The U.S. Securities and Exchange Commission (SEC) has proposed a new rule for climate disclosure by publicly listed companies. On March 21, the SEC announced actions for “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”
The SEC voted 3-1 in favor of the 510-page proposal, which will be open to public comments over the next 60 days.
After the review period, the SEC may revise the proposal before holding a vote to finalize the rule, which is expected to go into effect starting in 2023. The proposed ruling applies to publicly listed companies in the U.S., which are under the regulatory jurisdiction of the SEC.
The SEC noted that investors “have expressed a need for more consistent, comparable and reliable information about how [a publicly listed company] has addressed climate-related risks when conducting its operations and developing its business strategy and financial plan.” The new proposed rule builds on several existing frameworks that many companies – and their investors – are already familiar with such as the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and the Greenhouse Gas Protocol.
The SEC announcement stated:
“The proposed rule changes would require [companies] to disclose information about (1) the [company’s] governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.”
In addition, according to the accompanying SEC fact sheet summarizing the proposed rules, registrants will be required (amongst other things) to report on overall [GHG emissions] footprint, including their:
- Direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2), separately disclosed, expressed both by disaggregated constituent greenhouse gases and in the aggregate, and in absolute terms, not including offsets, and in terms of intensity (per unit of economic value or production);
- Indirect emissions from upstream and downstream activities in a registrant’s value chain (Scope 3), if material, or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions, in absolute terms, not including offsets, and in terms of intensity; and,
- If the registrant has publicly set climate-related targets or goals, information about: the scope of activities and emissions included in the target, the defined time horizon by which the target is intended to be achieved, and any interim targets; how the registrant intends to meet its climate-related targets or goals; relevant data to indicate whether the registrant is making progress toward meeting the target or goal and how such progress has been achieved, with updates each fiscal year; and if carbon offsets or renewable energy certificates (RECs) have been used as part of the registrant’s climate targets or goals.
“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.” SEC Commissioner Gary Gensler said in the announcement. “Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do.”
The announcement of proposed new rules expands upon the SEC’s 2010 guidance on climate change, and is intended to bring into companies’ filings information that might otherwise appear in their corporate responsibility or sustainability reports, which are not subject to SEC regulation. The SEC is looking for consistency between climate-related disclosures found within companies’ corporate social responsibility (CSR) reports and regulatory filings in terms of their scope and detail.
Gensler said the proposal, if adopted, would provide investors with “consistent, comparable and decision-useful information for making their investment decisions,” as well as require consistent and clear reporting obligations for issuers.
Former SEC Commissioner Allison Herren Lee echoed that sentiment, stating: “This is a watershed moment for investors and financial markets as the Commission today addresses disclosure of climate change risk – one of the most momentous risks to face capital markets since the inception of this agency.”
The SEC announcement called for “public input on the Commission’s disclosure rules and guidance as they apply to climate change disclosures, and whether and how they should be modified” in the broader context of how the SEC might update its guidance to entities that make public filings with the SEC.
Proposed Reporting Timelines
Publicly listed companies will have specific timeframes to comply with the new SEC rule, once implemented, depending on their size and registration category with the SEC.
Assuming the proposed rules will be adopted December 2022 and that the filer has a Dec. 31 fiscal year-end, certain large companies will be required to report on their status and progress with proposed disclosures, including GHG emissions metrics: Scope 1, Scope 2, and associated intensity metric, but excluding Scope 3, in FY23, with filing due in FY24; and will be required to report on Scope 3 and associated intensity metric in FY24. Other companies will begin to file greenhouse gas disclosures in 2025 or 2026.
Read more: 10 Key Questions for Publicly Listed Companies.
Implications of the Proposed SEC Rule
The new rule will focus both investors and publicly listed companies in the U.S on climate risks.
“Companies that have taken steps to identify, quantify, assess, and manage their climate risk exposure in a systematic way will be better positioned to meet the requirements of the proposed SEC regulation,” said Michael Mondshine, WSP USA senior vice president.
If adopted, the long-term impact of the new SEC rules will improve both firms’ ability to identify, assess and manage their climate risks, as well as strengthen investors’ ability to differentiate between firms as they build investment portfolios that can outperform their relevant market benchmark.
“Regardless of regulation, climate change is beginning to have financial implications for all companies and investors, whether through losses, or in some cases, cost of capital,” said Stacy Swann, WSP executive vice president. “Companies and investors that begin to identify the financial implications of climate-related risks will not only be well positioned to align their strategy and operations in a way that meets investor expectations, but will also be exceptionally well positioned to meet disclosure requirements.”
“This is a turning point for climate change regulation in the U.S.,” added Emily Wasley, WSP climate, risk, adaptation and resilience practice lead. “We anticipate this will translate into rules that require companies to disclose their plans and progress towards achieving any climate targets they publicly announce, particularly net zero commitments. These regulatory changes will directly impact our clients and the services they seek, but also clarify the expectations regulatory bodies and investors have for companies to operate as the sustainable and resilient, organization that they wish to be, and the accountability and transparency the public expects from corporations.”
“Companies that view the undertaking as an opportunity to improve their competitive market position will be better placed to seize opportunities to identify, quantify, assess, and manage their climate risk exposure than companies who view the new rule as strictly a compliance exercise,” said Darius Nassiry, WSP practice leader, Sustainability, Energy and Climate Change.
TCFD Advisory Support
WSP has publicly supported the TCFD recommendations, which serve as an important reference point for the proposed SEC rules on climate change, and is partnering with clients across sectors and industries to provide technical and strategic support to advance climate action, including helping to enhance the overall sustainability and resilience of companies and organizations. WSP recently published it's first stand-alone TCFD report.
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