How to Prepare for the SEC’s New Climate Disclosure Recommendations

Ross Pounds
6 min read

SEC Announces New Climate Disclosure Proposal

How should organizations address the climate crisis? A recent announcement by the U.S. Securities and Exchange Commission (SEC) could mark a sea change in how the climate impacts of U.S. listed companies must be disclosed.

In the announcement on March 21, the SEC set out plans to require publicly traded businesses to outline the climate risks their operations bring about – known as Scope 1 and Scope 2 emissions  when they file registration statements, annual reports or other corporate filings.

In addition, larger companies will also have to provide information on Scope 3 emissions (emissions that come from other firms in their supply chain) if they are material to their performance . Smaller companies will be exempt, and the SEC climate disclosures would be phased in over time. As it stands today, many companies only confine their disclosures to informal reports that carry less legal liability.

Large companies would be also required to obtain assurance from an independent third party that their emissions disclosures are accurate. Third parties might include traditional accounting firms, but could include other experts, such as engineering firms.

Companies that have promised to eliminate greenhouse gas emissions or reduce their impact with a net-zero plan must report annually on their progress. They will be required to detail their use of offsets — whether that’s paying to plant trees, capturing carbon, generating renewable energy or any other activity set in motion to compensate for emissions. For organizations who have not yet sought out the technology to assist them when it comes to monitoring ESG activity and achieving their ESG goals, now is the time to take action.

 

The Path Toward Increased Climate Disclosure

Under the Biden administration, a focus on the implementation of climate risk disclosures has progressed at relative speed. From the initial announcement of the Climate and ESG Task Force to the passing of the Climate Risk Disclosure Act of 2021, it’s been clear for some time that renewed efforts to address the impact of U.S. businesses on climate are being made.

With pressure coming from both investors pushing hard for more information about climate risks and green activist groups reasoning that increased climate disclosure will act as a catalyst for more climate-conscious investing, the SEC needed to act.

The announcement made on March 21st (delayed, according to some, since Fall 2021) will, as SEC Chair Gary Gensler noted, benefit both companies and investors by laying out what Gensler referred to as “clear rules of the road” when it comes to climate disclosure. Indeed, as Gensler elaborated in a statement alongside today’s proposal: “Over the generations, the SEC has stepped in when there’s significant need for the disclosure of information relevant to investors’ decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks.”

With the SEC having often emphasized the need for what it termed “consistent, comparable, and decision-useful” disclosures related to climate risk, the announcement on March 21st offered significant insight into what any proposed SEC climate disclosure requirements would be.

As a number of observers expected, many of the plan’s elements align with the TCFD reporting regime, a voluntary framework that asks corporations to disclose greenhouse gas emissions and report on how they manage global-warming risks.

But what do the details of today’s announcement mean for you  and what will happen next?

 

What Happens Next

Even before the recent meeting, the SEC found itself coming up against stern opposition to its efforts regarding climate disclosures. Objections raised so far have included:

  • The SEC lacks the authority to require disclosures that are not financially material
  • The pursuit of implementing climate risk disclosures is beyond the authority of the SEC
  • Requiring SEC climate disclosures will discourage firms from becoming publicly traded
  • Publicly traded companies could sell their greenhouse-gas-related assets to privately held companies

While these concerns remain up for debate, it would be sensible to assume that more objections  and the intensity that surrounds them  will continue to raise their heads.

Going forward, as Bloomberg notes, we can expect to see a major clash between industry lobbyists and Republican politicians who argue the regulations are outside the SEC’s jurisdiction and Liberal lawmakers, environmental advocates and the SEC themselves, who all suggest that mom-and-pop investors need the information to make informed decisions.

From a climate perspective, the March 21st proposal is undeniably a positive one. But crafting effective disclosure regulations is fraught with difficulty, with many seeking to bend the rules or to reject them outright.

The inclusion of Scope 3 reporting requirements for larger companies is likely to be a major bone of contention. Many critics of SEC climate disclosures, for example, have suggested that the SEC has no authority to require disclosures that are not financially material (‘material’ defined in this instance as information that a reasonable person would consider important in making an investment decision), with significant debate being given to which side of the ‘material’ line Scope 3 disclosures fall on.

As noted on The Conversation, the Administrative Procedure Act allows courts to vacate SEC rules that are deemed arbitrary or capricious because the agency failed to offer sufficient justification for choosing the proposal over alternatives. It is a risk that the SEC is acutely aware of, and is one of many reasons why it is choosing to take its time and proceed cautiously.

The steps being taken now have huge implications for the private sector’s response to climate change. With the proposal having passed 3-1 and now moving onto a 60-day public commentary phase, companies large and small will be eagerly watching out for future developments.

 

How Can You Prepare?

While the SEC proposal may currently be more "maybe" than "definitely,” one thing is for certain: the climate disclosure picture for companies is getting ever more complicated. As Beveridge and Diamond suggested recently, with the potential for climate disclosure obligations at both the state and federal level  not to mention multinational companies who will also have to grapple with emerging requirements in the European Union and beyond  organizations must give serious thought to how they will manage differing requirements across multiple regimes and regions.

Companies must now dedicate time and energy to a full understanding of emerging frameworks, and to firmly get a grasp on how to track their Scope 1, 2 and, if necessary, 3 emissions properly. Seek out the right technology to help you aggregate and report on ESG data in an audit-ready manner. Fine-tune your data collection and reporting processes in anticipation of new compliance obligations, and be aware of developments in investor expectations, market shifts and public perception when it comes to ESG.

If you’re still not sure where to go from here when it comes to SEC climate disclosure and finding the right ESG solutions, Diligent are hosting a webinar on March 31st featuring Paul Barker, Partner, ESG & Impact Practice at Kirkland & Ellis LLP, where we’ll discuss the ramifications of the SEC’s new proposal and identify the steps your organization should take next.

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Ross Pounds
Ross Pounds is a Content Marketing Manager at Diligent. Based in the UK and a graduate of the University of Warwick, he has worked as a journalist and across a variety of industries in both corporate and early stage environments, and specializes in long-form content and broader content strategy. Ross has'a particular interest in ESG and pre-IPO companies.