SEC Mandatory Climate Risk Disclosure Rules Explainer and Fact Sheet - Last Updated: June 27, 2023

What's the SEC's Latest Proposal for Mandatory Climate Disclosure?

In March 2022, the US SEC (Securities and Exchange Commission) announced a plan called "The Enhancement and Standardization of Climate-Related Disclosures for Investors" to introduce mandatory climate diclosures for certain reporting organizations as a new legal ESG (environmental social governance) standard. These SEC rules will make corporate sustainability reporting more common, consistent, and standardized like financial accounting and reporting, similar to the recent EU Corporate Sustainability Reporting Directive (CSRD) in Europe.

After a 60 day comment period ending June 17, 2022, the SEC will draft changes to the Securities Act of 1933 (“Securities Act”) and Securities Exchange Act of 1934 (“Exchange Act”) requiring registrants to provide climate-related information in their registration statements and annual report. Based on SEC guidance, these rules will include the following climate disclosure information:

1. A summary of a company's climate-related risks likely to have a material impact on its business, operations, or financial condition
2. Disclosure of corporate greenhouse gas emissions (GHG) that reflects the organization's latest carbon accounting
3. Disclosure of other yet-to-be-determined climate-related financial metrics in a registrant’s audited financial statements

We expect the SEC's "Enhancement and Standardization of Climate-Related Disclosures for Investors" will apply to all publicly-listed SEC reporting companies. The initial focus will be on what the SEC defines as large accelerated filers, which are publicly traded companies with a market cap above $700 million.

However, the SEC also mentions smaller registrants in its proposal. Under Section 12(g) of the Exchange Act, the SEC's proposed climate disclosure requirements may also end up applying to a broader group of registrants, including:

1. Any company with total assets in excess of $10 million and 500 or more record holders of a class of equity security, each measured at the end of its fiscal year
2. Other SEC registrants

For large companies, the SEC's climate disclose requirements will likely begin in 2024, and the SEC currently indicates "final action" on climate disclosure will be made in April 2023. Smaller companies have until 2025 before they need to be in compliance.

A big goal of the SEC's new mandatory climate disclosure rules is to standardize and simplify sustainability reporting for companies. Many companies are currently under pressure to use a wide range of different sustainability reporting standards and frameworks. The SEC is looking to standardize these obligations into common ESG reporting standards that meet the needs of regulators, investors, and other stakeholders.

"We are proposing to require disclosures about climate-related risks and metrics reflecting those risks because this information can have an impact on public companies’ financial performance or position and may be material to investors in making investment or voting decisions," writes the SEC.

SEC Climate Disclosure Requirements

The SEC will be finalizing its legal requirements for climate disclosure this year, and we expect to see the final requirements in 2023. The SEC's climate disclosure standards are informed and influenced by TCFD (Task Force on Climate-Related Financial Disclosures), so we recommend organizations familiarize themselves with TCFD guidelines if they haven't alread done so (our ESG reporting platform comes auto-configured with TCFD standards requirements).

TCFD's four core reporting pillars are:

1. Governance
2. Strategy
3. Risk Management
4. Metrics and Targets

Similarly, SEC filers will need to consider, prepare, and disclose commentary on each of these four themes.

To comply with the SEC's new rules, we expect eligible organizations and issuers will need to take the following annual compliance steps, starting in 2023 (as currently drafted and proposed):

1. Integrate climate risk and carbon accounting into your regular financial accounting and regulatory reporting cycles
2. Track and disclose the required information - SEC reports will likely require management commentary and data on a company's:
•  Materiality outlook to select material ESG themes, topics, risks, and focus areas
•  Details on how the board and management exercise their oversight and set climate-related targets and goals, as well as disclosure regarding climate-related expertise
•  Sustainability and ESG performance targets, goals, and progress
•  Sustainability and environmental risks (including climate change) affecting the company
•  How sustainability and ESG risks could or are impacting operating results, financial performance, and shareholder value
•  Scope 1-2-3 GHG disclosure
•  Any ESG or climate analytics tools, such as scenario analysis, the registrant uses to assess the impact of climate-related risks on its business and consolidated financial statements, or that support business model resilience in light of foreseeable climate-related risks
•  Relevant information on an organization's use of carbon offsets, credits, and/or renewable energy credits or certificates (RECs) as part of the company's overall net emissions reduction strategy
3. Third party attestation - The proposed rules require accelerated filers and large accelerated filers reporting climate-related disclosures to the SEC to include an attestation report from a neutral, trusted, and experienced third party covering, at a minimum, the disclosure of the company's Scope 1 and Scope 2 emissions. This report should also include certain related disclosures about the attestation service provider. We see this as "limited" assurance of the ESG information being disclosed, which is less strict than a financial audit, but still requires working with a sustainability reporting partner organization

