The U.S. Securities and Exchange Commission (SEC) has put forward a proposal for new regulations to improve and standardize the reporting of climate-related information for the benefit of investors. Originally introduced in March 2022, these regulations were finalized March 6, 2024.
This article provides the latest insights into the SEC Climate Disclosure Rules, detailing essential aspects you need to understand and identifying the entities affected by these rules. It also includes an SEC Climate Disclosures timeline to help you prepare for your submission deadlines and offers strategies for effectively navigating this requirement.
The SEC climate disclosure has been drawn from the Task Force on Climate-related Financial Disclosures (TCFD), which has been the standard requirement used across the globe. The Financial Stability Board (FSB) created the TCFD to develop recommendations about the kind of information that businesses would have to disclose to support investors, lenders, and insurance underwriters in accurately assessing and pricing a specific set of risks that are related to climate change. There are four main themes recommended that include: governance, strategy, risk management, and metrics and targets.
At its core, the proposed rule comprises numerous essential elements. One of these is the concept of ‘narrative disclosures’, defined by the SEC as financial statement disclosures about the company’s climate-related financial risks, which include physical risks and transition risks to their business and their consolidated financial statements. This allows investors to gain a deeper understanding of the company’s potential vulnerabilities and strategic responses to climate change.
Greenhouse Gas Emissions Reporting: The rules mandate disclosure of a registrant’s greenhouse gas emissions, including both direct emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). At the moment, there is no requirement for disclosing Scope 3 emissions, which pertain to upstream and downstream activities in a company's value chain. Whether these emissions are included or not, adding Scope 3 data will give assurance to ESG investors and other stakeholders that data has been recorded and accounted for responsibly. This is key in proving your company’s traceability and that of other entities in your value chain. In parallel, the EU’s CSRD (Corporate Sustainability Reporting Directive) is making Scope 3 disclosures mandatory for its registrants.
Governance and Risk Management: Disclosures will need to include details about climate-related risks that are reasonably likely to materially impact their business, operations, or financial condition. Companies would need to report on their governance of climate-related risks and relevant risk management processes. This includes how identified climate-related risks have or are likely to impact the company's strategy, business model, and outlook, as well as the impact of climate-related events and transition activities on financial statements.
Comparability with International Standards: The SEC's proposal is generally in line with climate disclosure standards in the UK and the EU, and the IFRS's first draft of the ISSB (International Sustainability Standards Board) requirements. However, the SEC's scope is somewhat narrower, and it places greater emphasis on financial metrics.
Challenges and Implications: The rule poses challenges, particularly around Scope 3 emissions which the SEC has now taken out of the requirements.
Impact on Companies and Investors: These rules aim to provide investors with consistent, comparable, and meaningful information for making investment decisions. Companies would benefit from clear reporting obligations, while investors would gain reliable information about climate risks.
Transition Periods: The SEC is expected to include transition periods in the final rules, although details on these periods will be provided only once the rules are officially adopted.
Not only is the SEC Climate Disclosure inevitable, but recording precise ESG data will serve as a fundamental building block to your company’s success in being a transparent player in your industry.
According to PwC’s 2022 Executive Pulse Survey, 6 in 10 investors agreed that prioritizing ESG data would from now on be integral in long-term planning.
The delay in the adoption of these rules follows the SEC's pattern of facing challenges and pushbacks in implementing new regulations, and the rules' finalization and implementation might still evolve. The SEC is also working on other regulatory actions related to environmental, social, and governance factors, indicating a broader shift towards more comprehensive ESG reporting requirements for companies
Related Content
To learn more about carbon emissions, managing, and reporting them, please explore our blog:
• Article: GHG Reporting: Everything You Need to Know
• Article: How Are Carbon Emissions Measured?
• Article: Scope 3 Emissions: 10 Myths Debunked
Large accelerated filers, characterized by the SEC as companies boasting a cumulative worldwide public float exceeding $700 million, will be the pioneers in complying with the SEC Climate Disclosure Rule. They had been allotted a minimum of two years to make necessary preparations for the mandated disclosures as per the new SEC Climate Disclosure Rule.
As per the SEC Climate Disclosure Rule, large accelerated filers must incorporate an attestation report from an external auditor, addressing the disclosure of Scope 1 and 2 emissions. These companies will be the trailblazers in the implementation of this rule, setting the stage for other companies to follow suit.
Conversely, smaller reporting companies are afforded extra time to gear up for the SEC Climate Disclosure Rule. This additional time allows smaller companies to:
Additionally, smaller reporting companies are advised to consider the following strategies:
Thus, while smaller companies have a longer timeline, the preparation and planning needed for compliance with the SEC Climate Disclosure Rule are just as intensive.
The timeline for the SEC's climate disclosure rules has undergone several changes. Here's a brief overview:
This timeline indicates the SEC's ongoing process to formalize climate disclosure requirements, reflecting its response to evolving discussions and feedback from various stakeholders. The final implementation date and details of the rules could still be subject to change based on regulatory processes and further developments
Understanding market dynamics is crucial, especially when observing the transformative shift this decade brings across various sectors, including infrastructure, investment, construction, planning, transportation, and procurement, as they align with the energy transition toward a sustainable economy. This shift underscores the urgency of carbon reporting as an indispensable practice, with no room for delay.
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Book a demo with Net0 today to explore a comprehensive climate action platform designed to simplify the processes of emissions management. Discover how our platform enhances reporting and certification efforts, ensuring your business continues to advance toward a climate-neutral future. Experience firsthand how Net0 can facilitate your company's transition to sustainable business practices, providing the tools and insights needed for effective climate management.
