It’s Official: New Climate Risk Disclosure Rules Are Coming Soon from the SEC

Written By Aileen Boniface, Managing Director, Head of ESG & Minahil Choudry, Senior Consultant

August 11, 2021

The U.S. has largely lagged behind European regulators when it comes to detailed mandatory climate change reporting. But a bevy of recent activity indicates that the U.S. is quickly making up ground. Last week, SEC Chairman Gary Gensler drew a clear line in the sand, reaffirming his commitment to the issue and noting in public remarks that SEC staff has been asked to develop a mandatory climate risk disclosure proposed rule by year end.

Most notably, Chairman Gensler signaled that the forthcoming climate disclosure regime should be inspired by—but separate from—the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework. Based on his comments, we anticipate that the SEC will build upon its 2010 guidance, which broadly outlined ways in which climate change may trigger disclosure obligations, and soon require specific qualitative and quantitative disclosures to support investment decisions, ultimately giving both companies and investors “clear rules of the road.”  

This move is not unexpected, given global trends and recent U.S. policy changes. 

Throughout 2021, the U.S. has been stepping up its commitment to climate change reporting and mitigation. Some key milestones include:

  • In March 2021, the U.S. Federal Reserve established the Financial Stability Climate Committee (FSCC) to focus on the threats climate change pose to the broader financial system.
  • Also in March, SEC Acting Chair Allison Lee issued a public statement requesting public input on climate change disclosures.
  • President Biden’s latest executive order calls for half of U.S. cars to be zero-emission by 2030 to curb rising temperatures and the reliance on fossil fuels.

Europe, of course, continues to up the ante as well. In many ways, the SEC’s newest planned rulemaking is in lockstep with what’s currently happening across the pond: 

  • The UK is also expanding climate-related disclosures and plans to make alignment with TCFD mandatory across the economy by 2025.

3 keys to being prepared.

If you’ve been fence sitting, you can no longer afford to wait and see. While the new rules will likely not go into effect until 2022 at the earliest—our guess is 2023 reporting on 2022 results—issuers need to take immediate steps to prepare.

In his comments, Chairman Gensler laid the groundwork for the path forward. Here’s what you need to know, and what you can do to get ready.

  1. Expect to disclose in the 10-K.
    • As the audited financial statement used by investors to make investment decisions, your 10-K is likely going to be the vehicle for the newly mandated reporting. It seems clear that the Corporate Social Responsibility (CSR) report will still be used to communicate a company’s broader sustainability narrative, but will no longer suffice as the single source for climate-related financial disclosures.
  2. Plan on publishing both qualitative and quantitative information.
    • Chair Gensler floated that he has asked his staff to provide “recommendations about how companies might disclose their Scope 1 and Scope 2 emissions, along with whether to disclose Scope 3 emissions — and if so, how and under what circumstances.” In other words, companies need to be prepared to provide sufficient details on each of the following to help investors to gain consistent, comparable, and decision-useful information:
      • Quantitative Information
        • Scope 1 Emissions: Direct emissions from owned or operated sources, including:
          • Generated electricity, heat, and steam
          • Physical or chemical processing
          • Mobile combustion resulting from company-owned transportation
          • Fugitive emissions that result from releases, such as equipment leaks
        • Scope 2 Emissions: Indirect emissions from purchased electricity, heat, and steam
        • Scope 3 Emissions: All other indirect emissions, such as business travel, employee commuting, and purchased goods and services
        • Financial impacts of climate change: this includes a scenario analysis of how a company’s strategy might shift based on the degree of temperature rise
        • Specific metrics used to track progress towards climate-related goals
      • Qualitative Information
        • Management Approach: Details on how the management team identifies climate-related risks and opportunities
        • Strategy Overview: Specifics on how climate-related risks and opportunities are incorporated into the company’s overall strategy
  3. Make climate-change disclosure a company-wide effort.
    • Carefully review current emissions data collection efforts and corporate policies. Management teams need to take an inventory of what data the company currently collects, how it’s measured, what percentage of overall locations are included, and where data is tracked and housed (if at all). In addition to knowing the numbers, management also needs to be well-versed in overall corporate climate change strategy.
    • Review CDP/TCFD frameworks. As always, we strongly recommend aligning with an ESG framework. Investors prefer comparable and standardized information, and ESG frameworks provide decision-useful and comparable metrics. Both CDP (formerly the Carbon Disclosure Project) and TCFD provide great inventories of the types of data to be collected and questions to be answered. Whether or not you ultimately complete the CDP questionnaires or align with TCFD recommendations, it’s a good idea to get familiar with both sustainability reporting frameworks to get a sense of the types of information investors want to know most.
    • Put together an ESG steering committee. Charge this team with collecting and communicating environmental data and give them the authority and bandwidth to do a thorough job. In our recent piece, No One Gets a Pass on Climate Change: How to Start Sharing Your Story Now – Clermont Partners, we share tips on how to get started with calculating GHG emissions.
    • Begin E&S policy work. Start with establishing a climate change policy or environmental policy. Be sure to include board oversight in these efforts.
    • Start climate scenario analysis. If you haven’t already, add climate risk scenario planning to your internal strategic planning agenda. This exercise helps identify your climate risk vulnerabilities so you can be ready with a game plan to address and mitigate your risk both today and in the future.
    • Communicate your initiatives externally. Work to identify which internal policies and data can be published externally so investors and stakeholders can recognize your ESG progress

In the fast-changing landscape of ESG disclosures, the right resources can help.

Detailed climate change disclosure is no longer a recommended best practice. It’s a requirement—or it will be very soon. And, no doubt, the rules will continue to evolve and become increasingly stringent over time. While it can feel like a lot to tackle, don’t forget that leveraging available resources, including the existing frameworks and Clermont Partner’s own ESG Infinite virtual ESG counselor, can go a long way in simplifying your job. Of course, we’re always here to talk you through it. Reach out to learn more about the forthcoming SEC mandatory climate risk disclosure rules and how we can assist your team in adequately preparing.

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