The SEC just unveiled stringent mandatory climate disclosures for U.S. public companies. Considered to be one of the most sweeping environmental actions to date, the 534-page proposal would require companies for the first time to provide information on climate risks and how they plan to address those risks. The aim is to provide more consistent, comparable, and reliable information for investors to evaluate climate-related risks.
If adopted, these requirements will have far-reaching impacts on how companies measure, monitor, analyze, govern, and report on greenhouse gas emissions and other climate risks from their own operations (Scope 1) and from the energy they buy and consume (Scope 2) like electricity and heat. Estimates on these emissions will need to be independently certified.
Where it gets especially tricky is with Scope 3 emissions. Scope 3 is a very broad category that includes the emissions impacts of the actions you take outside of your direct control. The greenhouse outputs of supply chains and consumers’ use of products fall under this category. Flights and leased vehicles also would be included. For financial services companies, Scope 3 would include the emissions impact of investments.
Scope 3 disclosures only apply to the largest companies and would only be mandatory if the output of those greenhouse gases is material or if specific targets are stated – e.g., if a company had announced plans to reach net-zero emissions by a certain date. Companies, however, would not be required to obtain independent certification that their estimates are accurate and would not be held liable if they were provided in good faith.
The move to formalize ESG reporting requirements – and climate impacts in particular – has been gaining momentum worldwide. While many firms have responded to growing pressure by voluntarily reporting at least some ESG-related data, these disclosures are inconsistent and difficult for investors to make comparisons. The SEC rules would bring a measure of clarity and consistency to the reporting process. “Companies and investors alike would benefit from the clear rules of the road proposed in this release,” said SEC Chairman Gary Gensler.
The SEC’s proposal is partially modeled on the framework developed by The Task Force on Climate-Related Disclosures (TCFD), which is one of the most widely used ESG frameworks. Even if you have incorporated this framework into your voluntary ESG reporting efforts, however, it’s essential to take stock of your processes, metrics, and technology and make adjustments as needed.
Here are four actions to take immediately:
- Establish your ESG metrics for reporting Scope 1 and Scope 2 emissions, as well as Scope 3 if you have announced a reduction target.
- Formalize your risk management and governance processes to identify climate-related risks and report on progress.
- Evaluate your climate-related risks in terms of the financial impact and operational resiliency.
- Implement technology that will facilitate data collection and metrics tracking throughout your organization and entire supply chain
The proposed rules are open to public comment for the next two months and are expected to be finalized later this year. If enacted, Scope 1 and Scope 2 disclosures would be required by fiscal year 2023 for larger companies and fiscal year 2024 for smaller companies, with assurances for those disclosures phasing in starting in 2024 for large companies.
For more on climate-risk reporting, download our e-book, Taking a Stand on ESG, and check out Riskonnect’s ESG software solution.
