from potential breaches.

3. Version Control and Collaboration

Software solutions facilitate version control and collaboration among team members, ensuring that everyone is working with the latest, most accurate data.

4. Audit Readiness

Lease accounting software streamlines audit processes by providing auditors with easy access to accurate, well-organized lease data.

Leaving cumbersome spreadsheets for a purpose-built platform

While Excel templates may initially seem like a cost-effective solution for ASC 842 lease accounting, their limitations and potential pitfalls can lead to compliance issues, security risks, and inaccuracies. To ensure compliance with ASC 842 and streamline lease accounting processes, organizations should consider transitioning to specialized lease accounting software like Visual Lease. Making this transition can save time, reduce errors, enhance security, and ultimately contribute to more accurate and efficient lease accounting practices. Learn more about switching from Excel to Visual Lease.

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Leasing is a common practice for businesses of all sizes, offering flexibility and financial advantages. However, to accurately account for leases and comply with accounting standards like ASC 842, calculating the Present Value of Lease Payments (PV) is essential. While Excel is a commonly used tool for this task, there are better technologies to ensure compliance. In this article, we’ll walk you through the steps to calculate the Present Value of Lease Payments in Excel and highlight the importance of accuracy in lease calculations. We’ll also explore why switching to an established provider is a smart move for lease accounting.

How to Calculate the Present Value of Lease Payments in Excel

Excel is a versatile tool for various financial calculations, including determining the present value of lease payments. Follow these steps to perform the calculation:

Step 1: Organize Data

Before diving into calculations, ensure that you have all the necessary lease data organized. This should include:

• Interest rate per period (rate)
• Total number of payment periods (nper)
• Payment amount for each period (pmt)

Having this information at your fingertips will make the calculation process much smoother.

Step 2: Use the PV Function

In an empty cell, use the Excel formula for calculating the present value. The formula typically used is:

=PV(rate, nper, pmt)

• Rate: Enter the interest rate per period. Ensure that the rate is consistent with the payment frequency (e.g., annual rate for annual payments).
• NPER: Input the total number of payment periods over the lease term.
• PMT: Enter the payment amount for each period. Make sure to include any relevant negative sign (for outflows).

After inputting these values, Excel will calculate the present value of lease payments, which represents the total value of future lease payments in today’s dollars.

Step 3: Repeat as Needed

If you have multiple lease agreements or different payment schedules, you can repeat the above steps for each lease to calculate their respective present values.

Cons of Using Excel: Changes in Lease Payment Schedule

The PV function in Excel is easy to use, but it is very limited in function. It cannot accommodate changes in the payment schedule during the lease term. That is why most users will utilize the NPV function instead. While it accommodates changes, each payment must be entered individually, even if the payments are unchanged, as well as periods where the payment amount is zero.

Both PV and NPV only deal with full periods (usually based on a month, although other periods can be selected).  Sometimes, though, a partial period is required in the calculation of NPV, for example when the payment is not at the beginning or end of the calendar month. That can be done with Excel, but this requires creating a complex model.  Also, the payment methodology (beginning or end of period, see below) is important for making PV work with lease accounting schedules. This is an extra step in the PV or NPV functions, one not often used. This can create errors which are difficult to reconcile.

The Importance of Lease Calculations in Maintaining Compliance

Accurate lease calculations are crucial for several reasons, ranging from financial transparency and regulatory compliance to effective decision-making and risk management. Here are some of the most common reasons why having accurate lease calculations is important:

• Financial Transparency: Accurate calculations ensure that your financial statements accurately represent your organization’s financial position, helping stakeholders make informed decisions.
• Compliance: Regulatory standards like ASC 842 demand accuracy in lease calculations. Errors can lead to compliance violations and regulatory penalties.
• Audit Preparedness: Accurate calculations make audit processes smoother, reducing the risk of audit issues and delays.
• Budgeting and Planning: Precise lease calculations aid in budgeting and financial planning, helping organizations allocate resources effectively.
• Contract Negotiations: Accurate calculations provide a strong foundation for lease negotiations, allowing organizations to make informed decisions about lease terms.

Each of the lease accounting standards (ASC 842, IFRS 16, GASB 87) specifies methodology for calculating interest, straight-line rent, ROU Asset amortization, and Liability reduction.  If the present value calculation does not perfectly align with the schedule, the ROU Asset and Liability will not amortize to zero at the end of the lease term.  This is a red flag for auditors.

