Beat the Buzz: Steps to Stay Ahead of SEC’s Proposed Mandatory Climate Disclosure RulesESGRC | 6 Min Read |07 April 22|by Anand Hanchinamani
Industry circles are abuzz with what is being touted as the next big landmark announcement after Sarbanes-Oxley and Dodd-Frank. On March 21, 2022, Wall Street’s top regulator, the U. S. Securities and Exchange Commission (SEC) proposed new climate-related disclosure rules. The announcement revealed that all SEC registrants would be mandatorily required to include certain climate-related disclosures in their registration statements and periodic reports.
What are the New Rules and What’s the SEC’s Aim?
The proposed new rules will require public companies to disclose:
1) the climate-related risks that impact their business
2) their greenhouse gas emissions
To dive in deeper, quoting the SEC’s press release, this will include “information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.” Most importantly, the mandatory disclosure information would also need to include “disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.”
The goal behind SEC’s proposed mandatory climate disclosure rules is simple.
- Ensure standardization of climate-related disclosures
- Provide consistency and greater transparency in reporting for investors to make informed investment decisions
What Does This Mean for Your Organization? Should You Anticipate any Challenges?
According to the SEC, about one-third of public companies have already issued climate-related disclosures in their financial statements in 2019 and 2020. The SEC’s Fact Sheet on the new proposed rules requires large companies, by FY 2023, to:
- disclose greenhouse gas (GHG) emissions (Scope 1)
- disclose indirect emissions from electricity and other forms of energy (Scope 2)
- disclose GHG emissions from upstream and downstream activities in its value chain (indirect GHG emissions not otherwise disclosed in Scope 2 emissions) (Scope 3)
(Note: Smaller reporting companies would be exempt from GHG emissions disclosure under Scope 3. Additionally, a safe harbor provision is provided for Scope 3 GHG disclosures.)
Upon inspection of the proposed climate-disclosure rules, several challenges have been identified. The most pertinent are:
- Resource requirements for mid-sized and smaller companies: The new proposed regulations will require mid-sized and smaller companies—many of whom have to date not measured climate-related risks or tracked emissions—to seek additional resources to manage this disclosure requirement including having their GHG emission disclosures attested by a third-party.
- Private companies will be looped in as well: Although the proposed regulations require only public companies to comply, the rules may affect private companies as well. Suppliers to public companies will need to start measuring and reducing their emissions or else public companies won’t be able to meet the required disclosure mandate.
- Data collection for Scope 3 emissions: With the new rule proposing that organizations disclose GHG emissions generated in their supply chain and customer base, measuring and tracking can become a challenge. Organizations are concerned if this means that they will have to pressure their supply chain to reduce Scopes 1 and 2 emissions indirectly. Without a proper methodology to calculate Scope 3, corporates may be exposed to the risk of incorrect data from third-party suppliers.
- Potential legal and regulatory risks need to be assessed: Meeting the proposed mandatory climate change requirement would require companies to assess and evaluate any potential legal or regulatory risks and also estimate the costs involved in complying with the new rules.
So How Do Organizations Stay Ahead?
1. Start with the data
For larger companies, consolidate all your climate-related data and determine what additional data needs to be provided to comply with the new regulations. For mid-sized and smaller companies, start building an inventory, especially for your climate-related data.
2. Determine the physical climate-related risks, the policies and procedures put in place, and how you are reporting this
Whether you are a large corporation or mid-sized firm, it is important to disclose the physical climate-related risks that will financially impact your overall business. For instance, physical environmental risks like wildfires or hurricanes can impact properties and operations. Transition risks, such as an organization’s environmental targets and its plans to reach them, will also have to be disclosed. GHG emissions, as per Scope 1, 2, and 3 (if applicable) will have to be determined.
3. Evaluate your current methods to calculate for Scope 1-3 and your reporting framework
a) Decide on your evaluating methods
- For Scope 1, do you directly measure or analyze based on fuel input?
- For Scope 2 accounting, will your organization be following a location-based vs market-based method?
- For Scope 3, do you now require your business partners, suppliers, and/or clients to provide their GHG emission figures written in their contracts?
Scope requirements are constantly changing, and organizations need to stay abreast with the latest revisions and additions. As per the United States Environmental Protection Agency (EPA) Center for Corporate Climate Leadership, climate-related data classified under each scope currently is as follows:
Scope 1: All direct GHG emissions which are controlled or owned by your organization. This includes both sources of:
- Stationary combustion such as boilers, furnaces, etc., at your facilities
- Mobile combustion such as vehicles owned and operated by your organization
- Indirect GHC emissions from purchased electricity, steam, heat or cooling
- Direct GHC emissions from refrigeration, air conditioning, or fire suppression systems and industrial gases
b) Ensure all climate-related data is aggregated in a centralized repository supported by internationally recognized disclosure frameworks
With the proposal to make climate-related disclosures mandatory, it becomes increasingly important for organizations to collate and centrally manage all siloed climate-related data in a centrally managed repository as per internationally recognized disclosure frameworks.
Currently, various ESG frameworks including the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosure (TCFD), and others, provide organizations with the structure and methodology to measure, assess, and report on their ESG initiatives (including GHG emissions), risks, and opportunities.
Keep in mind, under the proposed rules, ‘accelerated filers’ and ‘large, accelerated filers” must include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions to ensure the reliability of the GHG disclosures.
c) Review overall timeline and plan for associated costs
With the potential legal and regulatory risks involved in following this new disclosure, you need to evaluate how much resources (e.g.: people, technologies) are required and the costs that would entail and forecast them in your overall budget.
Get Ready for What’s Next with MetricStream ESGRC
MetricStream’s ESGRC product offers ready-made disclosure templates for different audiences and even allows you to collect data in your own proprietary format. This will then be augmented by an external data feed from third-party ESG rating agencies enabling you to monitor your score and find any gaps in your own data.
And in the case of Scope 3, which is by far the hardest for companies to disclose, MetricStream ESGRC enables data gathering from your supply chain. Everything related to ESG is under one roof, in a single place—simplifying compliance with the SEC’s climate-disclosure rules and other ESG regulations and reporting standards.
Interested to know more about how MetricStream ESGRC can help you prepare for SEC’s proposed mandatory climate disclosure rules? Write to me at [email protected]