SEC Climate Disclosure Rule. Here’s What It Means.
Last updated March 7, 2024: The SEC has adopted the Climate-Related Disclosure Rule on March 6 (Fact Sheet Here). we are actively updating this blog based on the final rule details.
After two years of drafting and deliberation, the U.S. Securities and Exchange Commission (SEC) has adopted the Climate-Related Disclosure Rule which will require large publicly traded companies to disclose climate action, greenhouse gas emissions, and the financial impacts of severe weather events. It is crucial for businesses to understand what the new rules entail and to whom they apply. To help businesses navigate this significant regulatory change, we have compiled a guide addressing key questions such as:
What are the new climate rules?
Why has the Climate-Related Disclosure Rule been enacted?
What impact will the new reporting requirements have on business?
How can my business prepare?
What’s next?
What are the new climate rules?
On March 6, 2024, the SEC finally adopted on a set of climate-related disclosure rules originally proposed in the fall of 2022. The newly adopted rules dictate the steps that companies must take to improve the standardization and transparency of companies’ material environmental impacts. This comes at the bequest of a multitude of stakeholders, particularly asset managers, who support the notion that climate risk is investor risk, and the absence of this reporting prevents investors from making fully informed investment decisions.
We will delve into Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, the rule the SEC introduced for companies to measure and manage their climate-related data. General discourse regarding the “SEC climate rule” is likely referring to this.
Why has the Climate-Related Disclosure Rule been enacted?
Under the SEC’s climate disclosure rules, public companies are required to make climate-related disclosures based on “materiality”. Materiality, as described by the SEC per its 2010 guidance, is “…information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision.”
Based on this definition, one can surmise that there is a fair degree of subjectivity as to what is material and what is not. This room for interpretation for companies has led to inconsistent reporting, contributing to the information asymmetry that plagues the sustainability space. We do not know who the good actors and bad actors are due to a lack of objective reporting standards. For example, one of the more seemingly “quantifiable” metrics, greenhouse gas (GHG) emissions, has a history of inaccuracy due to companies’ reliance on estimates rather than concrete energy usage data and direct measurement.
According to the pro bono academic ClimateDisclosure100.info initiative, only 20 firms worldwide accurately report 100% of their Scope 1 (direct emissions) GHG emissions, to say nothing of Scope 2 emissions (indirect emissions) and Scope 3 emissions (value chain emissions).
These faulty, inconsistent reporting practices are detrimental for a variety of reasons. Firstly, in an effort to cater to stakeholders demanding greater sustainability, companies have increasingly engaged in “greenwashing”, the practice of making deceptive or exaggerated claims about a company’s true sustainability. A study found that when managers underperformed the earnings expectations (set by research analysts following their company), managers often publicly talked about their focus on sustainability and ESG (environmental, social, and governance) initiatives to soften underachieving financial performance. The lack of data integrity stemming from inconsistent, under regulated reporting practices, has stymied the space and drawn the ire of certain political groups, further adding to the cacophony of noise impeding accountability and remediation. The inability to track corporate sustainability over time or compare the performance of one company to another not only hampers investors but hinders our global goal to achieve a net zero economy.
This is why the SEC introduced the climate disclosure rule. The SEC has a three-part mandate: protect investors; maintain fair, orderly, and efficient markets; and facilitate capital information. At the beckoning of the 93% of institutional investors who do not believe that markets have fully incorporated climate-related risks, the SEC adopted the climate disclosure rule to ensure that investors have access to relevant data to make informed investment decisions.
What impact will the new reporting requirements have on business?
The final rule will require publicly traded companies to report their GHG emissions and how their business is affected by climate change and a net-zero transition alongside financial statements. This brings sustainability data to the same level of rigor and reliability as corporate accounting.
This rule, which borrows from the Task Force on Climate-Related Financial Disclosures and the GHG Protocol Corporate Accounting and Reporting Standard, will require public companies to report details regarding:
Climate-related risks and their materiality on business operations
Corporate governance and oversight concerning these risks
Their Risk management strategy for identifying, assessing, and mitigating said risks
Internally set sustainability goals or targets and how they will be realized
Financial harms from severe weather events
Proof of internal decarbonization efforts
The final regulations mandate only significant filers (under two distinct classifications) to report material Scope 1 and Scope 2 emissions with an accompanying audit report.
How can my business prepare?
Although the specific requirements of the climate disclosure rule depend on a company’s unique circumstances, encompassing both qualitative and quantitative features, it’s evident that many, if not all, companies must tighten their internal reporting mechanisms ton ensure compliance by the time the SEC rules go into effect, estimated within the next two years.
Studies, such as Deloitte’s 2022 Sustainability Action Report, highlight that data reliability remains a significant concern, with over half (57%) of senior executives citing data availability and quality as the biggest hurdles in their ESG disclosure efforts.
This concern, now carrying future regulatory risks, only reinforces the need for more robust impact reporting beyond the reliance on indirect measurement. Data automation, powered by multiple data sources (internal and local community data), offer businesses a reliable method to accurately report the necessary disclosures in an auditable fashion.
Executives must recognize the significance of accurate reporting with the new scrutiny climate disclosures will be held against. Ultimately, the CFO who signs off on this data is going to want to know it is auditable.
What’s next?
The regulations will become effective 60 days post-publication. There will be a phase-in period with the larger companies being affected first. By 2026, these larger filers are expected to report their emissions, extending to assurance on emission calculations by 2029. Smaller entities meeting the disclosure threshold will start this process in 2028.
How Can Narralytics Help?
In preparation of the SEC’s Climate-Rule Disclosure, Narralytics can help companies verify the materiality of their climate disclosures through local, ambient impact reporting validated through the lived experiences of communities. Much consternation regarding the rule has centered on dropping the Scope 3 emissions (indirect supply chain emissions) provision. In California, companies generating a billion dollars or more in revenue will be required to report these emissions. Companies excluded from this law must still be ready for the prospect of the SEC implementing this policy to align with global standards as the effects of climate change are becoming increasingly pronounced and materially affect business operations.
The future of corporate responsibility transcends reporting; it demands profound engagement with the communities most impacted by climate change and operational activities. Narralytics stands at the forefront of this transformative era, offering more than just compliance tools. Our platform embodies the essence of true sustainability—integrating hyperlocal impact intelligence with global corporate responsibility. By leveraging the lived experiences of communities, we not only ensure your disclosures are robust and compliant but also resonate with real-world impacts and contributions to a sustainable future.
We invite you to join us in redefining corporate sustainability.
Discover how Narralytics can transform your sustainability reporting into a powerful tool for positive change. Reach out to us at nikhil@narralytics.ai and embark on a journey of impactful, meaningful, and compliant climate action.