Calculating the Present Value of Lease Payments with Visual Lease Accounting Software

While Excel is a useful tool, it has limitations, and managing complex lease portfolios can be challenging. That’s where Visual Lease software comes in.

Visual Lease can calculate the Net Present Value of a lease accounting schedule in one of two ways. The following describes these ways in terms of the Excel function NPV, and B1 through BN are the individual payments:

• Beginning of the Period: This method deducts the payment amount from the principal, then calculates the periodic interest. The formula is NPV(Annual Rate/12, B2:Bn) + B1 .
• End of the Period: This method calculates the periodic interest, then deducts the payment amount from the principal. The formula is NPV(Annual Rate, B1:Bn).

If the initial period is partial (begins any day other than first of a month), the methods are as follows, referencing the Excel function PV. The platform creates individual present values for each period i as PV(Annual Rate/12,Period,,-Bi) where Bi is the payment for the ith period, and sums the values for the initial liability value, according to one of these methods:

• Beginning of the Period: This method uses the full face value of the first payment. It then discounts the second payment by the fractional initial month. For each subsequent payment, it increases each subsequent period by adding 1 to the prior period value.
• End of the Period: This method discounts the first payment by the fractional initial month. For each subsequent payment, it increases each subsequent period by adding 1 to the prior period value.

The Net Present Value of payments affects the Right of Use Asset Starting Balance, Total Ending Liability Starting Balance, and Interest for all schedules affecting the balance sheet.

Users can easily select their preference in the Net Present Value Calculation Method drop-down within VL. This can

Visual Lease simplifies the process of calculating PV and offers numerous advantages:

• Automation: Visual Lease automates lease calculations, reducing the risk of errors and saving you time.
• Accuracy: With a dedicated platform for lease accounting, Visual Lease ensures accuracy in all calculations, helping you stay compliant with accounting standards.
• Comprehensive Reporting: Generate detailed and customizable reports for better insights into your lease portfolio.
• Centralized Document Management: Store and manage all lease documents in one secure location.
• Audit Trail: Visual Lease maintains an audit trail, making it easier to track changes and ensure transparency.
• Compliance: Visual Lease is designed to keep you compliant with the latest accounting standards, reducing the risk of regulatory issues.

Improving your Lease Management Process

Calculating the present value of lease payments is a critical aspect of lease accounting. While Excel can handle these calculations, it comes with limitations and potential risks. Transitioning to Visual Lease software not only simplifies the process but also offers enhanced automation, accuracy, compliance, and reporting capabilities. If you’re serious about lease accounting, Visual Lease is the smart choice to ensure accuracy and efficiency in your lease management processes.

Making the Switch from Excel to Visual Lease Software

When Excel can’t keep up with multiple leases and running reports is an extremely manual process, it’s time to consider a better option. Switching from Excel to Visual Lease is a straightforward process. Visual Lease’s proven migration methodology ensures completeness, consistency and sustainable workflows.

Visual Lease offers an easy transition, and like our customers, your organization can quickly realize the benefits of using specialized lease management software:

• Efficiency: Visual Lease streamlines lease management, saving you time and reducing manual data entry.
• Accuracy: With automated calculations, you can trust that your lease data is accurate.
• Compliance: Visual Lease ensures compliance with ASC 842 and other accounting standards.
• Advanced Reporting: Access advanced reporting and analytics to gain valuable insights into your lease portfolio.
• Document Management: Store and organize all lease-related documents within the platform.
• Audit Readiness: Visual Lease prepares you for audits with accurate and well-documented lease data.

Switch to Visual Lease today to experience the difference.

Digital transformation necessitates a robust technology-driven framework, underpinned by effective controls, to navigate (and automate) the complexities of lease accounting and meet eventual ESG reporting standards.  

To achieve digital transformation in lease accounting, organizations can consider these best practices: 

Digitize your leases and centralize them in a dedicated system of record 

Leases are complex and dynamic documents –  it’s critical that organizations understand and digitize the terms of their lease. Misunderstandings about financial obligations often result in delayed payments, overpayments, and missed opportunities for cost savings. By tracking leases systematically, organizations can optimize their portfolios and even identify opportunities for value creation.   

For example: A company has 20 forklifts, split 10 each at 2 warehouses. One warehouse is 50% idle, while the other is overcapacity and oftentimes has forklifts down for service. Reallocating some of the assets to the overcapacity facility (portfolio optimization) saves money from excessive wear and tear and increases capacity.   

