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:
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:
For large companies, the SEC's climate disclose requirements will begin in 2023, 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.
The proposed SEC Climate Disclosure rules from the U.S. Securities and Exchange Commission require public companies to provide certain climate-related financial data, and greenhouse gas emissions insights, in public disclosure filings. As part of the issuer rule, companies would have to disclose emissions they are directly responsible for, as well as emissions from their supply chains and products.
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:
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):
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 early 2023. Right now, the timeline for SEC Mandatory Climate Disclosures coming into effect is:
|All proposed SEC climate disclosure metrics, Scopes 1 and 2 GHG, but excluding Scope 3||Scope 3 GHG disclosure|
|Large accelerated filer (public market cap of $700 million+)||Fiscal year 2023 (filed in 2024)||Fiscal year 2024 (filed in 2025)|
|Accelerated filer and non-accelerated filer||Fiscal year 2024 (filed in 2025)||Fiscal year 2025 (filed in 2026)|
|Smaller reporting company||Fiscal year 2025 (filed in 2026)||Exempted|
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.
Based on guidance shared by the SEC in December 2022, 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.
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.