Get Ready for Climate Change…Disclosures, Part 1

ESG criteria are becoming increasingly popular in the market and in the world of business, and regulators are starting to follow suit. Their first topic of focus: climate change. Join us for this three-part series as we break down the rules recently proposed by the SEC for publicly traded companies in the US, and see what new disclosures may be required in the near future.

The concept of ESG (Environmental, Social, and Governance) initiatives can be overwhelming. There are numerous ESG issues in the world that fall under its umbrella, which can make it difficult to prioritize.  However, based on recent introductions of regulations around the world, there is one clear winner: climate change.

It makes sense. Climate change is a global issue that will affect every living being on this planet, far beyond the human population alone. Humankind’s advancements in technology, society, and the economy over the past 2,000 years have been incredible, but they have also done massive amounts of near-irreversible damage to the planet and its atmosphere. If this damage doesn’t stop, the atmosphere will be destroyed, temperatures will gradually increase, and global natural disasters will ensue that could ultimately end our species’ ability to live.

I’m not sure about you, but I’d like to keep all of that from happening - and it seems like there are a lot of people out there that agree with me. In recent years, countries around the globe have introduced laws and policies that require businesses to disclose information on their emission of greenhouse gases, their risks and impact in the case of climate change, and their plans to reduce their carbon footprint. And now the United States is following suit. In March 2022, the SEC released their proposed rules for disclosure requirements by public filers in the US market related to climate change. This casual 490-page report includes details of the requirements and the SEC’s rationale for proposal based on discussion with various stakeholders including institutional investors, industry groups, and individual companies.

Most sane people wouldn’t consider reading that novel of an SEC document, especially when the proposed rules have not yet been finalized. Lucky for you, I am a bit less sane in areas like this, so here is my take on the proposed rules.

Why is the SEC proposing these rules?

As noted above, and in our other posts, ESG has become more important in the business world. It has become difficult to ignore the scientific reports on climate change, and most governments now agree that drastic measures must be taken to avoid major disasters in the future.

But things aren’t quite as bleak as they might seem. There are a number of large businesses that have acknowledged the need for climate action in recent years, and have already taken steps to begin reducing their carbon footprints. Some companies have even begun issuing their own sustainability reports on a period basis, showing interested readers the steps that are already being taken and progress made. The challenge at this stage is that there is a great deal of diversity in practice of these efforts.

With no clear disclosure guidelines or audit requirements, companies are able to cherry-pick in reporting the information that portrays them in a positive light; negative results or other adverse information can be left out of these reports at the companies’ own discretion. Furthermore, there are multiple frameworks that have been established around climate change and sustainability; a few such frameworks include the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP), the Climate Disclosure Standards Board (CDSB), the Sustainability Accounting Standards Board (SASB), and the Task Force on Climate-Related Financial Disclosures (TCFD). Each of these frameworks has their own sets of guidelines and requirements that vary, and many companies have selected different of these frameworks for making their disclosures.

With its proposed rules, the SEC aims to achieve consistency and regularity in reporting. Its disclosure requirements are based on a specific climate change framework from the Task Force on Climate-Related Financial Disclosures (TCFD), as well as a greenhouse gas emission disclosure framework based on the GHG Protocol. Both of these frameworks are widely accepted by other countries and organizations across the globe, and the TCFD principles also align with many key principles from some of the other largest frameworks. This will greatly help in the comparability of climate change disclosures between SEC filers, as well as between SEC filers and other companies in other countries or jurisdictions with a similar framework.

Lastly, the creation of a clear set of disclosure requirements, and their inclusion and required attestation procedures within required SEC filings, helps readers see a full picture of a Company’s climate change related information. All of this information will be required, whether it shows a positive or negative impact on the Company.

Next week, we’ll dive into the proposed disclosures coming down the pike and what they mean for your business.