A lease management system allows organizations to view and track key clauses, obligations and other lease information including master leases, subleases, lease options, critical dates and special scenarios in real estate, equipment, operating or any other leased asset. 

Take Preemptive Action on ESG Reporting 

With numerous ESG regulations already in place and more on the horizon, organizations must proactively prepare to meet these reporting requirements. Investors, employees, and customers are closely monitoring ESG disclosures, demanding greater transparency. Without the ability to report on environmental aspects of their leased and owned assets, such as water consumption and carbon emissions, property owners risk alienating key stakeholders. They may also find themselves ill-prepared to comply with forthcoming climate change regulations and reporting standards.  

Providing organizations with environmental transparency aligns with their internal ESG objectives, making it an attractive proposition. By implementing robust lease controls and leveraging a carbon accounting tool, organizations can position themselves as pioneers in this space. 

Lease accounting was never a walk in the park, and its complexities have only deepened with the introduction of ESG reporting standards. As these standards continue to expand, organizations and their accounting teams must adapt. Digitizing and implementing the right technology is the key to successful reporting and upkeep in this evolving landscape, ensuring teams can meet an expanding array of business requirements. 

Discover more about the VL ESG Steward here. 

All of these changes require the right technology-backed controls framework to successfully meet both lease accounting and ESG reporting standards. Here are three ways the right lease management can help organizations stay on top of these changes. 

1. Ensure clear communication and documentation

Leases are complex and dynamic documents –  it’s critical that tenants understand and can track the terms of their lease. Misunderstandings about expenses and what’s owed can often lead to late payments and negatively impact a tenant-owner relationship. This also helps property owners track tenant payments to identify more financially stable and accountable tenants who pay rent and other expenses on time. The right lease controls ultimately benefit both parties through improved communication and a better understanding of the lease agreements.

2. Increase lease agility and flexibility

Tenants increasingly want the flexibility to react to changing circumstances, whether that is a dynamic work schedule or an uncertain economy. The ability to track a tenant’s performance or occupancy through lease management will help inform property owners on how to structure future agreements and establish more individualized terms for each tenant. Lease management can also improve communication between both parties by allowing them to quickly convey messages like important dates about the building and potentially dangerous weather.

3. Staying ahead of ESG reporting requirements

ESG regulations are here and more are around the corner, so company leaders need to be planning ahead to stay in front of reporting requirements. This reporting is also likely to be closely watched by investors, employees and customers who all have indicated they expect to see greater transparency from companies when it comes to where things stand with ESG.

Owners run several risks if they do not have the ability to report on their leased and owned asset portfolios’ environmental output – from water usage to carbon emissions and on. These risks include falling out of favor with key stakeholders, including employees, tenants and investors, and being wildly unprepared for climate change regulations and reporting standards. Having the ability to provide this level of environmental transparency to tenants will only gain in appeal as it allows them to use these metrics toward their own internal ESG goals as well. Implementing strong lease controls and the right tracking technology, like the VL ESG Steward, now will position these owners ahead of the rest. 

The bottom line: The right lease controls will enable successful reporting within a complex system.

Lease accounting has never been easy, and it’s only become more complicated with the introduction of new ESG reporting standards, which will ultimately fall to organizations and their accounting teams to manage and maintain. ESG standards are only expected to expand, which means companies will have to further adapt their accounting to suit regulations. The right controls in place will enable successful reporting and maintenance for teams that must meet a growing range of business needs. 

Learn more about the VL ESG Steward here.

California has taken a significant step toward addressing climate change by enacting the ground-breaking California Climate Accountability Package. This legislation not only sets the stage for comprehensive reporting of carbon emissions but also expands the scope of companies impacted, going beyond publicly traded entities. 

In this post, we’ll delve mainly into the details of SB 253, its implications, and the broader landscape of environmental disclosure.

What is the California Climate Accountability Package?

The California Climate Accountability Package comprises two bills, Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261), which mandate both public and private companies operating in California to disclose their greenhouse gas (GHG) emissions as well as climate-related financial risk. These bills were signed into law by Governor Newsom on October 9, 2023.

What is SB-253? Who does it impact?

SB-253, at its core, establishes a robust reporting framework for carbon emissions. Unlike other environmental disclosure laws, SB-253 primarily focuses on carbon emissions and does not encompass additional factors like water waste or biodiversity standards. However, it goes further than future federal SEC guidelines, as it applies to both public and private companies with a revenue threshold of at least $1 billion, doing business in California – expanding the potential scope to a wide range of entities.

