SEC’s climate disclosure rule proposal explained

The U.S. Securities and Exchange Commission (SEC) has issued a rule proposal to standardize the way organizations make climate-related disclosures.  The rule proposal would require U.S. publicly traded companies to disclose annually how their businesses are assessing, measuring, and managing climate-related risks.  This would include disclosure of greenhouse gas emissions as a measure of exposure to climate-related risk.

The proposed rule would standardize climate-related disclosures for investors, allowing them to clarify exposure to risk and potential impact on the business operations or financial condition of the organization they are investing in.

Why SEC’s climate disclosure rule proposal matters

This rule proposal follows global efforts in recent years to standardize climate-related disclosure requirements for organizations.

Whilst many companies already disclose their GHG footprint, there are discrepancies with how this is reported even within the same industries. SEC’s rule proposal aims to harmonize emissions reporting, ensuring data is comparable and transparent for shareholders, investors and the public.

The enforceable nature of the rule proposal if enacted, will also require companies who have never previously reported on their GHG emissions to do so – increasing the significance of climate-related risks to portfolio managers.

Evidence from other geographies shows the significant impact these mandates can have on emission reduction.  Mandates drive action, as seen in Australia when the National Greenhouse and Energy Reporting (NGER) Act was introduced in 2007, which now includes hundreds of registrants reporting on their energy production, consumption and GHG emissions.

The United Kingdom is also taking up the mantle this year with plans to mandate UK-registered companies and financial firms to disclose their emissions, and the European Union is set to force all large companies listed on the European stock exchange to report their emissions beginning in 2024. 

How will organizations be impacted if SEC’s rule is enacted?

SEC’s proposed climate disclosure rules are targeted at large, publicly listed US companies.

The rule proposal includes some flexibility around Scope 3 emissions reporting including an exemption for smaller reporting companies.

SEC’s climate-related proposal requirements

SEC’s proposal is aligned with existing recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).

SEC’s proposed rule amendments would require organizations to disclose certain climate-related information including:

• greenhouse gas (GHG) emissions, Scopes 1, 2 and 3 (reported to an auditable standard)
• disclosure of climate-related risk, impacts, targets and goals
• systematic management of offsets and REC’s
• articulation and management of a transition plan
• finance-grade reporting aligned with TCFD

Next stage in SEC’s rule proposal

The public will have 60 days to submit comments after the proposed rule is published on the SEC’s website. The agency will take those comments into consideration before issuing a final rule, which will be voted on by the SEC’s commissioners.

In its fact sheet, the SEC stated that the new requirements would be phased in over several years. The largest companies would need to start disclosing climate risks in 2023, while other firms would have until 2024.

Envizi will continue to closely monitor developments as SEC’s climate disclosure proposal moves through consultation stages, and as further announcements by the SEC are made.