In the face of growing concern over climate change and its implications for businesses and investors, the U.S. Securities and Exchange Commission (SEC) has taken a significant step by proposing new climate disclosure rules.
These proposed rules aim to enhance transparency and provide investors with critical information about the climate-related risks and opportunities faced by public companies.
In this blog, we will explore the key aspects of the SEC's proposed climate disclosure rules, who must comply, what the requirements entail, when they become mandatory, why they matter, and how they may impact sustainability strategies.
What are the SEC’s Proposed Climate Disclosure Rules?
The SEC's Proposed Climate Disclosure Rules represent a response to the increasing demand for consistent and reliable climate-related information from investors and the public. These rules are designed to provide a standardized framework for companies to report on their climate-related risks, opportunities, and impacts.
The key goal is to ensure that investors have access to the data they need to make informed decisions and assess the climate-related risks and opportunities associated with their investments.
The upcoming regulation will mark a substantial shift in climate reporting requirements. While some companies may be better poised to adapt to these changes, all companies must grasp how these rules will affect them and adapt their climate and disclosure policies accordingly. In essence, these regulations can assist companies in preparing for future climate risks, much like they prepare for other financial risks.
The forthcoming regulations for public companies are likely to comprise two key components:
Greenhouse Gas (GHG) Emissions
These regulations may require public companies to divulge details concerning their GHG emissions. This includes a company's direct GHG emissions (scope 1), indirect GHG emissions arising from purchased electricity and steam (scope 2), and, for many public companies, other indirect GHG emissions (scope 3) – which extend to emissions within their value chain.
Public companies may be obliged to disclose information regarding their governance and management of climate-related risks and opportunities. For instance, this might involve strategies for safeguarding their facilities against the anticipated threats of increased heat and flooding due to climate change. Additionally, the regulations could mandate the inclusion of information in financial statements detailing the potential impact of these risks and opportunities on their business.
Who needs to comply with the SEC’s Proposed Climate Disclosure Rules?
The proposed rules are primarily targeted at public companies registered with the SEC. Essentially, any publicly traded company will be subject to these rules, regardless of their sector.
As prominent, publicly traded companies disclose their climate impact, their suppliers could also come under scrutiny, not to mention the influence of consumer demand. Ultimately, both publicly traded companies and each company that contributes and participates in their supply chains will eventually have to comply with the proposed rules to some degree.
What are the requirements of the SEC’s Proposed Climate Disclosure Rules?
The full requirements are extremely detailed and can be read here.
However, here are the three core pillars of the proposed rules likely to pass that your organization should be aware of:
1. Detailed Reporting
To begin with, the forthcoming SEC climate disclosure regulation compels companies to provide comprehensive descriptions of their governance structures, risk management procedures, strategic action plans, and performance metrics pertaining specifically to financial risks associated with climate. This encompasses the public disclosure of information regarding the company's carbon emissions. These disclosure mandates are in alignment with the recommendations laid out by the Task Force on Climate-Related Financial Disclosures (TCFD).
2. Third-Party Verification
The second pivotal element of the proposed regulation revolves around the imperative need for independent verification and attestation of the disclosed information. This requirement primarily applies to accelerated and large accelerated filers and focuses on data related to scope 1 and scope 2 greenhouse gas (GHG) emissions. The implementation of this provision will be gradual, with the level of assurance transitioning from "limited" to "reasonable" as time advances.
3. Addendum to Financial Statements
Lastly, in addition to requiring detailed climate impact reporting, the draft SEC rule stipulates the inclusion of an addendum within a company's normal financial statements. This addendum will furnish quantitative data illustrating the impact of climate change on the company's financial performance. It covers both the physical and transitional risks posed by climate change, as well as any measures adopted by the company to mitigate these risks.
Why should you care about the SEC’s Proposed Climate Disclosure Rules?
The proposed regulation holds significant implications for both companies and investors. Here's why you should care:
Compliance with the SEC's Proposed Climate Disclosure Rules is crucial for companies, as non-compliance could lead to substantial fines and penalties.
