The Wind of Change – The SEC Issues Its Long-Expected Disclosure Rule

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“The future’s in the air; can feel it everywhere; blowing in the wind of change.” – Scorpions[1]

The title and opening quote are not meant for either histrionic or empty platitudes, but to convey a slow-but-steady process that has been transpiring in the U.S. As addressed in our recent piece, A (Surprising) Convenient Truth – ESG Considerations Find a Foothold in the U.S.

What’s in the Rule?

“It is what it is. But, it will be what you make it.” – Pat Summitt[2]

Under the proposed rule, all publicly traded companies would have to disclose their climate-related risks in their financial reports to the SEC and explain how those risks will probably affect their business and strategy, according to a fact sheet from the commission.

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All firms would be required to share the emissions they generate at their own facilities, and larger businesses would need to have these numbers vetted by an independent auditing firm, the SEC said. If the indirect emissions produced by a company’s suppliers and customers are “material” to investors or included in the company’s climate targets, the SEC said those emissions must be disclosed, as well.

For companies that have made public pledges to reduce their carbon footprint, the SEC said it will require them to detail how they intend to meet their goal and to share any relevant data. Companies also would need to disclose their reliance on carbon offsets, which some climate activists view with skepticism, to meet their emissions reduction goals.

If a company uses an internal price on carbon, it would need to share information about the price and how it is set. In 2019, ExxonMobil prevailed in a high-profile lawsuit alleging the oil giant misled investors by using two different estimates — one public, one private — of the future costs of climate change.

What’s The Data Impact?

“Data is like garbage. You’d better know what you are going to do with it before you collect it.” – Mark Twain[3]

Companies will be responsible for providing qualitative and quantitative reports on emissions produced, as well as on the effect of climate-related risks to company operations, business, and strategy. Companies with public plans to reduce emissions or with specific sustainability objectives will also be asked to share plans to achieve them and progress with the regulator. The SEC believes this new regulation, which builds on 2010 SEC guidance for companies to disclose information on climate change effects, will create new industry standards for reporting emissions and climate-related risks.

A central regulatory body like the SEC scrutinizing companies, especially the largest ones, and setting new standards for reporting emissions and climate-related risks will provide investors and the public with more reliable and comparable data, allowing them to compare companies’ ecological footprint both within and across industries. Amongst the SEC’s tools, letters of comment and no-action letters may lead to remediation programs at companies and financial institutions, especially in those that SEC investigations suspect of misrepresenting reported emissions, or consider their emissions and climate-related risks ‘material.’

What’s The Schedule; When Will It Go Into Effect?

“Tell me quando, quando, quando” – Englebert Humperdinck [4]

The rule was officially posted on the SEC site on March 21, 2022, for which the public will have 60 days to submit comments to propose amendments. While the new requirements of the rule will be phased in over several years, the largest companies will begin disclosing climate-related risks in FY23, and will begin reporting supplier and customer emissions starting in FY24.

A Solution?

Financial institutions need to review their climate data reporting structures, improve their data collection procedures, and implement a plan for reporting FY 2023. Companies must become more transparent and adhere to the SEC climate disclosures, from an initial gap analysis to designing road maps to meet the 2023 reporting requirements and the actual implementation.

Since its publishing, the rule has received mixed commentary. Some question the SEC’s ability to investigate set standards, provide guidance, and investigate climate and emission-related topics given their inexperience and lack of subject matter expert staff in the space. Others are skeptical about companies’ ability to determine whether indirect emissions produced by suppliers and customers account are ‘material’ as these emissions (classified as Scope 3 by the EPA) represent up to 75% of all greenhouse gas emissions produced. While the U.S. public largely has supported regulations forcing companies to report their climate impact and to stuck to their sustainability goals, Europe still leads the global push for climate-related financial disclosures, along with other global sustainability champions, like New Zealand, Japan, Hong Kong, Singapore, and Switzerland.

Article By Benjamin Harding, Efraim Stefansky, Pablo Wenhammar

About the Author

Benjamin Harding is managing principal, Efraim Stefansky is manager, and Pablo Wenhammar is a consultant at Capco, a global business and technology consultancy.