In a major development for U.S. companies and regulatory interest in climate disclosure, the SEC recently proposed rules for climate reporting and disclosure requirements. These changes have the potential to reshape corporate approaches to climate change management and align the nation with global greenhouse gas emission reporting practices. What’s more, the new rule presents an unprecedented opportunity for organizations to re-evaluate their climate risk, commitment and reporting ecosystem. Here are three takeaways listed companies should keep in mind regarding the new rule:
Assessing and managing climate risk
In requiring companies to determine climate-related risks and their impacts, the SEC has taken a step toward how companies affect climate change, and how climate change affects companies.
In 2021, natural disasters were responsible for $111 billion in insured losses globally, according to Swiss Re. Hurricane Ida was the single costliest disaster in the United States. As climate events grow increasingly intense, frequent and devastating, companies that have yet to evaluate their climate risk will be required to do so under the new rule. Those that have evaluated their risk will need to disclose how it was assessed, what those risks include and how they plan to manage the risk moving forward. Besides planning for both physical and transition risks, companies also will need to disclose material financial impacts due to climate change in annual financial reporting.
Industrial complex flooding, weather-induced power outages, drought and more can have a wide array of physical and financial ramifications on operations. It is critical that companies assess various scenarios to understand the threats, design effective climate governance protocols and leverage sustainability best-practices for monetizing damages, to maintain compliance and ensure long-term climate resilience.
Including Scope 3 emissions in the big picture
Per the SEC, “The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2).”
As part of the new rule, some companies are also required to report relevant Scope 3 emissions categories, or the indirect emissions that result from upstream and downstream activities in an organization’s value chain.
This change will require many organizations to look more holistically at their operations, factoring in supply, resourcing and transportation impacts. Given the logistical complexity associated with Scope 3 emissions, the SEC has proposed some accommodations to ease the transition to Scope 3 reporting.
The Scope 3 rules are for large, accelerated, and non-accelerated filers (small reporting companies are exempt), and the reporting requirements will be phased in at different dates based on the filing status of the reporting company. Scope 3 emissions calculations and progress will also be required for relevant categories if the company has set a GHG emission target or goal that includes Scope 3 emissions (progress toward net zero goals would therefore be included under this rule).
Many organizations may find it valuable to consult with third-party experts to ensure all factors are considered and reported accurately. This change also requires companies to disclose their climate-related goals, providing an opportunity to re-evaluate how progressive your organization may be amidst increasingly ambitious targets.
Reasonable assurance will be required down the road
Likely a relief to many, these requirements will not go into effect immediately. While different stipulations apply based on filing status, Scope 1 and 2 emissions must first be filed (as opposed to furnished) in FY23 and will need to undergo limited assurance then respective assurance in consecutive filing years. This gives organizations time to evaluate their reporting ecosystems and pursue their goals with growing commitment. Large accelerated filers, on the fastest track, will need to disclose Scope 3 emissions beginning in FY24.
For more information on some of these details, the SEC has provided a helpful resource in the form of their Enhancement and Standardization of Climate-Related Disclosures Factsheet.
Ultimately, the proposed rules will change how organizations approach their climate goals and practices. However, it also offers U.S. companies a chance to compete with global emissions reduction commitments and lead the way toward lasting sustainable changes that benefit the nation and the economy. And with the latest IPCC report detailing the importance of accelerating these actions, it is truly now or never.