Transparency and Accountability
These rules will promote transparency in how companies are managing climate risks and opportunities, enhancing accountability and fostering trust among investors and stakeholders.
Climate change poses tangible financial risks, from regulatory changes to physical damage from extreme weather events. Understanding and disclosing these risks can help companies better manage them.
Early adopters of strong climate disclosure practices may gain a competitive advantage, as investors increasingly prioritize sustainable investments.
Complying with these rules will be a legal obligation for publicly traded companies, and non-compliance could lead to regulatory repercussions.
Overall, this proposed rule is in line with global efforts over recent years to standardize the disclosure requirements related to climate issues for organizations.
Despite the fact that many companies currently divulge their GHG emissions, there are disparities in how this information is presented, even among companies within the same industries. The SEC's rule seeks to standardize emissions reporting, ensuring that the data is both comparable and transparent for the benefit of shareholders, investors, and the general public.
If this proposal is put into effect, its legally binding nature will necessitate companies that have never previously reported on their GHG emissions to start doing so, which will elevate the importance of climate-related risks in the eyes of portfolio managers.
Evidence from other regions demonstrates the significant impact that such mandates can have on reducing emissions. Mandates stimulate action, as exemplified by Australia's introduction of the National Greenhouse and Energy Reporting (NGER) Act in 2007. This legislation led to hundreds of registrants reporting on their energy production, consumption, and GHG emissions.
The United Kingdom is also planning to require UK-registered companies and financial firms to disclose their emissions. Additionally, the European Union is poised to compel all large companies listed on the European stock exchange to report on their emissions, starting in 2024.
When does the SEC’s Proposed Climate Disclosure Rules become mandatory?
The expected timeline for the finalization of the SEC climate disclosure rule points to late 2024 or early 2025 as the commencement of reporting, covering data from 2024 or earlier. This underscores the urgency of having a well-prepared plan in place by the end of the current calendar year.
How will the SEC’s Proposed Climate Disclosure Rules Impact your Sustainability strategy?
The impending SEC regulation concerning climate disclosure marks a monumental transformation in the regulatory environment. Although the exact details of the rule are still somewhat ambiguous, its implementation is a certainty. This rule isn't merely a matter of compliance; it also presents a chance for companies to harmonize their efforts for decarbonization with the pressing demands of addressing climate change.
For companies with existing sustainability strategies, the proposed rules may require adjustments to ensure compliance. They may also necessitate a more comprehensive approach to climate risk management and emissions reduction. On the positive side, they can serve as a catalyst for strengthening sustainability practices and attracting environmentally conscious investors.
To get ready, it's prudent to initiate preparations by seeking advice from experts, making essential infrastructure investments, and actively involving your stakeholders.
Staying informed about updates is crucial, and this can be achieved by regularly monitoring SEC publications. Additionally, you might want to consider leveraging robust carbon management platforms like Arbor to navigate through these impending changes effectively.
As the anticipated SEC climate disclosure regulations draw closer, taking proactive measures is imperative. Early preparation ensures strong data management, precise greenhouse gas (GHG) reporting, and mitigates the risks associated with last-minute rushes that can lead to legal complications and damage your reputation. Here are proactive steps to boost your climate disclosure readiness:
Commence GHG Tracking: The expected SEC regulations mandate the disclosure of scope 1 and scope 2 greenhouse gas emissions and potentially scope 3 emissions, particularly if they are significant or part of emissions reduction targets. Tedious spreadsheets and manual calculations are no longer necessary. Modern carbon management software solutions, such as Arbor, streamline carbon calculations while ensuring the highest degree of accuracy with our region specific data.
Identify and Assess Climate Risks: Recognizing and preparing for climate-related risks, both physical (e.g., natural disasters) and transitional (e.g., changing consumer preferences), is a key component of the SEC's proposal. This isn't a one-time task. Assign responsibility for risk assessment to specific teams within your organization and motivate them to incorporate climate risks into their regular evaluations.
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