What You Need to Know About the SEC’s Updated Climate Disclosure Regulations

The Securities and Exchange Commission recently released an updated proposal that would amend existing rules on how public companies disclose non-financial, climate-related information. The proposal is now open for public comments, where stakeholders are encouraged to weigh in on these rules and provide feedback that the SEC will hopefully integrate. There’s a lot of speculation regarding what the SEC’s updated climate disclosure regulations mean for public companies and their stakeholders, so we’ve taken the time to summarize the key information and explain how we intend to contribute. As new information develops, we will provide more blog content detailing everything you need to know about the SEC’s updated climate disclosure regulations.

Some Background: SEC’s Climate-Related Activity

With these updated disclosures, the SEC is playing a pivotal role in responding to a recent government mandate to advance climate policy. This activity is consistent with their previous efforts. Back in 2010, the SEC published interpretive guidance (called “2010 Guidance”) for public companies. That release outlined certain ways in which climate change could trigger disclosure obligations under the SEC’s rules. It also noted legislation and regulations governing climate change, international accords, changes in market demand for goods or services, and physical risks related to climate change. However, the impact of the measures was somewhat limited given the early approach.

Then, in the spring of 2021, the SEC hired its first-ever Senior Policy Advisor for Climate and ESG. This individual was responsible for an enhanced focus on climate-related disclosures in public company filings. The SEC’s spring Examination Priorities included rule amendments “to enhance registrant disclosures regarding issuers’ climate-related risks and opportunities.”

Concerns over the pace and scale of climate change have increased in the years since 2010, leading to a new round of activity from the SEC. Investor demand for company disclosures on climate change risks, impacts, and opportunities has grown significantly. Experts and policy leaders are increasingly calling for bolder action. Additionally, standardization of climate-related disclosures is overdue. Many experts agree that enhancement and benchmarking is necessary to help investors and businesses to compete in an economy focused on decarbonization.

Summary of the New Disclosures

In today’s landscape, businesses and investors working to decrease or eliminate their impact on the climate do not have a level playing field. There are currently no universal reporting standards for assessing climate-related issues and validating suitable investment options.

These efforts by the SEC are a great step in getting us to a universal and comprehensive reporting standard. Investors and business owners will benefit from greater transparency and accountability, along with long-term improvements on climate-related goals globally.

Under the new proposal, U.S. companies will be required to have some of their carbon emissions included in regulatory filings. The proposed rule would make the following disclosures mandated:

• Which climate-related risks have been identified or are likely to become present and have a material impact on business or financial statements.
• How climate risks affect the company’s strategy, business model, and outlook.
• The organization’s process for identifying, assessing and managing climate-related risks as well as how these processes are incorporated into overall risk management programs.
• Scope 1 and 2 greenhouse gas (“GHG”) emissions, separately disclosed, expressed in absolute terms.
• Scope 3 GHG emissions and intensity, if material.
• More attention from investors and stakeholders on the company’s non-financial performance.

Much of this Information about specific emissions is not standardized, if it is currently disclosed at all. The SEC’s proposal for standardization is also helpful to improve transparency and verification. Additionally, the proposed standards will help to reduce greenwashing - meaning that any company advertising, marketing, or drafting ESG statements will be required to pay closer attention to the language used in all documents, or run the risk of encouraging SEC scrutiny. Business can also expect:

• Increased disclosure requirements which means more internal processes to measure and report.
• Internal processes to improve performance on these metrics (namely scoped emissions).
• Increased transparency needed to accurately and sufficiently report.
• More attention from investors and stakeholders on the company’s non-financial performance.

If finalized, the breadth, specificity and complexity of the latest regulations would result in one of the most sweeping changes to public companies’ disclosure obligations in several years.

The SEC is Requesting Public Commentary on Proposed Regulations

Because of the enormous scope of compliance requirements, the SEC is looking to its stakeholders to help refine and finalize their proposal. For this reason, the SEC expects to receive a significant amount of commentary from trade associations, individual registrants, and others. It’s worth noting the current political makeup is likely to result in some debate as well. After considering all of these inputs, the SEC will officially publish the new regulations, which might look somewhat different than what they initially proposed.

The SEC is currently requesting public feedback on climate change disclosures. Commentary is requested by June 17, 2022. Commenters can submit empirical data or other supporting documents as well.

Obtaining this commentary is a crucial part of the overall process. If you’re able, it makes sense to take the time to participate, since public opinion can actually influence these rules. This commentary is very similar to voting - you get the best result when you exercise your democratic rights. Though the SEC has its own internal experts, they do take into account the insights of expert practitioners in order to get the bigger picture of how these rules will be enacted in real businesses. This is extremely important because understanding how these disclosures are implemented at the business level will have a direct influence on the design. Therefore, this context is needed to ensure that the disclosure standards are reasonable, reliable, and relevant.

By commenting, you have the ability to influence a larger network of systems that all interact in the market we participate in. You’ll influence the future of disclosure rules, the systems used to measure and report internally, and the ways that businesses interact with their non-financial metrics and performance. Further, providing comments will influence the way information is disclosed to the public, as well as how the public interacts with it. At the end of the day, taking the time to comment thoughtfully will have a real impact on ESG as a whole, helping to steer the system in the right direction to create favorable future outcomes.

What We Intend to do About the SEC’s Updated Climate Disclosure Regulations

We are taking the SEC’s updated climate disclosure regulations and associated commentary period very seriously. Currently, we are reading through the SEC’s full proposal and taking detailed notes to fully understand how this will impact ESG reporting, and particularly how this will impact our clients.

Once we’ve had a chance to distill our thoughts, we will develop a detailed commentary piece that outlines our considerations and critiques. At this point, we will submit a carefully crafted commentary piece to the SEC, along with a detailed addendum highlighting key points within the proposed rules. We will also apply the latest learnings and best practices to our work so that our clients are continuously at the forefront of ESG reporting. Stay tuned to review an update on our curated commentary and other updates regarding the regulations in the future.