How the SEC’s Proposed Rule on Climate-Related Disclosures May Impact Your Business

In March 2022, the SEC proposed a rule to enhance and standardize climate-related disclosures for investors. If adopted, the rule will require registrants to disclose certain climate-related information, including greenhouse gas emissions, in registration statements and annual reports (e.g., Form 10- K).

While some companies have voluntarily compiled and disclosed environmental data for years, the SEC is looking to standardize this practice, amid a global effort to converge a few key climate-related standards and frameworks – namely, Greenhouse Gas Protocol (“GHGP”) for carbon accounting and the Task Force on Climate-Related Financial Disclosures (“TCFD”) for climate risk disclosure. Akin to the evolution of financial accounting, having a common and standardized basis from which users of financial or carbon emissions data can analyze and report is critical in a world where companies operate internationally and investors seek to deploy capital globally. Along these lines, SEC Chair Gary Gensler emphasized that implementation of the rule will provide investors with consistent, comparable and decision-useful information for making their investment decisions while providing clear reporting obligations for companies.

Type of data to be included

As proposed, a registrant will be required to include certain climate-related financial impact and expenditure metrics and a discussion of climate-related impacts on financial estimates and assumptions in a footnote to the financial statements. These disclosures would be subject to internal control over financial reporting (“ICFR”) and external audit requirements. A registrant must also provide certain quantitative and qualitative disclosures in a new section preceding Management’s Discussion and Analysis (“MD&A”). These would be subject to disclosure controls and would address:

• Governance and oversight of climate-related risks
• Climate-related risks and opportunities
• Climate risk management processes
• Climate targets and goals
• Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions

Scope 1 emissions cover direct emissions from owned or controlled sources (e.g., stationary combustion such as from boilers and heaters, mobile combustion such as from automobiles and airplanes, etc.); Scope 2 emissions cover indirect emissions from the generation of purchased or acquired electricity, steam, heat or cooling consumed by a registrant; and Scope 3 emissions refer to those produced by other organizations, such as suppliers, that impact the company’s value chain.

Which businesses will be impacted and when

The SEC may release a Final Rule by as early as late 2022. If that happens, the requirements will begin to be phased in next year.

Assuming the rule is finalized by December 2022 and a registrant operates with a calendar year-end, see the charts for applicable dates.

Preparing for the new requirement

The SEC’s rule will have broad implications for registrants. For example, measuring and reporting carbon emissions data is brand-new territory for many companies, who may be unsure of where or how to begin. But similar to the adoption of other emerging accounting rules or regulations, including internal and financial controls that companies have implemented in the past, this will come down to having a good foundation of people, process and technology in place.

Step One: Assess what you are already doing

The first step is to assess where you are on your carbon journey. Depending on which standards and frameworks you have been using, companies that have voluntarily disclosed emissions may find that at least some aspects of the SEC’s proposed requirements are similar to what they already do. The proposed rule tends to align with the TCFD standard for its disclosure format. For carbon accounting standards, SEC’s proposed rule is largely based on Greenhouse Gas Protocol (“GHGP”), which is the most widely used international accounting tool to understand, quantify and manage greenhouse gas emissions.

Step Two: Determine how the rule applies to you

Based on the size and complexity of your operations, you will need to determine the extent to which the rule will impact you and the timetable by which you must take appropriate action. For instance, an organization with a complex supply chain may have a more challenging roadmap for calculating its Scope 3 emissions as part of a complete carbon footprint.

Step Three: Your plan of attack

Do not wait – begin to prepare now. Have conversations with your advisors and auditors as you determine the people, processes and technology needed to competently and efficiently calculate, track, report and disclose data. This requirement will have a ripple effect on your entire business, from your internal controls to your board. Many companies have not budgeted for the cost to adopt and implement such as for a proper technology-enabled carbon accounting function, and the impact on cash flow will need to be examined. By contrast, companies should consider the cost of taking no action, which may include failure to be in compliance and lost investor confidence.

Real-time climate data can help your business

Implementing an efficient system to measure and manage your carbon emissions and other climate-related information can allow you to not only help the planet but to proactively take steps to improve your business’s efficiency. For example, companies that measure carbon emissions now typically do so in disparate Excel sheets, with manual processes that are inefficient, prone to error and with the help of consultants, receiving data that is often several months old. These archaic methods won’t suffice to produce timely and periodic audit-ready and investor-grade disclosures, nor will they allow for efficient and ongoing measurement and management of your organization’s climate-related risks, goals and opportunities. A technology-enabled solution is critical. Think back to pre-Sarbanes-Oxley, when financial data was compiled manually, and by the time companies pulled the data together, it was already stale. Just as improvements to financial reporting systems have allowed companies to make more informed financial decisions in real time, an efficient climate management system can allow you to proactively improve your business.

Written by John Cornell. Originally published by Long Island Business News.