Is your company ready to meet the SEC Climate Disclosure Rule? - Blog

Blog Is your company ready to meet the SEC Climate Disclosure Rule?

SECURITIES AND EXCHANGE COMMISSION (SEC)

The United States Securities and Exchange Commission (SEC)’s push for standardization in climate-related disclosures will likely become a reality in 2024. And what does that mean for public companies? An urgency to put together a concrete environmental, social and governance (ESG) strategy to manage data in their supply chains. Here is an overview of the groundbreaking proposal and what it may be for your business.

WHAT IS THE SEC CLIMATE DISCLOSURE RULE?

On March 21, 2022, the SEC issued a rule proposal, also known as the SEC Climate Disclosure Rule, to force publicly traded companies to report their greenhouse gas (GHG) emissions and environmental impact along with their financial statements. In other words, businesses must disclose how they assess, measure and manage climate-related risks every year.

There are two goals to the Climate Disclosure Rule. For one, it would make it easier for investors and consumers to access and compare ESG data between companies, enabling them to decide better which organizations they should invest in or buy from. This level of accountability would ensure that companies actually contribute to fighting climate change—rather than greenwashing their efforts.

Secondly, the Climate Disclosure Rule would bring a new level of standardization to the information companies provide on climate-related goals. To date, there are varying degrees of reporting and discrepancies even between organizations in the same industry; many disclosures are idiosyncratic and incomparable year after year, making it challenging to concretely and accurately measure the rate of emissions reduction and progress. The SEC’s rule aims to change that with a harmonized framework that would require companies to provide emission targets based on type (absolute- or intensity-based), scope, progress when analyzed with a baseline, milestones and strategies to meet emission reduction goals.

SEC Rule Update

WHAT REQUIREMENTS DOES SEC’S CLIMATE DISCLOSURE RULE PROPOSE?

Although SEC’s climate disclosure rule has not been passed yet, it is expected to require that businesses, including international companies exporting to the US and foreign private issues, disclose the three levels of carbon emissions as set forth by the GHG Protocol: Scope 1 (direct emissions), Scope 2 (indirect emissions resulting from energy sources a company purchases), Scope 3 (indirect emissions generated by stakeholders across a company’s supply chain) only if deemed “material” to investors or if the company has publicly set climate-related targets.

In addition, businesses will need to disclose general information, such as the governance of climate-related risks by the board an management, the impact of climate-related risks, the company’s process for managing climate-related risks, metrics and targets used to address risks, etc.

SEC’S CLIMATE DISCLOSURE RULE TIMELINE

Following the publication of the proposed rules, an extensive public comment period ensued. SEC will consider these comments before issuing a final rule, which will subsequently be voted upon by the SEC’s commissioners. As per the SEC’s fact sheet, the implementation of new requirements would be staggered over several years, with the largest publicly listed companies expected to start disclosing climate risks in 2023, while other firms would have until 2024. The specifics of regulatory obligations and timelines for compliance will be dependent on the scale of the company and its history of filings.

For companies that aren’t publicly listed but anticipate launching an Initial Public Offering (IPO) in the future, initiating disclosure of environmental impacts will be key as prospective investors commonly seek this information.

Small, privately held businesses are not part of the Rule’s initial scope. However, even if an organization has no intentions of an IPO, it should also consider the advantages of voluntarily sharing its environmental data and tackling climate risk. This can enhance brand reputation and potentially improve both sustainability performance and profits.

WHY IS IT IMPORTANT TO ACT NOW?

With the rules likely to commence in either late-2023 or 2024, companies have little time to waste preparing themselves. The urgency is underscored because it takes time for companies to collect, aggregate, review, and report all emissions data across Scope 1, 2 and potentially 3. The reporting problem is extremely exacerbated for Scope 3 emissions, as it requires every value chain stakeholder to get on board, gather the right data, and have it centralized where emissions can be inventoried, measured and monitored throughout an organization’s processes.

According to Thomson Reuters Sustainability and ESG Analyst, Oliver Pike, time is of the essence for public companies to act now. A recent 2022 report stated that 32% of US companies have no GHG reporting at all, and only another 30% are disclosing Scope 1 and 2 emissions.

Is your company ready to meet the SEC Climate Disclosure Rule?

HOW CAN A COMPANY PREPARE FOR SEC’S PROPOSED CLIMATE DISCLOSURE RULE?

Although not all companies will be subject to SEC’s Climate Disclosure Rule once it is in effect, we all know consumers and investors expect companies to start addressing ESG issues. In fact, a recent Preqin survey found that over 70% of private markets investors would turn down deals due to ESG factors.

Therefore, as a company, you can start by doing research on the rule and if it applies to your organization. Then, consider conducting an ESG readiness assessment to determine your ESG plan and whether you have the organizational resources, skills, capacity, data, and tools to initiate GHG emissions reporting. Take the opportunity to also get to know our carbon tracing solution and end-to-end supply chain traceability platform, which help businesses become compliant and use the data to improve performance.

Rather than go it alone, many businesses also contact carbon-tracking experts for third-party help and external assurance of the emissions reports’ accuracy, timeliness and consistency. These partners can help you weed through the ins and outs of the Rules and provide the practical strategies your company needs for effective and efficient reporting.

In conclusion, the proposed rule by the SEC represents a significant stride towards transparency, accountability, and standardization in climate-related disclosures, with potentially far-reaching impacts on investor decisions, corporate accountability, and our global climate future. But the SEC’s looming deadline is an impetus for public companies to act now.

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