What’s Included in SB-253:

• Expanded Coverage: While the SEC regulations will apply primarily to publicly traded companies, SB-253 extends its reach to private companies that meet the revenue threshold, making it applicable to a more extensive group of businesses. The mandated Scope 3 disclosure brings many additional companies under coverage (regardless of their revenue).
• Mandated Scope 3 Disclosures: One significant feature of SB-253 is the requirement for reporting on scope 3 emissions. Although it leaves room for interpretation, this expands the responsibility of businesses to account for indirect emissions, such as employee commutes and business travel.
• Financial Risk Disclosure: SB-253 introduces the Climate-Related Financial Risks Act (SB-261), applicable to companies with a lower revenue threshold of $500 million. This aspect focuses on financial risk disclosure, emphasizing the need for companies to understand and report on the environmental impact of their operations.
• Incremental Reporting: Companies will need to start gathering data for scope 1 and scope 2 emissions from January 2025, with the first reporting year set for 2026. For scope 3, data collection begins in January 2026. This gradual approach allows companies time to prepare for the reporting requirements.
• Increasing Assurance Levels: The law outlines a transition from limited assurance to reasonable assurance for reporting by 2030. This progression emphasizes the importance of accurate and reliable reporting, requiring businesses to prove their emissions data through a full audit trail.

SB-253 represents a significant shift in the landscape of climate disclosure, not only in California but potentially influencing environmental reporting practices nationwide. Its broader coverage, scope 3 requirements, and increasing assurance levels place a premium on accurate data collection and reporting.

The Impact of SB-253:

The California Climate Accountability Package is set to transform climate disclosure practices and emissions reporting for more than ~10,000 companies. Advocates argue that this enhanced accountability will drive large corporations, major greenhouse gas emitters, to reduce their carbon footprint. It also empowers consumers and regulators to identify laggard companies and push them toward climate action, while revealing firms with significant climate-related financial risks. Forward-thinking companies already measuring and disclosing their greenhouse gas emissions will benefit from the proposed reporting framework, which emphasizes their initiatives. 

Businesses are gearing up for upcoming disclosures, like the SEC Climate Proposal, reflecting investors’ demand for consistent, reliable climate-related financial information. Many organizations are committed to achieving net-zero emissions, and transparency will enable investors to assess their progress. The new reporting requirements will also help identify value-creation opportunities through accurate carbon accounting, offering insights into emissions profiles and hotspots. These insights can lead to cost-of-capital reductions for sustainability-oriented firms and cater to consumers willing to pay premiums for eco-conscious brands or adjust their buying habits to reduce their carbon footprint.

California’s SB-253 is a significant step toward comprehensive climate disclosure. It not only expands the reporting scope but also emphasizes the need for accurate data and reasonable assurance. Whether driven by compliance or operating in self-interests, businesses should recognize the importance of environmental reporting in a world increasingly focused on sustainability and climate action. SB-253 sets the stage for a more transparent and accountable future, where businesses must take responsibility for their carbon emissions.

What is SB-261?

SB 261, also referred to as the Climate-Related Financial Risk Act, is a California statute designed to enhance transparency regarding climate-related financial risks confronting certain businesses. This legislation mandates that companies with annual revenues exceeding $500 million must:

• Compile biennial reports detailing their climate-related financial risks and strategies for risk mitigation.
• Commence reporting by no later than January 1, 2026.
• Adhere to the guidelines outlined in the Task Force on Climate-Related Financial Disclosure (TCFD) framework.

In essence, SB 261 strives to shed light on the financial vulnerabilities businesses encounter due to climate change, promoting greater awareness and preparedness.

How Can VL ESG Steward Help?

For businesses affected by SB-253 and SB-261, tracking and reporting emissions accurately is paramount. VL ESG Steward provides a platform for capturing, tracking, and reporting on direct and indirect emissions, offering a full audit trail to ensure data accuracy. As regulations evolve, VL continues to enhance its capabilities to meet the specific reporting needs of businesses.

With more and more organizations focusing on ESG initiatives, we’ll use this blog to demystify what ESG is, why organizations choose to focus efforts on ESG related initiatives, and how your organization can get started on ESG reporting.

What is ESG

ESG stands for Environmental, Social, and Governance. These three factors are used to evaluate the sustainability and ethical impact of a company’s operations.

