What do you need to know about the SEC's proposed climate disclosure regulation?

For the first time, 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 in March 2022 a proposal for mandatory climate disclosures with an implementation date targeted for the end of the year. This signals a significant shift in the treatment of climate reporting from voluntary to mandatory and will accelerate climate accountability by companies in the world’s largest carbon emissions-producing nation. It is a positive step towards the mainstreaming of climate considerations as a part of business, echoing investor sentiment for climate-resilient investments.

What disclosures will be required?

Taking recommendations from the Taskforce for Climate-related Financial Disclosures (TCFD) and GHG Protocol, the proposed regulation requires 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 accommodates companies at various stages of climate preparedness, with differing requirements for those just starting out with GHG emissions disclosures to those already using scenario analysis and transition plans in their climate strategies. While all companies under the regulation are required to disclose Scope 1 and 2 emissions, there is more leeway with Scope 3 emissions. The proposal requires disclosure of the latter from companies whose Scope 3 emissions are material 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.

Climate risk identification requires an understanding of the physical and transition risks to business over longer time horizons that may run counter-intuitive to traditional financial cycles, and translating those risks to the financial bottom line requires expertise in analytical tools such as 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.