The SEC’s Climate Disclosure Rule Proposal
Over the past few years, the U.S. Securities and Exchange Commission (SEC) has been developing a climate disclosure rule for public companies so investors have consistency and transparency on the climate-related risks or potential business investments. Currently anticipated for April release, the business community should understand the implications and identify preparations needed for compliance.
SEC's Journey Towards Climate Disclosure
Since the initial proposal was released in March 2022, the SEC's climate disclosure rule has gone through many phases, including numerous public comment periods and drafts. Originally slated for release in December 2022, the finalization has been postponed multiple times, with the latest update now projecting an April 2024 release. Of course, if the past is any prediction of the future, further postponements remain a possibility.
What Does the SEC Climate Disclosure Rule Include?
In broad strokes, the rule mandates all publicly traded companies in the U.S. to disclose climate-related information annually. The current draft includes:
Identification of Climate Risks: Disclosure of climate-related risks and how these may impact business operations and finances.
Adaptation and Mitigation Strategies: Disclosure of measures taken to adapt to or mitigate identified climate risks.
Greenhouse Gas (GHG) Emissions Reporting: Report annual GHG emissions across Scopes 1, 2, and potentially Scope 3.
External Assurance of Emissions Data: Provide external assurance of emissions data, similar to what is required for other financial information.
Climate-related Goals and Targets: Disclosure of any publicly set climate-related goals or targets, paired with detailed plans to achieve them.
Compliance Horizon: Who Needs to Comply with the SEC Rule?
All publicly traded U.S. companies, regardless of size, must comply with the rule. The timeline for compliance varies, with larger filers facing a shorter runway compared to smaller reporting companies. Due to the specific reporting requirements outlined by the SEC, all companies that fall under the SEC's jurisdiction will need to report to this rule via a company’s Form 10-K.
While uncertainty surrounds whether the final SEC rule will mandate Scope 3 reporting, the global landscape indicates a growing trend toward such disclosures. California's recent climate laws and the EU's CSRD underscore the importance of disclosing Scope 3 emissions, which normally constitute a significant portion of a company's carbon footprint.
Even if a company doesn’t have to comply with the California laws or EU CSRD directly, if they are a supplier to a company that does, they are most likely going to have to disclose their emissions to their customers as part of their supply chain. From a climate change perspective, Scope 3 represents more than 70% of emissions for most companies. Not including it in calculations of emissions severely limits visibility into a company’s real impacts.
Preparing for Compliance: What Steps Should Companies Focus on Now?
Navigating the complexities of emissions reporting and climate risk management requires early, proactive measures:
Understand Scope 3 Categories: Identifying relevant Scope 3 emissions categories (from among the 15 different categories) and prioritizing based on supply chain impact is the first step to understanding the company's full supply chain.
Engage Suppliers and Collect Data: Gaining visibility with direct suppliers and initiating data collection efforts. Companies sometimes struggle to get even basic information from suppliers, but starting where you have the greatest visibility will yield the best results.
Learn about Corporate Climate Risk: Climate risk falls into two categories: physical risk (weather-related) and transition risk (the ability of the company to adapt to policy changes). Every company has unique and widespread climate-related risks to its primary business and supply chain that need to be identified and addressed, as they can have major financial implications. Educating yourself on climate risk can help you prevent and prepare for climate risks that impact your business.
Partner with Experts: Collaborating with partners like The Uplift Agency who specialize in corporate emissions and climate risk can help you understand where your company is, where it needs to be, and what you need to do to get there.
Broader Regulations: Compliance Beyond the SEC
The SEC rule is just one of many climate-related requirements and regulations companies are being asked to comply with. Similar regulations from Canada, California, the EU, and other regions are emerging. From Canada's aligned disclosure regulations to the EU's comprehensive CSRD law, the global regulatory landscape is evolving rapidly, demanding a holistic approach to climate disclosure and risk management.
While the specifics of the final SEC's climate disclosure rule remain uncertain, the imperative for companies to navigate emissions reporting and climate risk management is undeniable. Developing and executing a compliance strategy can ensure your company is positioned for compliance and steer you towards a more resilient business.
Additional Resources on Recent Regulations:
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Uplift builds strategies, programs, and communication campaigns that advance ESG in workplaces, supply chains and communities.
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