• Environmental: Environmental factors refer to a company’s direct or indirect impact on the environment, and may include carbon emissions, energy consumption, climate change effects, pollution, waste disposal, renewable energy, and resource depletion.
• Social: Social factors refer to a company’s impact on society including how a company treats its employees, customers, and the communities in which it operates. Social factors include discrimination, diversity, equity and inclusion, human rights, community relations, and animal rights.
• Governance: Governance factors refer to a company’s internal management and decision-making processes that help ensure that a company’s leadership is accountable to its shareholders, investors and employees; abides by government regulations, and that the business operates with integrity. Governance factors include executive compensation, shareholder rights, takeover defense, staggered boards, independent directors, board elections, and political contributions.

For the purposes of this blog post, we’ll be focusing on the Environmental factors.

Why Focus on ESG?

There are 4 main reasons why an organization may choose to focus on ESG initiatives:

1. Financial performance: In the past decade, studies have confirmed a link between ESG policy performance and financial performance. One of the largest studies conducted by the Journal of Sustainable Finance & Investment, analyzed over 2,000 empirical datasets, with 90% of them indicating either positive or neutral correlations between ESG factors and financial performance.
2. Regulatory risks: While ESG reporting in the United States is currently largely voluntary, companies that ignore ESG factors may face regulatory and legal risks in the future. Many state and local governments are implementing ESG-related regulations, with fines and penalties for organizations that do not comply. The European Union (EU) is leading the way in requiring compliance to sustainable business practice; they currently have the world’s most advanced ESG regulations. For example, the ‘European Green New Deal’ is a comprehensive plan that aims to make Europe climate-neutral by 2050 through an array of measures to combat climate change and promote sustainable innovation.
3. Reputation: Consumers and investors are increasingly looking to do business with companies that prioritize ESG, and companies that don’t prioritize ESG may risk damaging their reputation. According to PwC, 76% of consumers say they will stop buying from companies that treat the environment, employees, or the community in which they operate poorly.
4. Environmental impact: Companies that prioritize ESG are more likely to operate sustainably, reduce their carbon footprint, and engage in ethical business practices.

It’s becoming increasingly essential for organizations to determine where the risks and opportunities lie in a company’s ESG profile and whether they will have a material impact on its strategy, messaging, risk assessment, and reporting. This is especially true as companies compete for capital and stakeholders demand more transparency around a company’s environmental impact.

Where to Get Started?

While having your organization prioritize ESG initiatives can seem like a daunting task, there are some clear steps you can take to start navigating this complex landscape.

1. Gather the right team members in the business to discuss your ESG priorities and set goals. Examples of ESG goals may include:
   1. Partnering with non-profits to identify, fund, and scale proven environmental impact solutions
   2. Reducing scope 1, 2, 3 GHG emissions
   3. Reducing energy and using renewable energy sources to become a net zero organization.
   4. You can also look towards standards (i.e. ISSB) or frameworks (CDP) for guidance on relevant goals.
2. Establish an internal task force. If your organization doesn’t have a head of sustainability or similar role, consider bring together folks from:
   1. C Suite – consider asking your CFO to serve the role as executive sponsor
   2. Reporting & Finance – like your Controller, and/or Director of Reporting
   3. Data Gathering & Execution – like Facilities Manager, Procurement lead, Real Estate executive and/or Supply Chain manager
3. Develop an understanding of scope 1 and scope 2 emissions and requirements. Keep in mind, requirements for ESG reporting may vary depending on the specific standard being used.:
   1. Scope 1 emissions are a type of greenhouse gas emissions that come directly from the sources owned or controlled by your organization. You can think of this in terms of “I burned it,” Examples include your organization’s facilities and company vehicles.
   2. Scope 2 emissions are also a type of greenhouse gas emissions, but these come from the generation of purchased electricity, steam, heating & cooling of a company. You can think of this in terms of “I paid someone else to burn it.”
4. Start taking practical steps for gathering your data so you can establish baselines. This may vary depending on where and how information is stored, but energy bills, for example, are a great source of information for gathering energy consumption.
5. Ensure your team considers best practices in reporting. You’ll likely want to track energy and water consumption, waste and biodiversity activity data, and calculate greenhouse gas emissions based on the Greenhouse Gas Emissions Protocol and EPA Energy grid emissions factors. Alternatively, leverage a tool with automatic and transparent calculations complete with audit trail.

While the ESG compliance requirements are still evolving, one thing is certain: ESG compliance isn’t a one-and done disclosure, it’s a mindset shift across an organization and an ongoing, iterative journey towards sustainability. For more information on how to begin your journey and to learn about Visual Lease’s carbon accounting tool, visit ESG Steward