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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.
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:
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.
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.