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SEC Climate Disclosure Rule Requirements for ESG Compliance

Learn what the SEC climate disclosure rule is all about. Learn key requirements, climate disclosure standards, and steps to get ready for ESG compliance.
by 
Maryam Khan
December 30, 2023
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Introduction: What is SEC’s Climate Disclosure Rule?

The Securities and Exchange Commission (SEC) has put forth a rule proposal aimed at standardizing the way in which companies disclose information about their approach to climate-related matters. Under this proposal, publicly traded companies in the United States would be obligated to annually disclose details regarding their assessment, measurement, and management of risks associated with climate change. This disclosure would encompass information on greenhouse gas emissions as an indicator of the company's susceptibility to climate-related risks.

The intention behind this proposed rule is to establish a uniform framework for climate-related disclosures, enabling investors to gain a clearer understanding of the risks and potential impacts on the business operations and financial health of the companies in which they invest.

Who falls under the SEC Climate Disclosure umbrella?

The SEC has suggested extensive new regulations to improve how public companies share information about climate change risks and effects. These rules would apply to all public companies and will include specific climate-related financials in their audited financial statements. Additionally, companies must reveal information about carbon emissions, and there will be a gradual assurance requirement for this data.

LARGE, PUBLICLY LISTED US COMPANIES

  • Descriptive Reporting: Companies must disclose detailed information on governance, risk management, action plans, and performance metrics related to climate financial risks, including carbon emissions. This aligns with the Task Force on Climate-Related Financial Disclosures (TCFD) guidelines.
  • Third-Party Verification: Filers must undergo independent verification of disclosed information, focusing on scope 1 and scope 2 greenhouse gas (GHG) emissions data. The level of assurance will transition from "limited" to "reasonable" over time.
  • Addendum to Financial Statements: A supplementary note in financial statements must quantify how climate change impacts financial performance, covering physical and transitional risks, and mitigation measures. This applies if climate-related risks' financial repercussions constitute at least 1% of a specific financial statement line item.

MID-MARKET PRIVATE COMPANIES

  • Even though SEC climate disclosure rule is essentially for publicly listed US companies, it is also applicable on some mid-private companies due to their supplier relationships with public companies. For instance, any privately owned company that is working in a publicly listed company’s supply chain is also indirectly falls under the SEC climate disclosure rule. However, for mid-private companies how much information disclosure is mandated versus voluntary is yet to be decided by SEC.

When will the SEC Climate disclosure rule be applicable?

The SEC's climate disclosure rule remains under consideration, with the commission now anticipating the release of its finalized regulation in April 2024. This rule mandates companies to disclose climate-related risks, including scope 1, scope 2, and scope 3 emissions, alongside their practices for managing these risks.

What are the disclosure requirements for SEC Climate disclosure rule?

In compliance with SEC climate rule, publicly listed companies will be mandated to disclose key aspects. These include:

  • Form 10-K disclosures on climate risk management, governance, and strategy
  • Targets and transition plans to achieve ESG stated goals
  • Impact on Financial statement line items (applicable if aggregate absolute impact on line item >1%)
  • Scope 1 and Scope 2 Emissions
  • Scope 3 (required if material or public goal set)

Why does the SEC Climate disclosure rule matter?

This proposed rule aligns with global initiatives in recent years that seek to standardize requirements for organizations to disclose information related to climate change. Despite many companies already disclosing their greenhouse gas (GHG) emissions, inconsistencies exist in how this information is reported, even among companies within the same industries. The SEC's rule proposal aims to:

  • Standardize the reporting of emissions: Ensuring that  data is comparable and transparent for shareholders, investors, and the public.
  • Mandatory reporting: Upon Approval, its binding nature will compel companies that have not previously reported their GHG emissions to do so, thereby elevating the importance of climate-related risks for portfolio managers.

What happens if your company does not comply with SEC Climate disclosure rule?

Failure to comply with regulations holds legal consequences, with the SEC possessing the power to levy fines and instigate legal proceedings against firms that do not adhere to the updated reporting standards.

What to do next if your company needs to comply with SEC Climate disclosure rule?

  1. Data: Initiate the process of recognizing and gathering the necessary data to fulfill potential disclosure obligations, encompassing Scope 1 and 2 GHG emissions, and, if relevant to your business, Scope 3. It's essential to note that for most investor-owned utilities, disclosing Scope 3 will be significant and obligatory. Additionally, the SEC ruling mandates that climate-related disclosures align with a company’s fiscal disclosures, requiring potential modifications to existing data collection practices.
  2. Systems and Processes: Commence the establishment of essential systems and processes to guarantee the precision and reliability demanded by the proposed disclosures. If your organization lacks an enterprise-wide system for tracking GHG emissions, along with associated governance processes ensuring calculation integrity, clear data input understanding, alignment with disclosure requirements, and an executive-level dashboard for leadership access, it is imperative to consider instituting such a system promptly.
  3. Engagement and Preparation: Formulate a comprehensive roadmap and initiate the essential steps to prepare for complying with the proposed requirements.

How can ESG Flo help you?

If your company needs to comply with SEC Climate disclosure, engaging with ESG Flo can significantly streamline the process. ESG Flo serves as an AI-powered platform and a strategic partner for businesses navigating the SEC landscape. Here's how ESG Flo can assist you:

DATA

  • Data Ingestion: ESG Flo can facilitate the initiation of the data recognition and gathering process. Its capabilities include efficiently identifying and collecting the necessary data to meet potential disclosure obligations, covering Scope 1 and 2 GHG emissions, and addressing Scope 3 if applicable.
  • Data Accuracy: ESG Flo is designed to enhance data accuracy and completeness, ensuring compliance with SEC mandates regarding climate-related disclosures aligned with fiscal disclosures.

SYSTEMS AND PROCESSES

  • Data Tracking: ESG Flo can assist in commencing the establishment of essential systems and processes. The platform offers an enterprise-wide solution for tracking GHG emissions, providing governance processes to maintain calculation integrity.
  • Reliability & Precision: It ensures a clear understanding of data inputs, alignment with disclosure requirements, and offers an executive-level dashboard for leadership access. ESG Flo's capabilities align with the precision and reliability demanded by the proposed disclosures, making it a valuable tool for organizations lacking a comprehensive system for ESG data management.

ENGAGEMENT AND PREPARATION

  • Compliance Readiness: ESG Flo supports the formulation of a comprehensive roadmap and initiation of essential steps for compliance preparation. The platform acts as a strategic partner in navigating the complexities of ESG compliance, offering guidance on establishing climate risk governance, creating a dedicated climate team, compiling risk registers, and upgrading data flows and calculations.
  • Stakeholder Engagement: ESG Flo ensures a smooth engagement process with compliance, investor relations, and regulatory affairs, aiding in the overall preparation for meeting proposed requirements.

ABOUT ESG FLO

ESG Flo is the AI-powered platform for accurate, complete, and auditable ESG data. It simplifies compliant reporting, third-party verification, and responsible decision making. Book a demo with us to learn more.

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