The US Securities and Exchange Commission’s (SEC)’s recent climate disclosure report is a game-changing moment for companies already struggling to understand sustainability reporting.
With compliance potentially required as soon as 2023, we break down what the disclosure entails and how you can prepare (spoiler alert, you should start now).
The SEC proposed a new rule in March 2022 that would require public companies to disclose certain climate-related information on a regular basis, providing shareholders, the regulators,, and the general public with more information regarding their current climate related activities and future goals. Comparable to the recent EU Corporate Sustainability Reporting Directive (CSRD) in Europe, these SEC guidelines aim to make corporate sustainability reporting more common, uniform, and standardized, similar to financial accounting and reporting.
This proposed regulation is the most significant adjustment in corporate disclosure policy since the financial crisis of 2008. The SEC considers it as an appropriate response to investors' needs for information about climate-related risks that have present financial consequences.
According to the SEC, existing climate disclosures are inconsistently disclosed in various types and formats, and this increased transparency will benefit shareholders assessing climate risk and greenhouse gas emissions exposure in their investments. From a company perspective, the rules may increase reporting obligations for some, it should reduce uncertainty and associated risk for most.
The SEC climate disclosures would be included in registration statements and periodic reports, and would contain Scope 1, Scope 2, and Scope 3 information. The proposed rule would require disclosure of specified greenhouse gas (GHG) emissions, with a phased-in attestation requirement of emissions for certain categories of filers, and of climate-related financial statement metrics. If the proposed rules are implemented by the end of the calendar year 2022, disclosure requirements for large companies would start in 2023, while smaller companies would have until 2025 to comply.
The SEC's initial focus will be on big accelerated filers, which are publicly listed companies with a market cap of more than $700 million. However, the SEC also includes smaller registrants, and the proposed climate disclosure requirements may be applicable to a larger group of registrants under Section 12(g) of the Exchange Act, including:
The SEC's proposal is based largely on the Task Force on Climate-Related Financial Disclosures (TFCD) framework, which assesses “material climate-related risks and opportunities through an assessment of their projected short, medium, and long-term financial impacts on a registrant.” Companies will disclose climate metrics through finance-grade reporting aligned with TCFD, and be required to include the following information as part of their reporting:
The SEC's climate disclosure proposal adds an additional level of transparency and accountability, allowing companies and investors to better understand their current risk scenarios, verify emissions targets, set clear and measurable goals, and provide visibility on the methods used to commit to sustainability goals. This sort of information is already being gathered and, in many circumstances, publicly disclosed by a wide range of companies. According to the SEC:
5,200 companies across 52 countries (including the United States) stated that, of the top 100 companies (by revenue), 80% have reported on ESG (including climate), with up to 61% of those companies also obtaining assurance.
For companies already collecting this data, these regulations will provide much needed guidance on what information should be included, as well as standardize where and how it is disclosed.
Companies who don't currently collect this data may face immediate hurdles, but they will ultimately be able to provide more climate-relevant information to their investors, shareholders, and the general public. Compliance with the SEC's climate disclosure requirements is not only possible but also beneficial for companies if the right resources are in place.
As one of the three carbon accounting/management firms mentioned in the SEC’s Emissions’s Climate Disclosure, NZero (referenced as Ledger8760), collaborated with the SEC to create their report.
In it, the SEC strongly recommends using third party companies, such as ours, to track and manage emissions for companies. From the report “[Ledger8760] is an organization that assists companies, communities, and other organizations in accurately assessing emissions data across all scopes of emissions.” SEC climate disclosure proposal, page 392
We have worked with a wide range of companies and has expertise producing comprehensive climate change and environmental information for corporate reports. We are familiar with all the major frameworks—CDP, GRI, GRESB, and TCFD and our same approach for corporate reports can be used to support compliance with the SEC ruling. We offer a comprehensive solution for tackling climate risk as well as Scope 1,2, and 3 emissions calculation and reporting. We focus on automation of data gathering and calculations, creating a streamlined system for your organization that is accurate and audit-ready, while reducing your internal workload. Our approach enables customers to go beyond the minimum or mandated disclosure, and implement genuine climate initiatives that will have a positive financial and environmental benefit to a company's operations.
We will continue to keep a close eye on developments as the SEC's climate disclosure plan proceeds through the consultation rounds and the SEC makes subsequent announcements.
With federal funding available, now is the time for municipalities to advance their sustainability efforts and make a real impact on energy efficiency and emissions reduction.
