The U.S. Securities and Exchange Commission (SEC) has finalized its long-awaited rule that will require thousands of publicly traded companies to disclose certain climate-related risks and information.
Under the new rule, known as The Enhancement and Standardization of Climate-related Disclosures, all publicly traded companies must now disclose certain climate-related information in their registration statements and annual filings, such as their 10-K). The final rule requires a company to disclose, among other things:
- material climate-related risks,
- activities to mitigate or adapt to such risks,
- information about the company’s oversight and management of material climate-related risk; and
- details on any climate-related targets or goals that are material to the company.
As defined by the Commission and consistent with Supreme Court precedent, a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities, or how to vote, or if a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.
The final rule walked back the initial draft requirement of disclosing scope 3 value chain greenhouse gas (GHG) emissions and instead only requires disclosure of scope 1 and/or scope 2 GHG emissions on a phased-in basis by certain larger companies (Large Accelerated Filers and Accelerated Filers) when those emissions are deemed material. There is also a phased-in requirement for an attestation report covering the scope 1 and scope 2 emissions disclosure. Finally, there is a requirement to disclose costs and losses and financial statement impacts from severe weather events and other natural conditions.
Expenses and other details related to the purchase of carbon offsets and renewable energy credits (RECs) must also be disclosed when used as a material component of a company’s plan to achieve GHG reductions. Companies with a current carbon neutrality commitment or a net zero commitment that use a significant amount of carbon removals to achieve that commitment will likely consider carbon offsets material. Required information to disclose will include the source, cost and registry authentication of the REC or offset, as well as additional quality attributes.
The final rule includes a phased-in compliance period for all registrants, with the compliance date dependent on the filer status and the content of the disclosure.
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While some stakeholders see the new SEC ruling as going too far, others say it has not gone far enough to address pressing climate issues. Whatever your view, now is the time to solidify plans for compliance. Here are five steps that forward-thinking companies are taking now to prepare for these SEC requirements:
1. Refine Climate Governance
With climate disclosure now the purview of the SEC, companies should review current governance approaches and identify opportunities to strengthen them. This may include increasing corporate board oversight as well as board competency in climate-related matters.
Also, review the role and composition of the committee(s) tasked with climate governance, ideally ensuring C-suite representation and active subject matter experts who can provide practical insights into corporate targets, progress and potential exposure.
Companies will also benefit from engaging with external experts who can share best practices and provide a candid third-party perspective on how corporate commitments, plans, timelines and actions may be perceived externally.
2. Build Agility in Tracking, Reporting and Assurance for GHG Data
It’s all about the data!
Companies should take steps to minimize potential unknowns, gaps and vulnerabilities around their tracking and reporting. Review what you are tracking and how. Consider questions such as:
- Who is on point for ensuring data quality?
- Do they have the experience to deliver against rising expectations for data quality and integrity?
- What is the basis for our company’s climate-related calculations?
The rule includes a requirement for enhanced third-party data assurance in the form of an attestation report covering the reporting of scope 1 and scope 2 emissions for certain larger registrant companies. This means companies should plan for the additional time and budget involved with data compilation, management and assurance of GHG emission inventories.
It is also important to note that privately held companies in the value chain of listed companies may be indirectly affected by this ruling via requests for GHG emissions data and/or climate risk data, furthering the need for assurable data reporting.
It’s also a good time to explore what it would take to align to an internationally recognized climate disclosure framework, such as The International Financial Reporting Standards Foundation’s Sustainability Standards (S1 and S2), or how to uplevel initial efforts to align to external standards.
Doing so can strengthen your overall reporting efforts and reliability of disclosures.
Privately held companies in the value chain of listed companies may be affected by this ruling via requests for GHG emissions data and/or climate risk data.
3. Review Your Emissions Reduction Targets and Transition Plans
Tracking and reporting are at the heart of the SEC requirements, and stakeholders will invariably measure and compare climate performance among corporations.
To prepare for likely peer comparisons by external stakeholders, companies need to proactively conduct, or refresh, peer benchmarking of this fast-moving space.
