Unraveling the US SEC’s Climate Disclosure

About the SEC climate disclosure rule

The United States Securities and Exchange Commission (U.S. SEC), the government agency responsible for regulating securities markets and safeguarding investors, has recently proposed a new rule called the ‘Enhance and Standardize Climate-Related Disclosures for Investors’ Act. This rule aims to ensure that the U.S. capital markets receive consistent, comparable, and useful information regarding climate-related matters, while also promoting standardized reporting practices among organizations. 

The proposed climate-disclosure rule encompasses both quantitative and qualitative metrics. It will require U.S. companies, as well as foreign private issuers, to disclose their climate-related risks and greenhouse gas emissions (GHG). These disclosures will include detailed information about a company’s climate-related governance and plans for transitioning to a more sustainable future. By providing this information, companies will enable investors to make more informed assessments of their enterprise value, considering climate-related risks that can affect various aspects such as business operations, value chains, financial condition, and specific climate-related financial statement metrics. 

In a manner similar to financial disclosures, the SEC rule will emphasize transparency and traceability throughout the reporting process. As the rule is implemented, companies will increasingly be required to ensure that their climate-related disclosures meet various assurance requirements, thereby enhancing the credibility and reliability of the information provided.

Who does it apply to and when?

The SEC climate rule mandates a shift in the United States’ approach to sustainability reporting, expanding it from voluntary to mandatory. Under this rule, all companies registered with securities (approximately 30,000 companies), including foreign private issuers, will now be obligated to comply with climate-related disclosures as outlined in the new regulation. The specific deadlines for compliance depend on the filing status of each company. 

To ensure a smooth transition, the SEC has implemented a phased-in compliance schedule. In the initial two years of reporting, companies will be required to obtain limited assurance for their Scope 1 and 2 emissions. After this period, all disclosures will be subject to reasonable assurance.

Companies that have made public commitments or set goals related to climate action will face additional disclosure requirements specific to their goal setting and strategies for achieving those goals. For companies that announce sustainability targets and goals, there may be a requirement to disclose Scope 3 emissions and other relevant metrics in the subsequent year. Additionally, these companies will need to provide a reasonable transition plan outlining how they plan to achieve their goals, including defined timeframes and emissions baselines against which annual progress will be measured and tracked.

Consequences of not complying with SEC rule

Non-compliance with SEC climate-disclosure requirements carries the risk of substantial administrative sanctions that can restrict a company’s trading capabilities. Violations of these requirements may lead to potential liability for the company and its leaders, exposing them to legal and financial consequences. Furthermore, a qualified audit report resulting from non-compliance could leave the company vulnerable to shareholder actions, as it raises concerns about the accuracy and reliability of its financial information.

Reporting areas and key requirements

The SEC rule, aligning with the Task Force on Climate-related Financial Disclosures (TCFD) framework, establishes reporting parameters with four essential disclosure areas and 11 key reporting requirements. Companies must include climate-related information in their registration statements and annual reports, addressing governance, strategy, risk management, and emissions metrics and targets. By adopting the TCFD recommendations, the SEC rule ensures consistent and comprehensive reporting of climate-related information.

The rule incorporates a materiality assessment from an investor’s perspective, encompassing both financial materiality and GHG emissions metrics, enabling investors to identify, benchmark, and evaluate a company’s risk exposures.

Materiality assessment

Financial Materiality encompasses sustainability factors that affect a company’s cash flows, development, performance, position, cost of capital, or access to finance in different time horizons. As reporting will be based on materiality analysis, companies will need to disclose information that is reasonably expected to have a material impact on their business operations and consolidated financial statements.

GHG Emissions Metrics offer investors quantifiable and comparable data across industries, aiding in transition risk analysis and assessing progress towards sustainability targets. This evaluation relies on the GHG Protocol, encompassing scope 1, 2, and applicable scope 3 emissions measured in carbon dioxide equivalent (CO2e). As a result, companies need to comprehend and address climate-related risks and opportunities from both perspectives.

How Position Green can help your company

No matter where your company stands in your SEC climate-disclosure journey, Position Green offers comprehensive assistance through analysis, training, and a digital solution. Our team provides customized technical solutions and expert advisory services to navigate the complexities of the SEC rule and propel your compliance efforts forward. 

With our ESG software, you can efficiently gather, analyze, and report all sustainability data in accordance with SEC requirements, simplifying the process for external assurance providers to deliver statutory reasonable assurance for the SEC climate-disclosure report.