All about the SEC climate disclosure rules

Public-listed companies in the U.S. will be bound by law to disclose their emissions' footprint, climate-related risks, and climate mitigation strategies. The U.S. Securities and Exchange Commission (SEC) released a proposal for mandatory climate disclosures, with an implementation date targeted for the end of the year 2022.

This signals a significant shift in the treatment of climate reporting – from voluntary to mandatory. Furthermore, the SEC climate disclosure rules will accelerate climate accountability by companies in the world’s largest carbon emissions-producing nation. It is a positive step towards the main streaming of climate considerations as a part of business, echoing investor sentiment for climate-resilient investments.

What disclosures will be required?

The SEC climate disclosure rules are taking recommendations from the Taskforce for Climate-related Financial Disclosures (TCFD) and GHG Protocol. Therefore, they require companies to provide information on these key areas of climate disclosures:

• Climate governance within the organisation: expertise and oversight over climate risks and a description of the processes by which those risks are managed
• Risk identification and methodology: the climate-related risks that are material to the business and the financial bottom line and a description of the process to identify those risks‍
• Impacts on the business model and strategy: the identified climate risks and how they will impact the business, including the analytical process or methodology used‍
• Climate transition plans: the targets and goals to mitigate and adapt to climate risks, including the baseline year‍
• Climate-related financial statements: the financial impact of climate-related events and transition plans in the financial statements

The regulation caters to companies at different climate preparedness levels. It sets specific requirements based on whether companies are beginning to disclose GHG emissions or already implementing scenario analysis and transition plans in their climate strategies. While all companies must disclose Scope 1 and 2 emissions, there is flexibility regarding Scope 3 emissions. Companies only need to disclose Scope 3 emissions if they are significant to the business or part of their emissions' reduction strategy.

If a company uses an internal carbon price, it is required to disclose the process for setting the price and its rationale and implications for the business. Companies must also explain the role and costs of carbon credits or renewable energy certificates if these are a part of their emissions' reduction strategy.

How can companies prepare themselves?

Scope 3 emissions are defined as emissions that arise from assets beyond the operational control of the company and are therefore inherently more complicated for monitoring and mitigation. And yet, it frequently accounts for the most substantial part of total emissions. Disclosure of Scope 3 emissions will be mandatory for companies in staggered stages. Companies are advised to develop capabilities in carbon foot-printing based on the GHG Protocol in preparation for these requirements.

To identify climate risks, we must understand the risks to businesses over extended periods. These risks may not align with traditional financial cycles. Translating these risks into financial terms requires expertise in tools such as scenario analysis.

Translating these risks into financial terms requires expertise in tools like scenario analysis. Companies preparing to embark on scenario analysis should start gathering qualitative and quantitative data needed for robust modelling exercises.

The SEC’s proposal requires disclosures on climate information directly in the financial statements. Building expertise in financial modelling of climate risks will be an enormous asset. Companies will also have to provide assurance of their disclosures, so getting the data right is critical. To that end, more companies will enhance their monitoring and reporting capabilities with the help of powerful data and analytics tools.

How we help you

• We explain the SEC’s climate disclosure regulation and other similar climate directives/frameworks and help you understand what data you need to collect to satisfy requirements.
• We guide you through the data needed for TCFD disclosures and collect and organise that data to generate a formatted report.
• We simplify the collection of ESG data in your organisation by offering one central platform and integrations into ERP, HRM, CRM, EMS etc., to automate data collection.
• We facilitate data collection from your suppliers and ensure that relevant information such as Scope 3 emissions from your supply chain arrives in a complete and accurate manner. We will handle the burden of information exchange with your suppliers.
• We help you complete the information requests from regulators and guarantee the protection of business-critical information, for example about your supplier network.

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