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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.
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:
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.
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.