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Sustainability

SEC Climate Disclosure Rule: Navigating the Pause, Preparing for Key Requirements and Ensuring Company Readiness

In light of the recent developments concerning the Securities and Exchange Commission’s (SEC) rule, the discussion on sustainability reporting and regulatory compliance remains critically important.  Despite the current pause on the rule, it is essential to prepare for its potential implementation given the global emphasis on corporate transparency and environmental responsibility.

To dissect the nuances of SEC’s new regulation, marking a pivotal shift in the corporate sustainability landscape, we convened a panel of sustainability and compliance experts, from Schneider Electric's Sustainability Business and EcoAct. This blog summarizes the key insights and takeaways from our comprehensive on-demand webinar.

Understanding the SEC's Climate Disclosure Rule

The SEC's rule mandates U.S. publicly listed companies to disclose climate-related risks, climate strategies, and GHG emissions data to investors about the financial risks businesses face due to climate change.  The rule requirements differ based on the type of filer as defined by the SEC.  The rule distinguishes between Large Accelerated Filers (LAF), those with a public float of $700M USD or more, and Accelerated Filers (AF) those with a public float of $75M – 700M USD, will need to report their material Scope 1 and 2 emissions. Companies that don’t meet the $75M USD public float will not have to report Scope 1 and 2 metrics.

The Emissions Disclosure

The SEC's climate disclosure rule has placed a spotlight on the emissions reporting requirement, for certain entities. This requires LAFs to report material Scope 1 and 2 emissions, which refer to direct emissions from owned or controlled sources and indirect emissions from the generation of purchased energy, respectively. Requiring the disclosure of these emissions supports the SEC's commitment to providing stakeholders with a clear picture of a company's direct environmental impact. The rule requirement goes beyond merely reporting figures; it also calls for third-party assurance on the reported emissions, to be disclosed starting in the 2030 financial statements. Initially, companies will be required to obtain limited assurance, akin to a review of financial statements. Still, eventually, they will need to achieve reasonable assurance, which is more rigorous and akin to an audit. This progression reflects the SEC's intention to increase the reliability and accuracy of emissions data over time. For organizations, this means establishing and following a robust emissions accounting process that can withstand the scrutiny of third-party verification. It involves implementing measurement protocols, data management systems, and internal controls that ensure the integrity of emissions data. Companies must also stay abreast of evolving methodologies and standards for emissions measurement to ensure their reporting aligns with best practices and regulatory expectations.

The SEC’s ruling focus on Scope 1 and 2 emissions is a critical step, but the exclusion of mandatory Scope 3 emissions reporting – which encompasses all other indirect emissions that occur in a company's value chain – has been noted as a significant omission. While not currently required, many organizations recognize the importance of Scope 3 emissions in understanding their full environmental impact and are choosing to report these voluntarily. In essence, the SEC’s requirement for emissions disclosure is a call to action for companies to enhance their sustainability practices and provide transparent, reliable data to investors and the public. As companies work to meet these new requirements, they will not only contribute to a more sustainable future but also gain valuable insights that can drive operational efficiencies and innovation.

The Role of Software in Compliance

In the realm of compliance, particularly with the SEC's new climate disclosure rule, software is not just a tool but a strategic asset. As the panelists highlighted, the right software can transform the complex emissions accounting and climate risk assessment process into a manageable and transparent operation. It serves as the backbone for companies to not only collect and organize vast amounts of data but also to ensure that the data is auditable and verifiable.

Software solutions enable companies to conduct comprehensive analyses across their operations and supply chains with precision and speed. Moreover, software can facilitate the clear documentation of processes, which is crucial for meeting the SEC's requirements for risk measurement and management.

The transition to software-driven compliance is a significant step for many organizations. By adopting robust software platforms, companies not only minimize errors and inefficiencies, but also allows the organization to apply controls, log changes, and streamline the assurance process, ultimately leading to a more resilient and responsive compliance strategy.

Preparing for Compliance

The panelists agreed that preparation for compliance of emissions accounting, assessing climate-related risks, and the relative disclosure of both should begin immediately. The process of aligning internal teams, educating stakeholders, and ensuring data completeness is intensive. Companies are encouraged to transition from manual, Excel-based methods to more automated, controllable, and auditable systems. This shift is critical, as many organizations will need to integrate sustainability and financial reporting processes, which historically have operated separately.

Climate Risk Assessment and Disclosure

The journey towards compliance with the SEC's climate disclosure rule is a marathon, not a sprint. This preparation involves a multi-faceted approach, beginning with stakeholder engagement and education. It is crucial to bring various departments, including financial reporting, enterprise risk management, legal, sustainability, and functional risk owners, onto the same page. Each stakeholder must understand their role in an integrated climate-related enterprise risk management program designed for annual disclosure and the significance of the information for which they are each responsible.

Data collection is the cornerstone of compliance for assessing organizational risks and quantifying annual GHG emissions. In the early stages of risk assessment, especially for organizations new to the process, conducting it for the first few times - data collection can prove to be a substantial endeavor. Ensuring that the information is as complete, accurate, and relevant as possible can take considerable time requiring widespread participation across the organization. Companies may need to conduct gap assessments to identify and address any missing information or discrepancies in their current reporting practices.

Given the potential for the SEC’s rule to evolve, companies should adopt a proactive stance. This means setting internal timelines well ahead of regulatory deadlines, allowing for practice runs of public reporting, and ensuring that internal systems supporting emissions accounting, risk assessments, and the documentation thereof are maturing alongside expectations and are robust enough to meet the new requirements.

Companies are required to disclose the following:

  • Material climate-related risks and how finances are impacted in both short and long-term
  • How these risks affect their business model, strategy, and outlook
  • Severe weather impacts if they exceed 1% of all expenditures expensed, losses or capitalizes costs and charges
  • How are climate-related risks overseen by the board and management
  • Explain how climate-related risks are identified, assessed, and managed and if they are integrated into overall risk management
  • Describe scenario analysis details, assumptions, and projected financial impacts -*if scenario analysis is performed and results determine that a climate-related risk is reasonably likely to have a material impact on its business, results of operations, or financial condition
  • Share goals and transition plans including metrics and information on internal carbon pricing if used -*if such target or goal has materially affected or is reasonably likely to materially affect the registrant's business, results of operations, or financial condition; if a registrant has adopted the plan to manage a material transition risk
  • Metrics on Scope 1 & 2 emissions, if deemed material, and provide limited assurance information

Preparing for compliance is an iterative process that demands attention to detail, cross-functional collaboration, and a willingness to invest in the systems and processes that will support long-term sustainability goals. With the right preparation, companies can navigate the evolving landscape of compliance into an opportunity for growth and leadership in corporate sustainability.

The Call to Action

The SEC's climate disclosure rule presents both a challenge and an opportunity. While there is pressure to comply, there is also the privilege of being at the forefront of sustainability reporting. The journey towards compliance will not only fulfill regulatory obligations but also drive business value and contribute to an organization's sustainable development.

As we continue to monitor the legal landscape and potential adjustments to the rule, we remain committed to providing guidance and support to organizations navigating these changes. Gain more insights and updates on compliance programs, and virtual events here