SEC Proposed Changes to Climate Risk Disclosures: What You Should Know
The Commission first addressed the disclosure of material environmental issues in the early 1970s, and these latest proposals come on the back of a wide-reaching consultation that began in March 2021. Introducing the proposals, SEC Commissioner Allison Herren Lee said: This is a watershed moment for investors and financial markets as the Commission today addresses disclosure of climate change risk – one of the most significant risks to face capital markets since the inception of this agency. The science is clear and alarming, and the links to capital markets are direct and evident.”
Many organizations have made public statements relating to climate change, such as commitments to reduce greenhouse gas emissions or becoming “net zero” by a particular date. These statements may be made to attract investors, to appeal to customers that prioritize sustainability, or to reduce their exposure to risks posed by an expected transition to a lower carbon economy. In response, investors have demanded more detailed information about climate-related targets and plans to assess their credibility and allow inter-company comparisons.
Current disclosure practices are regarded as fragmented and inconsistent. The proposed SEC rules are intended to enhance and standardize climate-related disclosures, providing more efficient and effective disclosure of risks. The objective is to deliver consistency, quality, comparability, and transparency; benefiting both investors and risk disclosure issuers.
Led by investors, the new requirements will apply to public companies in the USA and any foreign issuers listed in the USA. A key feature of the requirements is that unverified data reporting will no longer be acceptable; companies will be required to have their data verified by a third party in the same way that they do with financial disclosures. This will effectively align financial disclosures with companies’ sustainability and climate risks disclosures. Initially, companies will be required to disclose their Scope 1 and Scope 2 emissions in addition to GHG intensity (emissions per economic output). Companies will have an additional year to phase in their material Scope 3 emissions.
Climate-related risks and opportunities affect a company’s business and its financial performance. Severe and frequent natural disasters can damage assets, disrupt operations, and increase costs. Transitions to lower carbon products, practices, and services, triggered by changes in regulations, consumer preferences, availability of financing, technology and other market forces, can lead to changes in a company’s business model. Furthermore, governments around the world have made public commitments to transition to a lower carbon economy, and efforts towards meeting GHG reduction goals have financial effects that may materially impact companies.
The SEC proposal, therefore, creates new requirements for the disclosure of climate-related risks and impacts on a company’s business, as well as information about a company’s governance, risk management, and climate risk strategy. Companies’ financial statements will need to include disaggregated metrics on climate-related impacts, expenditure, estimates and assumptions.
GHG emissions will be an important part of the disclosure, drawing on the GHG Protocol, and including Scopes 1, 2, and, for all but the smallest companies, material Scope 3 emissions.
The proposal requires these disclosures to be filed with the Commission, with phased-in reporting requirements over time based on a company’s size. Importantly, there will be a phased-in requirement for verification at a reasonable level of assurance of GHG Scopes 1 and 2 for larger filers to help ensure the reliability of these disclosures.
Transitions to lower carbon products, practices, and services, triggered by changes in regulations, consumer preferences, availability of financing, technology and other market forces, can lead to changes in a company’s business model. Verification services help put you in control – driving positive change and greater transparency across every aspect of your sustainability agenda.
Learn More: https://info.lrqa.com/sec-proposes-major-changes-to-climate-risk
About the Author
Her 16+ years of practice experience in the environmental field have taken her to landfills, power plants, cruise ships, upstream and downstream oil and gas operations, chemical plants, hotels, agricultural operations, and various manufacturing facilities. She received a B.S. in civil engineering from Purdue University.