Public U.S. companies may soon be required to disclose climate-related risks

Public companies in the United States may soon be required to disclose their climate change risk strategies. Earlier last week, the Securities and Exchange Commission (SEC) voted 3-to-1 to support a proposed rule requiring firms to disclose their climate risks as well as data on greenhouse gas emissions (GHG) as part of regular annual SEC filings.

This decision comes after five years of exponential ESG (Environmental, Social, Governance) focused growth, with investors, regulators, and consumers all driving demand for responsible businesses and investments. ESG exchange-traded funds witnessed a $120 billion inflow in 2021, more than tripling the previous year's $51.1 billion.

Regulators are recognizing the need for new disclosure criteria regarding climate-related risks, opportunities, and measures as ESG investments begin to dominate the financial sector. Make sure to watch the recording of our recent Q&A session to learn more about the proposed climate disclosure rules.

An overview of the SEC proposal

While the SEC recognizes that many companies are already disclosing climate data and risks in order to meet investor requests, the proposal seeks to ensure consistency in climate disclosures and improve transparency. This is partially in response to over 5,000 public comments the SEC received in 2021 on climate change disclosures, with a majority in favor of stronger disclosure criteria to fight greenwashing.

The SEC proposed rule amendments that would require public companies in the U.S. to include climate-related information in its registration statements and periodic reports (i.e., Form 10-K), including disclosures on:

• Actual or likely physical and transition climate-related risks, such as the financial impacts of severe weather events and other natural conditions, and transition considerations such as financial and regulatory impact of transitioning to clean energy
• Strategy or process to manage these risks
• GHG emissions data, scope 1 and 2 at a minimum with scope 3 required from some filers
• Details about climate-related targets, goals, and plan to meet these
• Climate-related impact on strategy, business model, and future outlook
• Board and management oversight process of climate-related issues
• Metrics and data assurance, as part of a phased approach

The public will have up to 60 days to comment on the plan, which, if enacted, would set up a reporting framework for companies to provide information in 2024 about climate-related risks in reports covering data from the 2023 fiscal year.

A look into the proposed disclosure framework

The proposal establishes a disclosure framework based in large part on the Task Force on Climate-Related Financial Disclosures (TCFD) Framework and the Greenhouse Gas Protocol (GHGP). The SEC believes that incorporating the TCFD framework will facilitate implementation of the new rules since many companies already report climate disclosures based on TCFD guidelines.

The proposed rule would require companies to disclose information about its direct GHG emissions (Scope 1) and indirect emissions (Scope 2), such as purchased electricity or other forms of energy. In addition, some companies would be required to disclose GHG emissions from upstream and downstream activities within their supply chain (Scope 3), if that information proves to be material or if the company has set a GHG emissions target or goal that includes Scope 3 emissions.

These proposals for GHG emissions disclosures would provide multiple benefits, including:

• Providing investors with decision-useful information regarding a company’s exposure to physical and transition climate-related risk and how those risks are being managed
• Providing a safe harbor for liability from Scope 3 emissions disclosure
• Providing an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies

The proposed rules would include a phase-in period for all companies, with a compliance date dependent on the registrant’s filer status. There would be an additional phase-in period for Scope 3 emissions disclosure & data assurance.

What this means for companies & how to prepare

Many companies already disclose many of the items included in the proposal as part of internal and/or external reporting exercises. The Governance & Accountability Institute (G&A) reported that roughly 92% of S&P 500 companies already publish a sustainability report. However, the new proposal will require companies to further track, manage, and plan for climate-related risk, as well as demand companies to disclose GHG emission data, in a more structured, systematic way.

Companies and funds can prepare for impending mandates by implementing ESG strategies and frameworks from the top down. Those ESG efforts should begin by cross-functionally mapping out ESG strategies and risks while working to capture data on relevant, material ESG metrics.

It is important to note that most of the disclosure considerations included in the proposal are provisional to whether a matter is material to the company. According to the SEC, “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote”. The proposal also does not make having a climate-related risk plan or setting goals and targets mandatory. However, it is expected that since investor demand for ESG-centric business plans continues to grow, and as the number of companies disclosing this grows as well, it will be detrimental for a company not to include climate risk considerations into their standard business practices.

Do you want to start diving into what this means for your business and wondering where to start? For those just beginning their ESG journey, we have multiple resources to help you understand TCFD, GHG, and more. Here are just a few of those resources:

• Our blog has articles on a wide range of ESG topics, including reporting frameworks, strategies & best practices, emerging trends, & industry news
• A recent webinar - “Pathways to net zero: A multi-dimensional approach to carbon neutrality”
• The ESG reporting matrix: A guide to understanding the alphabet soup of ESG

Sambhram Patel

In his role as a Senior Solutions Architect, Sam manages portfolio-wide projects for reporting frameworks such as GRESB, CDP, and the S&P CSA for multiple clients. Additionally, he helps drive asset-level sustainability by supporting projects such as LEED, ENERGY STAR, Fitwel, and utility benchmarking.

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