How to prepare for the SEC's climate disclosure requirements
The SEC's climate disclosure proposal
How should organizations address the climate crisis? Since the U.S. Securities and Exchange Commission (SEC) first announced its proposed climate disclosure rules in 2022, publicly traded companies doing business in the U.S. have anticipated, and been preparing for, a sea change in how their climate impacts must be disclosed. This week, the SEC announced it will vote on the final rule March 6.
In the original announcement, the SEC set out plans to require publicly traded businesses to outline the climate risks their operations bring about – known as Scope 1 and Scope 2 emissions — when they file registration statements, annual reports or other corporate filings.
Per the proposed rule, larger companies will also have to provide information on Scope 3 emissions (emissions that come from other firms in their supply chain) if they are material to their performance, although that requirement is expected to be dropped from the final rule.
Large companies would be also required to obtain assurance from an independent third party that their emissions disclosures are accurate. Third parties might include traditional accounting firms, but could include other experts, such as engineering firms.
Companies that have promised to eliminate greenhouse gas emissions or reduce their impact with a net-zero plan must report annually on their progress. They will be required to detail their use of offsets — whether that’s paying to plant trees, capturing carbon, generating renewable energy or any other activity set in motion to compensate for emissions. For organizations who have not yet sought out the technology to assist them when it comes to monitoring ESG activity and achieving their ESG goals, now is the time to take action.
"Clear rules of the road" for climate reporting
Under the Biden administration, a focus on the implementation of climate risk disclosures has progressed at speed. From the initial announcement of the Climate and ESG Task Force to the passing of the Climate Risk Disclosure Act of 2021, it’s been clear for some time that renewed efforts to address the impact of U.S. businesses on climate are being made.
With pressure coming from both investors pushing hard for more information about climate risks and green activist groups reasoning that increased climate disclosure will act as a catalyst for more climate-conscious investing, the SEC needed to act.
The announcement made in 2022 was expected, as SEC Chair Gary Gensler noted, to benefit both companies and investors by laying out what Gensler referred to as “clear rules of the road” when it comes to climate disclosure. Indeed, as Gensler elaborated in a statement alongside today’s proposal: “Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks.”
With the SEC having often emphasized the need for what it termed “consistent, comparable, and decision-useful” disclosures related to climate risk, the announcement offered significant insight into what any proposed SEC climate disclosure requirements would be.
As a number of observers expected, many of the plan’s elements align with the TCFD reporting regime, a voluntary framework that asks corporations to disclose greenhouse gas emissions and report on how they manage global-warming risks.
California outpaces the SEC in mandating disclosures
Yet in the time since the SEC made its announcement in 2022, California issued its own, more stringent climate disclosure legislation. California's laws apply to both public and private companies; because of the large number of companies doing business in the state, the new climate-disclosure legislation will have far-reaching impact beyond the state line.
Clearly, it is well past time to be ready to comply with climate disclosure mandates.
What happens next?
Shortly after its 2022 announcement, the SEC found itself coming up against stern opposition to its efforts regarding climate disclosures. In particular, the inclusion of Scope 3 reporting requirements for larger companies has been a major bone of contention. Many critics of SEC climate disclosures, for example, have suggested that the SEC has no authority to require disclosures that are not financially material ("material" defined in this instance as information that a reasonable person would consider important in making an investment decision), with significant debate being given to which side of the "material" line Scope 3 disclosures fall on.
Still, as the passage of the CSRD and the California laws demonstrate, mandated climate disclosures aren't going anywhere.
“For the next couple of years, even the organizations that say they want to do the minimum are going to experience death by a thousand cuts as they try to comply with each new regulation as it comes out,” says David Metcalfe, CEO of research and advisory firm Verdantix. Instead, he suggests, companies should “have an ESG framework that allows [them] to comply as [regulations] arise.”
How can you prepare?
While we await the final SEC rule, one thing is for certain: The climate disclosure picture for companies is getting ever more complicated.
Companies must now dedicate time and energy to a full understanding of existing and emerging frameworks, and to firmly get a grasp on how to track their Scope 1, 2 and, if necessary, 3 emissions properly — and disclose them with a full audit trail.
At the same time, boards should ensure they have the right standards for evaluating climate issues. The Diligent Institute Climate Leadership Certification helps boards connect climate to the balance sheet, contextualizes director and officer fiduciary duties on climate, provides guidance on structuring oversight of climate risk, and helps companies consider how to disclose and report on climate issues, as well as engage with investors.
Companies can already review their confidence in their data, and they should empower their internal audit teams to consider climate data with the same scrutiny they do audited financial statements. This will help them consider risk levels in current climate data.
Are you prepared for the SEC's rule? To make sure your organization is ready to comply, download our free checklist, Preparing for the SEC’s climate rule.