Insights

March 30, 2022

SEC’s Proposed Climate Disclosures Rule Marks a Radical and Needed Shift in Climate and Financial Reporting

On March 21^st, 2022, the U.S. Securities and Exchange Commission (SEC) issued a landmark proposal for new climate-related disclosure rules for all public companies. The proposed rule passed 3-1 along a party-line vote, with the one Republican commissioner voting against it.  Advocates say the rule would hold companies accountable for their role in climate change and give investors more leverage in forcing changes to business practices that contribute to rising global temperatures.  Opponents argue that the proposed rules would increase compliance costs and go far beyond the SEC’s mandate to protect investors by requiring disclosure of information relevant to companies’ financial performance.

The proposed rule builds on existing guidance from the Taskforce on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol, and would mark the end of voluntary and irregular climate reporting in the U.S.  The “Enhancement and Standardization of Climate-Related Disclosures,” as the proposed rule is called, is the most extensive and comprehensive disclosure initiative in decades and would be phased in from 2024 to 2026 depending on company size (most SR Inc member companies are considered Large Accelerated Filers and would need to comply in 2024 for their FY23 financial reporting).  The rules are designed to provide a more thorough and consistent means for investors to evaluate companies’ climate-related risk profiles and management plans for those risks.  Member-Clients will be required to disclose:

• Climate-related risks and their likely impacts to businesses in the short, medium, and long-term
• Oversight & governance by boards and management for those climate risks
• Scope 1 & 2 GHG emissions and an attestation report from an independent attestation service provider covering those emissions
• Scope 3 GHG emissions (if material or included in company goals)
• Climate-related financial statement metrics and related disclosures in audited financial statements
• Information about any climate-related goals and descriptions of any scenario analysis, transition plans, and carbon prices in place

SR Inc’s Member Advisory, available to Member-Clients today in our Digital Library, goes into detail on the major components of the proposal and what it would require for most SR Inc Member-Clients.

It is unclear which parts of the proposals will make it to the final rule and how many legal challenges the final rule will receive, but we nonetheless expects this proposed rule to affect all companies, regardless of whether the SEC regulates them, and especially if they are in the value chain of other companies affected by this rule.  For example, the practice of requiring suppliers to provide their Scope 1 & 2 emissions to customers is likely to accelerate if this rule is adopted.

SR Inc recommends that companies begin preparing for these rules now.  While Member-Clients are at different stages of preparedness, we offer below a “checklist” of ESG program and reporting tasks to be prepared for the new reporting requirements:

1. Conduct a Scope 1-3 GHG footprint analysis
2. Conduct a materiality assessment
3. Develop a global decarbonization strategy for Scopes 1-3 and initiate procurement implementation (for at least Scopes 1-2)
4. Set global ESG goals including Science-Based Targets
5. Implement an ESG governance structure reporting to an established board committee
6. Report to the CDP
7. Conduct TCFD climate scenario analysis and identify & quantify physical and transition risks
8. Secure a third-party reporting assurance firm
9. Identify a plan for incorporating ESG data, findings, and progress into SEC required statements (as per above)
10. Complete reporting in alignment with the TCFD recommendations

As always, the SR Inc team is ready to help with this kind of analysis within the SBER membership service.  SR Inc also encourages Member-Clients to make an official comment to voice their support or concerns related to the proposal.  The comment period for the proposal is open through May 20, with a final rule expected by the end of 2022.  Litigation is likely to follow the final rule before it is expected to go into force in 2024 for 2023 fiscal year reporting.