SEC Climate Disclosure Timeline

As of today, the SEC's "Enhancement and Standardization of Climate-Related Disclosures for Investors" is still in proposal form and has not yet been passed into law. The SEC is collecting comments, will review them, and then make the necessary changes and final steps to update the Securites Act and the Exchange Act. These steps will happen over the course of 2022, although it's possible we may not see final SEC guidance until late 2023. Right now, the timeline for SEC Mandatory Climate Disclosures coming into effect is:

• March - June 2022 - Interested participants are asked to submit public comments. The SEC recently extended the public comments period to June 17
• June - December 2022 - The SEC will review public comments and draft the final laws and regulations
• April 2023 - The SEC initially indicated it would take final action and issue a ruling on adopting rule amendments to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities in April 2023, however that deadline is now passed
• October 2023 - Our latest guidance is that the SEC is likely to issue its ruling in October 2023
• Late 2023 or early 2024 - SEC climate disclosure requirements take effect and large accelerated filer organizations will need to track their 2023 ESG strategy, climate risks, and performance to prepare their SEC reporting. This includes all proposed SEC climate disclosures, including GHG metrics and Scope 1 and 2 emissions, but excludes Scope 3 emissions (in 2024 fiscal year). See here for the latest SEC filer definitions.
• 2025 - Qualifying businesses will need to disclose SEC reporting according to a first set of climate disclosure standards for their 2023 financial year. Accelerated filer and non-accelerated filers will also be required to begin disclosing their required GHG metrics and Scope 1 and 2 emissions for this current fiscal year in the following reporting year. Large accelerated filers will now be required to start disclosing Scope 3 emissions.

This means companies should implement their SEC climate disclosure compliance approach by 2023 to be ready for the 2024 reporting cycle and stay compliant. It's not yet know exactly how the SEC will penalize businesses who fail to comply with its upcoming climate disclosure requirements, but according to the Commissions’ requirements, non-compliant eligible organizations may be forced to pay a meaningful fine.

Additional SEC ESG Regulations

Based on guidance shared by the SEC throughout 2022 and 2023, the SEC's proposed climate-related disclosure rules appear likely to be the first of many ESG reporting rules and proposals from the SEC. Other current proposals focus on the 'S' or social pillar of ESG, including board diversity disclosure and a human capital management proposal. The board diversity proposal will require reports from all NASDAQ-listed companies. The human capital proposals will include reporting on hiring practices, workplace culture, employee well-being efforts, and diversity, equity, and inclusion (DEI), among others.

A Few Helpful Recommendations

Your Next Steps With SEC Climate Disclosure Reporting

For organizations in the early stages of their sustainability reporting and SEC climate compliance roadmap, we have a few general recommendations, additional reading, and suggested next steps:

ESG and climate risk leadership structure - Ultimately, the board has a responsibility to oversee ESG issues, and to assess the potential ESG and climate risks to a company’s overall strategy. Clarify the board's role, structure, and processes around ESG, including which committee(s) will review and decide on ESG matters and disclosure. Your company will likely also want to set up one or more ESG working groups, comprising senior management and staff, to report to the board.

Materiality assessment - Before picking standards, collecting data, or thinking about preparing your first report, it’s often beneficial to conduct a “Materiality Assessment” to help determine what your sustainability goals, targets, KPIs, and reporting objectives should be. A materiality assessment is a project which determines and ranks the most material themes for your business based on stakeholder interviews and surveys. For example, a healthcare company might focus on healthcare access, affordability, innovation, and its supply chain. A technology company could focus on data privacy, security, and STEM education access. A bank might designate financial inclusion as its most material theme. Pick and rank the right sustainability themes depending on your organization’s mission, makeup, goals, and ESG maturity. Be sure to think through which climate risks and environmental themes are most relevant and material to your company's business model and financial performance.

Sustainability data systems and process - While this might go without saying, in order to report your organization's GHG emissions, you need to know what they are - with a high degree of accuracy. Your materiality process can help guide you toward the main sustainability themes you may need to focus on and collect data around. Is employee travel a big source of your organization's carbon footprint? Facilities? Manufacturing sites? Your supply chain? Where does that data exist today, and how will you access or collect it?

Many organizations start their sustainability reporting with relatively simple spreadsheets, surveys, and documents, but things can get complex fast - particularly for larger companies. If you're an organization with a medium-to-large or complex environmental footprint, you likely need dedicated sustainability reporting and data management software, like the kind we design here at Brightest to help organizations stay ESG compliant. Ongoing report archiving, version control, and governance is also important to think about, since you'll be reporting every year.

Further reading - Our free guides to sustainability measurement and ESG reporting provide additional, detailed guidance and insights on how to measure and report your sustainability performance. Or, if you've already mastered the basics, up-level your sustainability reporting and SEC climate compliance efforts with a dedicated, best-in-class tool.