In 2021, the Securities and Exchange Commission (SEC) began working on new legislation requiring US-listed companies to provide reports on emissions disclosures and other ESG metrics.
On March 22, 2022, the SEC released proposed climate-related disclosure rules. These rules, if approved, would require registrants (companies registered to sell securities) to disclose climate-related information in their annual reports and registration statement, including attestation in specific circumstances. As expected, the disclosures focus on climate risk and scope 1 and 2 emissions. A highly anticipated topic was whether scope 3 would be included and if so, how The SEC did include Scope 3 and provided a few guardrails around it.
The proposed rules will now go through a comment period to gather input. We expect that the final disclosure rule will be in place by the end of 2022.
What Does the SEC Climate Rule Include?
The new proposed rules require registrants to disclose the following:
- Governance. Oversight and governance of climate-related risks by the registrant’s board and management.
- Material Impact on Business and Financial Statements. How any identified climate-related risks are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term.
- Impact on Strategy, Business Model, and Outlook. How any identified climate-related risks have affected or are likely to affect business model, strategy, and outlook.
- Management Process. The process for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the registrant’s overall risk management system or processes.
- Expenditures and Assumptions. The impact of climate-related events (like severe weather events), and the transition activities (including identified transition risks) on the line items of a registrar’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities.
- Scopes 1 and 2 Emissions. Scopes 1 and 2 GHG emissions metrics, separately disclosed.
- Scope 3 Emissions. Scope 3 GHG emissions, if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.
- Targets and Transition Plan. The climate-related targets or goals, and transition plan, if any.
Climate-Related Risks Affect Financial Performance and Position
The SEC’s interest in climate-related reporting is not just for the good of the global environment. There are many ways that climate-related risks can impact a company’s performance.
- Severe and frequent natural disasters can damage assets, disrupt operations, and increase costs.
- Changes in regulations, consumer preferences, availability of financing, technological advances, and other market forces can lead companies to transition to business models with lower carbon products, practices, and services.
- Increased government commitments to transition to a lower-carbon economy have financial effects that can materially impact a business.
- Banking regulators will likely incorporate climate risk in their supervision of financial institutions.
- How a company assesses and plans for climate-related risks may have a significant impact on its future financial performance and investors’ return on their investment.
Why is the SEC Proposing New Climate Disclosure Rules?
The new climate disclosure rules provided by the SEC are designed to provide additional protections to investors. While there are standard financial reporting approaches for publicly-traded companies, like GAAP, a similar set of rules do not exist for climate-impact metrics. These new rules aim to improve the consistency, comparability, and reliability of climate-related disclosures. Without the new rules in place, investors carry the burden of the costs to obtain useful climate-related information needed to make key decisions.
There are currently several frameworks, including CDP, GRI, SASB, and TCFD, that are used to report climate-related metrics. These frameworks lead to reporting fragmentation and an inability to compare disclosures in a meaningful way. Additionally, these disparate frameworks lack the oversight, liability and investor protections that occur with commission filings.
The oversight that the new SEC rules introduce ensures that climate-related metrics can also meet the standards of complete and accurate disclosure applied to financial information.
Investors can and should use these climate-related disclosures when making investment and voting decisions and evaluate how climate-related risks result in financial consequences. In the capital allocation decision-making process, climate-related disclosures give insight into governance and risk management practices, valuation models, and credit research and assessments. These disclosures will impact how investors choose to support publicly-traded companies in the future.
The SustainaBase software platform delivers Greenhouse Gas (GHG) Protocol compliant reporting of Scope 1, 2, and 3 carbon emissions which is required by the proposed SEC regulations.
How to Prepare for Climate Impact Reporting
There are many ways to prepare for climate reporting. Here are some tips, to get you started:
- Make sure that your company is ready to explain if or how climate-related risks are overseen and governed by the board and management.
- Start gathering information on how climate-related risks impact your business and financial statements. Organize these risks over the short, medium and long-term, and determine if the risks are material.
- From the identified list of risks, consider how these risks affect or are likely to affect your company’s business model, strategy, and outlook. Begin to explain this in written form.
- Document your company’s process for identifying, assessing and managing climate related risks. Also note whether these are integrated into your overall risk management systems or processes.
- Speak to finance and accounting about the impact of climate-related events and transition activities on costs and financials, and begin documenting how these events and transition activities might impact financial estimates and assumptions.
- If you don’t already, make sure your company measures Scope 1 and Scope 2 GHG emissions in a manner that complies with the GHG Protocol Corporate Accounting and Reporting Standard, which is required by the proposed regulations.
- Determine whether your company will also measure and report Scope 3 emissions. If they are material or if your company has set GHG reduction targets or goals that include its Scope 3 emissions, the proposed regulation will require them. If so, your Scope 3 GHG emissions calculations will need to comply with the Corporate Value Chain (Scope 3) Accounting and Reporting Standard. You should also begin considering how to obtain emissions data from your downstream and upstream supply chain.
- Make sure that your team has a repeatable, science-based process for measuring and reporting GHG emissions on a continuous basis.
- Start documenting climate-related targets and goals, as well as any transition plans.
It will be crucially important for all of your disclosures to be based on solid data and information to meet the upcoming requirements, and to avoid greenwashing claims.
Now is the time to review your company’s ESG disclosure reports and make updates in line with the very soon to be solidified climate disclosures. It’s essential that all reporting is substantiated and not misleading.
Improve your Emissions Disclosures Reporting with SustainaBase
We understand that this new rule could significantly complicate the disclosure process for many businesses, including those that serve publicly traded companies that are compelled to collect and report Scope 3 data.
At SustainaBase, we have an intuitive software platform that has everything your company needs for effortless management and reporting of carbon emissions, water, waste, and more.
We have a Greenhouse Gas Protocol compliant approach that supports a range of carbon accounting standards, and can identify and track your Scope 1, Scope 2, and Scope 3 emissions, including your supply chain, as well as water, waste, packaging, and anything else that is material.
Sign up now for a free demo and get your reporting in order before the new SEC climate rule goes into effect.
