With great anticipation, and for many businesses some apprehension, we await the finalization and launch of the SEC’s proposed rules to enhance and standardize climate-related disclosures for investors. Though there is much debate and scrutiny of elements of the rule, industry consensus points to a likely enforcement of all or some of the proposed rule to occur in 2023, and thereafter enter into force for many companies beginning in 2024. While the precise timeline around the release of the rule is still unclear, there is much a business can do today to prepare.
Read on for 10 things you need to know about the rule, including tips from Schneider Electric Sustainability Business experts, partners, and customers on how to prepare.
1. The proposed rule states that all publicly traded companies in the U.S. must comply with climate-related disclosures. What this means is that the SEC will require all companies that appear on the U.S. stock exchange to comply with the new rule. Moving forward, businesses will be required to disclose their climate-related risk and emissions. According to the proposed rule, these disclosures will include companies’ Scope 1 and 2 emissions and Scope 3 if material to your business operations.
2. The main objective of the proposed rule is to support investor decision-making. The SEC maintains that its responsibility is to protect and uphold the public’s interest, and that quantifying climate risk for potential investors is a critical part of this duty.
3. The proposed rule will align to existing reporting frameworks, like the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG). For the most part, it is not intended to create extra reporting burden; rather it will build upon the frameworks that companies are already familiar with.
4. Climate risks, both operational and financial, whether from physical or transition risks, are to be disclosed under the proposed rule.
5. Having internal, company-wide conversations with financial, legal, operations, procurement, investor relations, and supply chain teams is an effective way to plan what changes may be needed to comply with the rule. It may be wise to even engage the C-suite and board to begin to flesh out how these changes will impact risk management and governance at the highest levels. In general, this is an action that can and should be taken before the proposed rule is put into effect.
6. The rule stipulates that certain businesses must attain limited assurance first, and then reasonable assurance thereafter. Assurance is the process of receiving unbiased third-party verification on GHG emissions data. Picking an experienced assurance partner is important. Companies should look for partners with deep experience in these technical processes and who can add their expertise to these conversations.
7. Schneider Electric recommends conducting a gap analysis sooner rather than later. Undertake the exercise to measure your current ESG and climate disclosures against the SEC’s proposed rule now to better understand where your company stands. This helps in setting reasonable and timely expectations throughout the company in preparation for the finalized rule. It is expected that voluntary programs will remain independent and eventually will adapt their requirements to the SEC proposal.
8. We also recommend identifying what resources your company will need moving forward to bridge the gap in its preparedness for the rule to take full effect. This will give insight now as to the potential costs, recruitment and staffing, company restructuring, etc. that may be required under the final rule.
9. If it doesn’t already exist at your company, now is the time to advocate for and develop an internal team dedicated to sustainability. It will not be enough to have one or two people managing the “tsunami” of sustainable expectations coming for companies, and you should act accordingly in your staffing efforts. A well-rounded team of individuals assigned to these tasks will allow for a smoother and streamlined workflow. The partnership of an experienced consultant can also prove invaluable in avoiding pitfalls and maximizing your efforts across both voluntary and mandatory reporting activities.
10. Finally, be patient! There will be a learning curve for all of those involved once the rule is finalized and remembering to be patient as you learn and understand what the rule is asking from you, and your company at large, is good practice.
The prospect of mandatory climate reporting in the U.S. is a big step toward greater transparency for investors and other stakeholders, but for many businesses will mean changes in their operations and reporting processes. The bottom line is that climate disclosure is not going away, and nearly all businesses, in one way or another, will be impacted by the enactment of this rule. The good news is that businesses already reporting to CDP and exploring alignment with frameworks like TCFD have a head start, and there are many steps you can take today to position your organization for success no matter the outcome of the rule.