The SEC's Proposed Rule on Climate-Related Disclosures
Get a summary, key highlights, and a fresh perspective.
Introduction
On March 21, 2022, the SEC announced a sweeping new proposal for climate-related disclosures by public companies in the United States. Many companies and organizations are applauding the proposed rule, especially investors and large asset managers, while others are expressing concern about aspects of the rule. Across the US economy, however, very few companies are fully prepared.
Why did the SEC take this action?
In the SEC’s view, climate risk is financial risk. This includes increasing physical risks from extreme weather events, as well as transition risks like shifting legal or compliance costs, technology change, or damage to a company’s reputation.
The SEC’s disclosure rule aims to ensure that investors and markets can access consistent, clear, and decision-useful information about a company’s exposure to climate-related risks and opportunities.
What would the proposed rule require?
The proposed rule would mandate that publicly-listed US companies disclose both direct and indirect greenhouse gas (GHG) emissions (i.e., climate emissions directly caused by the company’s activities and those occurring as a result of energy purchasing or within the supply chain).
The rule also aligns with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), with critical implications for US companies (see “Point B’s Perspective”, below). However, the SEC goes beyond TCFD in several key areas – including integration with traditional financial reporting, assurance (auditing) of key categories of GHG emissions, and heightened scrutiny and risk around use of carbon offsets and renewable energy certificates (RECs).
When will the rule be finalized?
The SEC’s announcement on March 21st launched a 60-day public comment period, with the final rule expected later in 2022.
Who will it affect, and when?
The proposed rule affects publicly-listed US companies. Most large companies will need to begin reporting as soon as Fiscal Year 2023 (filing in 2024). This initial requirement includes reporting of Scope 1 and Scope 2 emissions – GHG emissions resulting directly from a company’s operations and its purchased electricity. A year later, companies will begin reporting Scope 3 emissions, the GHG impacts from their value chain.
Timing for GHG emissions attestation (assurance or auditing) lags the reporting requirements and applies only to Scope 1 and 2 emissions.
For the smallest category of public companies, Scope 1 and 2 reporting begins with FY2025, and these companies are exempted from the Scope 3 and assurance requirements.
Highlights of the Proposed Rule
- Board oversight and business leadership: Aligned with the TCFD framework, this rule explicitly requires public disclosure of how a company’s Board of Directors and C-suite leaders engage with climate-related risks and opportunities, and how those are fully integrated with enterprise risk management, strategy, and financial planning.
- Financial reporting: The SEC defines expectations for climate-related disclosure within traditional financial reporting, including a company’s annual financial report filed with the SEC (Form 10-K).
- Attestation: The proposed rule would require attestation (assurance or auditing) for Scope 1 and 2 emissions (but not Scope 3). This requirement is more stringent than disclosure standards emerging in many other markets.
- Scenario analysis: While the proposed SEC rule (in its current form) does not require scenario analysis, it does require disclosure of whether, and how, scenario analysis is used to identify climate-related risks and strengthen a company’s business model.
- Internal carbon price: The SEC rule does not require that companies determine and use an internal carbon price, but it recognizes this as a leading-edge practice.
- Science-Based Targets: Similar to internal carbon pricing, these are not required within the proposed rule but are explicitly recognized.
- Disclosure of RECs and offsets: Compared to the TCFD disclosure framework, this SEC rule greatly increases disclosure requirements and scrutiny of carbon offsets and Renewable Energy Certificates (RECs) – including a requirement that companies disclose the emissions impact of offsets and RECs and disclose emissions without offsets.
Point B’s Perspective
Point B helps some of the largest companies achieve their ESG and decarbonization strategies. We see important implications for our clients and for nearly every publicly-listed US company:
- This rule is part of a consistent, global trend toward ESG disclosures. The SEC’s proposal was expected, and this trend will accelerate.
- This is not about “GHG accounting.” This rule will require many companies to commit to broad organizational change. Effective, climate-informed Board oversight and executive engagement will be mandatory. Even more challenging for many companies, however, will be restructuring their corporate risk management, strategy-setting, and financial planning to include climate-related risks and opportunities alongside traditional business inputs. Capital markets will be watching company performance and maturity in these areas.
- The rule’s mandate for effective governance will connect with ESG issues far beyond climate. This specific proposal focuses on climate, but its framework for Board oversight, executive engagement, and strategic integration reflects growing stakeholder and market expectations for many other ESG issues – including crucial social issues like diversity, equity and inclusion (DEI), human rights, and community impact.
- Business model resilience is essential. Scenario analysis is suited not only to climate modeling, but to a broad range of ESG factors impacted by a range of possible alternative futures. Companies must analyze and stress-test their business model for resilience against a growing range of vulnerabilities across their entire value chain, beyond the traditional portfolio of corporate risk management.
- The risk of relying on carbon offsets (and RECs to a lesser degree) will continue to mount. Under this proposed rule, US companies using carbon offsets to claim emissions reductions will face even greater exposure to challenges from NGOs, sustainability leaders, and even investors. This will intensify the chance of reputational damage from “greenwashing.”
- This proposed rule is a golden opportunity for companies to comment and engage, potentially in pre-competitive partnerships, with others in their industry. Global asset managers, institutional investors, and many other stakeholders are strongly advocating for this proposed rule. The current public comment period is a chance to provide substantive guidance to the SEC while earning credibility with key stakeholders. (Submitted comments will be publicly accessible, and companies can also choose to share their comments with stakeholders.)
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