ESG Mandate: Navigating the SEC’s Climate-Disclosure Rule
A look at the implications for companies regarding a new Securities and Exchange Commission rule
In recent years, the global conversation around climate change has intensified, leading regulatory bodies to take significant steps to address environmental concerns. The U.S. Securities and Exchange Commission (SEC) recently announced a groundbreaking climate disclosure rule, underscoring the importance of environmental transparency and accountability for companies across various industries.
NEW SEC RULE HIGHLIGHTS
The SEC’s climate-disclosure rule represents a bipartisan compromise that will likely serve as the basis for future further action. At a high level, the climate disclosure rule mandates that publicly traded companies disclose their greenhouse-gas emissions, climate-related risks, and strategies for mitigating these risks. Specific requirements include disclosure of:
- Climate-related risks, and related risk management and oversight;
- Material scope 1 and scope 2 emissions (for certain filers only), while notably not requiring disclosure of scope 3 emissions from a filer’s supply chain;
- Statement describing financial impact of severe weather events, if the aggregate amount equals or exceeds a 1% threshold against gross profits or expenditures;
- Statement describing whether carbon offsets and renewable energy credits or certificates (RECs) have been used as a material component of the company’s plans to achieve its climate-related goals, and
- Carbon-reduction goals.
This move reflects a broader shift towards greater transparency in corporate reporting, as investors increasingly prioritize environmental, social and governance (ESG) factors in their decision-making processes.
OPERATOR IMPACT
It’s worth acknowledging that the SEC climate disclosure will not directly apply to all companies. First, the rule’s applicability is limited to companies with publicly-traded securities. Second, the type of emissions that are generated within a publicly-traded company’s supply chain (scope 3), which could potentially impact organizations that are not publicly-traded, are not required to be disclosed under today’s rule. That said, we anticipate the impact of this rule to include an overall commitment to improving data collection and increased focus on all sources of a company’s emissions, even those within the supply chain. In essence, it is best to get started down this path, rather than waiting for stricter regulations impacting supply chains to be promulgated and enforced.
Challenges:
- Data Collection and Reporting: Companies must enhance their data collection mechanisms to accurately measure and report their greenhouse-gas emissions. This may require investments in sophisticated monitoring technologies and robust reporting frameworks.
- Supply-Chain Transparency: As part of future disclosure requirements, companies may need to provide detailed insights into their supply chain operations.
- Regulatory Compliance: Compliance with the SEC’s climate disclosure rule necessitates a thorough understanding of evolving regulatory frameworks and reporting standards. Companies must stay abreast of updates and ensure adherence to compliance requirements.
Opportunities:
- Enhanced Stakeholder Engagement: Transparent reporting on climate-related risks and mitigation strategies fosters trust and credibility among investors, customers, and other stakeholders.
- Innovation and Efficiency: The emphasis on climate disclosure incentivizes companies to innovate and implement sustainable practices throughout their operations. From adopting energy-efficient techniques to optimizing delivery routes, significant potential for robust efficiency gains and cost savings exists.
- Market Leadership: Companies that proactively address climate risks and demonstrate a commitment to sustainability are poised to emerge as industry. By aligning business strategies with environmental objectives, these companies can attract socially responsible investors and gain a competitive edge.
By preparing for the U.S. SEC disclosures, companies can also make progress toward other pending regulations. If companies follow the steps outlined below, they will be better positioned for compliance and to evolve with the ever-changing reporting landscape.
HOW TO PREPARE FOR CLIMATE REPORTING:
- Conduct a Climate-Risk Assessment: Companies should assess their exposure to climate-related risks, including physical and transition/liability risks. Applying Taskforce on Climate-Related Financial Disclosure (TCFD), and now International Financial Reporting Standards (IFRS) to enterprise-level risk assessment processes, can help identify areas of vulnerability, inform disclosure and shape strategic objectives.
- Develop & Maintain a Greenhouse Gas (GHG) Inventory Management Plan (IMP): Develop procedures for managing climate-related detail and public disclosure, outline calculation methodologies, assumptions, and data sources. Ensure alignment to recognized standards and frameworks, such as the Greenhouse Gas Protocol, Global Reporting Initiative (GRI) and IFRS.
- Conduct a Climate Scenario Analysis: Conduct a climate scenario analysis to assess the potential impacts of different climate pathways on business operations, financial performance, and strategic priorities. Use insights to inform disclosure and strategic growth plans. Experts can help you evaluate different temperature pathways and even integrate the outcomes into your TCFD report.
Manage Oversight and Communications:
- Establish Governance Structures: Implement robust governance structures to oversee climate-related disclosures, including clear roles and responsibilities, accountability mechanisms and board oversight.
- Engage Stakeholders: Engage with stakeholders, including investors, regulators, customers and employees, to understand their expectations regarding climate-related disclosures.
- Collaborate with External Experts: Outreach efforts should include external experts, including consultants, auditors, and industry associations, to access specialized knowledge and guidance on climate-related disclosures.
Strengthen Data Management and Internal Processes:
- Enhance Data Collection and Management: Strengthen data collection and management systems to ensure the availability, accuracy, and reliability of climate-related data. Invest in tools and technologies that facilitate data aggregation, analysis, and reporting.
- Conduct a Readiness Assessment: Conducting a readiness assessment prepares companies for third-party assurance of data and other disclosures. It helps test the accuracy of calculations, effectiveness of the management approach and identifies ways to better align with regulatory expectations.
- Provide Training and Capacity Building: Provide training and capacity-building initiatives to enhance employees’ understanding of climate-related risks and opportunities and their role in facilitating accurate and timely disclosures.
- Foster Continuous Improvement: Foster a culture of continuous improvement by regularly reviewing and updating climate-disclosure practices in response to feedback, emerging trends, and regulatory developments. Strive for transparency and relevance in all disclosures!
LEADING THE CHARGE TOWARD SUSTAINABILITY
The SEC’s climate disclosure rule represents a pivotal moment for companies and investors, highlighting the imperative of environmental accountability and transparency. While compliance may pose challenges initially, it also presents an opportunity for companies to drive innovation, strengthen stakeholder relationships, and position themselves as sustainability leaders in a rapidly evolving landscape. By prioritizing energy efficiency and embracing sustainable practices, organizations can not only reduce operating costs and enhance competitiveness but also demonstrate their commitment to environmental responsibility and corporate citizenship. Experts such as those at Environ Energy, are ready to help embrace the principles of climate disclosure and integrate sustainable practices into your business models.
Editor’s Note: This article is intended to provide general insights and does not constitute legal or financial advice. Companies are encouraged to consult with legal and regulatory experts to ensure compliance with applicable laws and regulations.