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The SEC Climate Disclosure Proposal – What to Expect
On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) issued a new regulatory proposal that would mandate climate disclosure within financial reports. The comprehensive document is expected to be approved soon. So, what should you expect to see happen once the SEC climate disclosure proposal is approved? In this article, we’ll dive into areas of reporting that will be affected (and how), regulatory changes to be aware of, and future predictions.
Stay tuned for a related article exploring how your company can prepare for the SEC mandate! Or download our Complete Guide to the 2022 SEC Climate Disclosure Rules.
What Areas of Reporting Will Be Affected (And How?)
- Reporting of scope 1 and 2 emissions will be required of all filers via a phase-in schedule based on size of the company.
- Scope 3 emissions (emissions from the value chain) must be reported where “financially material” for larger companies or if scope 3 emissions are included in the company’s existing GHG emissions target. Materiality can be subjective: If a large percentage of a company’s emissions are scope 3, they will want to take a closer look to decide if it is material. There will be safe harbor for companies who do not always have control over changes in scope 3 emissions.
- Small companies will be exempt from Scope 3 disclosures.
- Disclosure of any climate targets the company has set (such as net zero goals) will be required, as well as a description of how the company plans to meet the target and measure progress.
- Companies will be required to disclose targets and goals, e.g., the scope of the activities that are covered, time horizons, how the company plans to meet those goals, the interim targets that are set, data to show if it is on track to meet those goals, and the role of offsets or recs in meeting goals.
Stress Tests of Climate-Related Risk
Companies will be required to disclose:
- Impacts of climate-related risks to business (physical and transition risks), in the short, medium, and long term.
- Their process for identifying climate-related risks and whether the company’s process is integrated into the overall risk management.
- Their strategy for addressing those risks (how are the risks integrated into the company’s business strategy and outlook).
- Advanced strategy – transition plans, scenario analysis, internal carbon pricing, etc.
Climate-Related Financial Statement Metrics
- Companies will need to disclose the impact of climate-related events 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.
- There will be required disclosure of a company’s governance and strategies for management of climate-related financial risks – starting with the board and executive management.
Regulatory Changes to Note
The SEC will require these procedures to ensure accurate and high-quality investor-ready climate data:
- ICFR procedures for data processing and board level governance
- Third-party audits of GHG emissions data and other climate disclosures
- Attestation reports, in which an auditor provides review and assurance over topics other than financial statements
Other important information to be aware of:
- Even though the proposal is being presented now, it could take until the year 2024 until it becomes mandatory.
- There will be an additional phase-out period for companies to deal with data collection.
- Higher carbon footprint companies such as heavy manufacturing and industrial chemical companies are going to face a harder time and might require “exceptions” due to the complexity.
- Some of the nuance related to tracking and penalizing misreporting is still up for consideration since it can sometimes be out of a company’s hands (i.e., third party suppliers or data collectors).
Predicted Future Effects of the SEC Climate Disclosure Proposal
- Sustainability will become less of an optional, segregated department within a larger operational strategy and instead begin to mix with different skillsets and departments.
- As companies report in a way that is consistent, comparable, and reliable, it will be easier for more companies and smaller entities to participate.
- Normalizing good data and reporting strategies will help to bring awareness to climate risks and hopefully, by default, reduce climate risks, creating a more stable and secure economy.
- Acquiring the proper data for sustainability and carbon metrics is complicated to do with consultants and spreadsheets – there will be an increasing need for data software.
- The ruling will create more transparency and gives consumers the ability to see whether companies are doing what they claim they are doing.
- Sustainability information now being subject to scrutiny from the ICFR will trigger a willingness to invest in the technology and talent needed to seriously incorporate sustainability into business practices, which could also change market pricing around physical assets.
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