Stay Green. Know Your Next Steps Under the SEC Climate Disclosure Rules
In March, the SEC announced that for the first time public companies will be required to tell their shareholders and the federal government how they affect the climate.
The rule was approved by a three-to-one vote. Republican commissioner Hester M. Pierce was the sole vote against the rule.
In a lengthy dissenting statement, she wrote: “Contrary to the hopes of the eager anticipators, the proposal will not bring consistency, comparability and reliability to company climate disclosures … We cannot make such fundamental changes to our disclosure regime without harming investors, the economy and this agency. For that reason, I cannot support the proposal.”
SEC Chair Gary Genslar heralded the decision.
“I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers,” he said in a press release.
“Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance.”
The move was welcomed by environmental advocates who have long demanded that the SEC adopt a rule that requires companies to be transparent about how their businesses affect and are affected by global climate change.
“Climate risk matters and the companies need to be prepared,” Danielle Fugere, president and chief counsel for As You Sow, said. As You Sow is a nonprofit focused on shareholder advocacy.
“You cannot reduce emissions if you don’t know what those emissions are. You can’t reduce emissions if you don’t have a plan of action. So by having companies look into each of these elements, I think that will be helpful.”
The SEC’s Proposed Climate Disclosure Rule At a Glance
The SEC’s proposed climate disclosures rule would require publicly traded companies to disclose the risks disasters like droughts and wildfires may pose to their business, changes in any corporate environmental governance policies and information about their emissions.
“If you look at the Deloitte survey that came out a few months ago, 97% of companies surveyed globally said climate change was negatively impacting their businesses,” said Bob Keefe, executive director of the business group E2. E2, which stands for Environmental Entrepreneurs, is a nonpartisan group of business leaders, investors, and professionals who advocate for policies that benefit both the economy and the environment.
In terms of emissions reporting, companies would be required to disclose three scopes of emissions. Scope one is simply the greenhouse gas emissions from a company’s direct operations. These emissions are owned or controlled by the company.
Scope 2 emissions cover a company’s greenhouse gas emissions from the use of electricity, steam, heat or cooling that is consumed by a business’s operations or is owned by a particular firm.
Scope 3 is where it gets complicated. Scope 3 emissions cover a company’s indirect greenhouse gas emissions, including those used by a business’s suppliers and in the transportation of any goods, among other things.
“It’s a broader perspective on both emissions and risk,” said Sandra Purohit, director of federal advocacy for E2. E2, which stands for Environmental Entrepreneurs, is a nonpartisan group of business leaders, investors, and professionals who advocate for policies that benefit both the economy and the environment.
“The scope, the breadth of what is being reported can really affect how you see that company and how you see the risk as an investment.”
Not all publicly traded companies will be required to disclose their Scope 3 emissions. Smaller companies are exempt from reporting Scope 3 emissions and larger companies are only required to report them if they have material Scope 3 emissions or if they have set specific greenhouse gas reduction goals that include this type of emission.
Fugere explained that including Scope 3 emissions in financial disclosures plays an important role in an investor’s ability to assess a firm’s ability to withstand the far-reaching effects of climate change.
“Maybe suppliers who aren’t paying attention will have insufficient water resources. Their employees may not be able to work outside in massive heat waves. They may be unable to get materials. Supply chains may break in the event of catastrophic storms. Droughts may make agricultural products unavailable,” she said.
“There’s a whole range of impacts associated with climate and companies need to be looking at that and they need to be looking down their supply chains.”
When Will the Rule Go Into Effect? How Will It Affect My Business?
The comment period for the SEC’s proposed climate disclosure rule will last for 60 days after it is published on the SEC website. During that time, the public will be allowed to submit their feedback.
Once the period closes, the SEC will then take those comments into consideration before the final rule is released — a process that could take several months. The SEC has stated they expect large companies will need to start disclosing their climate risks in fiscal year 2023. Other, smaller firms will have until 2024, per reporting from the Washington Post.
Additionally, portions of the rule will be implemented over a longer period of time. The SEC has said companies will have any extra year to start disclosing Scope 3 emissions and that they will not be liable for errors in that data.
“Nobody knows how to get to net zero emissions yet and investors recognize that,” Fugere said.
Keefe, Purohit and Fugere agree that as a whole the rule will be beneficial to companies, however. Many are already setting emissions goals — The New York Times reports that Microsoft seeks to be carbon negative by 2030, for example — and these guidelines will help create standard reporting frameworks.
For years, businesses have faced increased scrutiny when it comes to climate-related and emissions reduction goals, but they didn’t have a standard framework for reporting their progress, creating increased risk of shareholder derivative suits from investors who may feel the firm isn’t doing enough.
With this new rule, they will have the clarity they need to ensure they’re properly reporting their progress thereby reducing their D&O risk.
“It’s going to be beneficial because it’s going to standardize things for those of them who have boards and investors that are asking for this stuff. There are four different models in which they could report this information. They now know the model that they need to report in and they know that that is also going to be internationally recognized,” Purohit said.
For companies that have already taken action to reduce their emissions or calculate their climate risks, this new rule could be a boon for business. ESG-minded investors and consumers are already looking to support businesses that have made progress on their climate goals.
“For those companies that are mitigating the risks of climate or who are lowering their risks, that can become a selling point,” Purohit said.
If businesses are questioning the necessity of these rules, Keefe would point them to the purpose of the SEC: protecting businesses and their investors.
“The SEC doesn’t make climate policy, the SEC doesn’t make climate regulations. The SEC’s business is to protect investors and so that’s what this rule is about,” Keefe said.
“Climate change is killing our economy, and companies — public investor owned companies — are obviously at the heart of our economy.” &