Five Things to Know About the SEC Climate Change Disclosure Proposal

On March 21, 2022, the US Securities and Exchange Commission (SEC) released proposed rules that require publicly listed companies to provide climate-related disclosures. The proposed rules make it crystal clear that climate risk is investment risk. Investors have repeatedly expressed the need for more consistent, comparable, and reliable climate-risk information. These rules will allow investors to better assess the climate-related risk of a company’s business strategy so they can make more informed investment decision. With over 500 pages of new requirements that issuers must follow, the proposed ruling is a lot to digest. Here, we provide you with some of the key takeaways for this groundbreaking announcement from the SEC.

1. Accurate greenhouse gas (GHG) data is a necessity – The direct emissions that are controlled by a company (referred to as scope 1 emissions) as well as indirect emissions that primarily result from electricity purchases (referred to as scope 2 emissions) must be disclosed on an annual basis. Companies must also disaggregate emissions by GHG type (that is carbon, methane, nitrous oxide, etc.) and provide both absolute and intensity metrics. The company's internal controls for quantifying GHG emissions should generally resemble those in place for financial statement disclosure and undergo third-party verification. If your organization is unsure of its emissions profile or the quality of your quantification methods, now is the time to invest in better GHG measurement and management tools.
2. Climate change is now firmly on the board agenda – If it wasn’t being discussed already, climate change is now almost certainly going to make it on the agenda of your company’s quarterly board meetings. The SEC rule will require that a company’s annual report outline oversight and governance of climate-related risks at the board level. This risk oversight should consider both near-term and long-term climate issues. The potential risks are wide-ranging and include everything from increased frequency of hurricanes to carbon pricing and litigation. Board’s that have not discussed climate-related risks need to quickly get up to speed.
3. Companies may need to revamp their business model – As companies assess potential risk posed by climate change, they may find that their current business model is in jeopardy. For example, fossil-fuel intensive firms may face increasing regulatory risk as governments look to phase out the use of emitting sources of energy. Physical climate risk could render business activities in some parts of the world unviable. Climate change also presents potential money-making opportunities in the transition to net-zero GHG emissions. As the world makes this significant shift to avoid a climate-related disaster, expect business models to shift too.
4. Supply-chain emissions matter - Companies will be required to disclose not just scope 1 and 2 emissions but also emissions from their supply-chain (also called scope 3 emissions). This includes emissions associated with the production of goods purchased, employee travel, and the downstream processing and use of products. Scope 3 emissions quantification is an area that will be brand new to most companies. In order to comply with the rule, companies will first need to determine which scope 3 emissions sources are material. Companies looking for guidance on where to get started with scope 3 emissions should seek expert advice on available quantification approaches and techniques.
5. There will be impacts for non-publicly listed firms – If your firm is not publicly listed you may be thinking “this is interesting, but it does not affect me”. Think again. As publicly traded companies look to gather emissions data across their supply-chain, they may be requesting corporate GHG emissions information from you. If you want to keep selling to (or buying from) these publicly traded companies, it may even become a requirement of doing business. In order to avoid potential business disruptions, even non-publicly listed firms should start developing a GHG emissions inventory, implementing a climate change governance process, and begin assessing potential risks and opportunities.

Climate disclosure has quickly evolved from voluntary to regulatory. Luckily the proposed regulatory requirements are not a significant deviation for companies already managing climate-related and disclosing GHG emissions data. The SEC has grounded the proposed rules in the Task Force on Climate-related Financial Disclosures framework and GHG quantification is grounded in the GHG Protocol. However, for some companies this new rule will amount to a crash course in GHG quantification and climate risk disclosure. We expect the effects will be most pronounce for small and medium size companies or privately held companies that may now be required to provide climate-related data to publicly listed firms they do business with.

Frostbyte is here to help. With experts in GHG quantification, environmental data management software, and business process implementation, we can help you quickly and seamlessly get up the learning curve on climate-risk disclosure. Robust climate change disclosure not only helps to ensure compliance with new regulations but may even help to set your company on the path to better risk management and greater long-term resilience.

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