An audit of the climate-related questions or expectations in requests for proposals and competitive tenders is a relatively basic first step. Along with other information, this audit can provide context to help the corporate climate governance committee re-evaluate current goals and progress. Progress reviews will likely become a regular practice, as climate considerations are increasingly incorporated into standard business planning and budgeting processes.
To minimize potential accusations of greenwashing, consider submitting corporate emissions goals for approval by the Science Based Targets initiative and developing a credible transition plan that discusses the governance and strategies in place to achieve emissions reduction targets and climate goals. If a company has developed emissions targets or a transition plan, the company is required to disclose any progress made toward meeting the target or transition plan and how any such progress has been achieved under the rule.
Additionally, under the rule, if a company determines RECs and carbon offsets to be a material component of a company’s plan to achieve GHG reductions, companies must also report how fluctuating supply and demand and associated price variability of REC or offset products might present an additional material risk.
In evaluating long-term price variability, organizations need to consider how the unique aspects of each offset or REC could impact supply and demand. For carbon offsets, supply and demand are largely driven by the overall project quality and project type. For RECs, long-term price variations are expected to be influenced by the location where the renewable energy is generated, total quantity, the length of the purchase agreement, and any unique attributes of the purchase.
Finally, whichever emissions reduction goals and targets you set for your company, provide transparency in the efforts to achieve the goals, as well as provide timely, accurate updates on progress and barriers to achievement.
4. Evolve Your Approach to Risk
With this ruling, the SEC is confirming what some prominent investors have been saying for years: climate risk is business risk.
While climate risk management and disclosure are akin to longstanding financial disclosure requirements, in many ways, climate action is more challenging and subject to interpretation. Companies familiar with preparing TCFD-aligned reporting have already begun to see how the business community is expected to address climate-related issues as both material and ongoing business concerns and investment concerns.
By now, companies need to be working to integrate climate risk assessment and mitigation efforts into their overall enterprise risk management process. Participating in relevant industry, corporate and/or location-based groups can also help to provide perspective and illuminate emerging risk issues.
While climate risk management and disclosure are akin to longstanding financial disclosure requirements, in many ways, climate action is more challenging and subject to interpretation.
5. Look Ahead
Companies need to see this SEC ruling as the beginning — not the end — of climate-related disclosure fueled by regulation.
Now is the time to re-evaluate potential implications of additional frameworks and requirements such as the EU Corporate Sustainability Reporting Directive, the California Climate Corporate Data Accountability Act, and the UK Climate-related Financial Disclosure regulations, to name a few.
A unified approach to alignment with multiple regulations can reduce risks and compliance costs. More strategically, companies must look ahead at their business including their customer expectations, growth strategy, geographic footprint, value chain, production model and vulnerabilities, investments, supply chain and other factors that need to be considered with the SEC ruling.
The SEC ruling affirms that business strategy and climate strategy engage similar stakeholders — including shareholders and the broader investment community, regulators, top management, current and prospective employees and customers, and the media, among others. Those audiences are watching closely.
Companies need to continue to evolve governance and disclosure of climate-related risks and performance — not only to prepare for SEC requirements, but also to find new sources of competitive advantage and to realize opportunities while meeting evolving stakeholder expectations in a rapidly changing world.
I humbly offer this differentiation as I see it: WSP brings extensive experience working with clients to carefully evaluate policy-level information such as the SEC ruling, shape it for companies and communities to understand the real-world implications, then drive and deliver implementation.
WSP will continue to monitor and share any news on this and other rulings.
Joe Sczurko is U.S. president of Earth and Environment at WSP, a leading environmental, engineering and professional services consultancy. He has more than 35 years of experience helping companies overcome challenges through high-impact strategies and integration of business and environmental and infrastructure risk issues.
For more information, Sczurko discusses his thoughts on the impact of two lawsuits opposing the new SEC rule in a Triple Pundit article, “SEC Climate Disclosure Rule: Let the Lawsuits (and the Decarbonization) Begin.”
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