The SEC Climate Disclosure Ruling: A New Milestone with a Missing Piece

An Update from our Team on the SEC’s Climate Disclosure Ruling
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The SEC's finalized climate-disclosure ruling, enacted on March 6, 2024, mandates climate disclosures from publicly traded U.S. companies and other foreign registrants, a major step forward in transparency, and a milestone to be celebrated. However, the final ruling falls behind other emerging global regulations by not requiring companies to disclose Scope 3 emissions. Despite this, the ruling is a significant move in sustainable finance, promoting accountability and urging businesses to address their environmental footprint. Many companies already voluntarily report Scope 3 emissions or are required to do so by other global regulations and reporting bodies. While Scope 3 disclosure may not be mandatory by the SEC, companies should consider voluntarily disclosing these emissions to ensure alignment and consistency of their reporting across a multitude of reporting frameworks.    

A statement from our team on March 6, 2024: 

“We’re delighted to see the SEC's historic ruling on mandatory emissions disclosure, a significant leap forward for transparency in corporate sustainability and climate-related risks. Although we’re disappointed to see that the final ruling omits Scope 3 – the largest category of emissions for most companies, and therefore the most important to decarbonize – this remains a pivotal moment, promoting accountability and standardized reporting while encouraging businesses to comprehensively address climate impact for the benefit of investors, stakeholders, and the planet. We’re excited to help our clients navigate this new ruling and turn their decarbonization challenges into opportunities.”

If your business operates in the U.S., chances are that you’ve already taken a close look at the U.S. Securities and Exchange Commission’s (SEC) disclosure rule that governs and mandates emissions and climate-related risk disclosures. This ruling, just finalized, comes with a lot of questions around disclosure of GHG (greenhouse gas) emissions, assurance, and financial statement disclosures.

Although potential litigation could follow the ruling, we know one thing is clear... Corporations that start their journey now will be better positioned to successfully adhere to regulatory requirements around climate disclosure. 

The prevalence of climate-related risk and disclosure regulations is spreading across the globe. The concept that “climate risk equals financial risk” is no longer a theory, but a reality that investors, customers, and other business stakeholders are embracing to create more transparency, sustainability, and resiliency. In other words, it is no longer a matter of if disclosure mandates are coming to the U.S., the time is already upon us. 

Today, we see this as an opportunity for impacted organizations to proactively develop their ESG reporting strategies and take steps to ensure accuracy and compliance for these disclosures. We have developed SEC-readiness services to help meet clients where they are today and support them in preparing to disclose transparent, accurate, and compliant climate-related reporting to the SEC. 

1. Stakeholder Engagement

As climate-related disclosures and financial disclosures merge, it will be necessary for internal stakeholders to be aware of their roles and responsibilities and effectively collaborate with cross-functional teams. This workstream is centered around ensuring key stakeholders within the organization are aware and educated about the SEC’s climate ruling. 

Key aspects of this include aligning roles and responsibilities within the organization and providing clarity and accountability down to the departmental level. Potential stakeholders may include but are not limited to: finance, risk management, accounting, corporate controller, compliance, operations, internal audit, sustainability, communications, etc.  

Lastly, performing an initial data collection exercise of your current ESG reporting practice and uncovering high-level gaps for improvement will aid an organization in ensuring completeness across all aspects of reporting. Examples of data to collect include:

• Climate-related disclosures – CDP, TCFD, GRI, SASB 
• ESG governance policies and structures  
• Risk identification, assessment, and management processes 
• Climate Scenario Analysis documentation (qualitative or quantitative)  
• Internal carbon pricing  
• Inventory Management Plan 
• GHG Inventory (Scope 1, 2, and 3)  
• Verification statements/processes 
• GHG targets and goals
• Use of carbon offsets or renewable energy credits
• Names of key competitors for benchmarking 

2. Data Gap Assessment and Reasonable Assurance Matrix

With any public disclosure, companies should ensure that the information provided to investors and customers is as complete and accurate as possible. Additionally, organizations will eventually be required to take on the added challenge of auditing their data and processes at a reasonable assurance level. Key elements of this work include identifying and addressing gaps and improvement areas within your data and calculation processes. This includes data collection and controls, alignment with data owners throughout the organization, and planning and documenting inventory management procedures. This will give organizations confidence that they are ready for disclosure, and additionally, help companies prepare for the shift from limited to reasonable assurance.

3. Climate-Related Risk Management

Oversight of climate-related issues is critical for ongoing management of risks and strategic innovation. This workstream incorporates a governance review assessment aligned with IFRS S2 and CDP guidance. This involves orchestrating a survey and follow-up interviews to understand what governance processes are in place, those that are planned, and whether they are aligned with best practices and expectations. Any identified gaps will be addressed with recommendations and actions.  

Performing a climate-related risk assessment will guide the company through an identification, assessment, and prioritization exercise to support the development of an enterprise risk management (ERM)-aligned risk register. Gathering current information on potential risks from various stakeholders within the organization will support the documentation of assessment criteria and enable the development of recommendations to manage each prioritized risk.

To determine what material risks to disclose in their filing, every organization will be required to determine the materiality threshold of climate risks for investor decision-making. The disclosure will cover transition and physical, acute, and chronic risks that could manifest in the short-term (the next 12 months) and long-term (beyond the next year).  
 
A matter is considered “material” if there is a substantial likelihood that a reasonable investor would consider it important in deciding whether to purchase or sell securities, how to vote, or whether the omission of such information would significantly alter the complete picture of available information. Understanding the nuances of materiality and its timeframe is critical for financial reporting accuracy. 

The end goal is designing a comprehensive risk register, which can be integrated within the enterprise risk management team’s resources to build from in the future. This includes identifying a list of risks, functional risk owners, and assessing potential impacts of past and future events. These steps help to prioritize more impactful and emerging issues and find a plan around the most important key themes. In decentralized organizations, this exercise can build momentum, drive consensus, and connection-building.

Ready to get started now to learn more about how our team is monitoring this recent landmark legislation by the SEC? Schedule an appointment with one of our sustainability compliance experts. We also invite you to stay tuned to the Schneider Electric Sustainability Business LinkedIn account for our expert debriefs following the SEC’s final ruling announcement.

Fast Facts on the SEC’s Climate Disclosure Ruling

The final rules from the Securities and Exchange Commission (SEC) as-of March 2024 require companies (registrants) to disclose the following climate-related information:

1. Material Climate-Related Risks: Companies must disclose risks that have or are likely to materially impact their business strategy, results of operations, or financial condition.
2. Impacts on Strategy and Business Model: Companies must detail the actual and potential material impacts of identified climate-related risks on their strategy, business model, and outlook.
3. Mitigation and Adaptation Activities: If a company has taken steps to mitigate or adapt to a material climate-related risk, it must provide both quantitative and qualitative descriptions of expenditures incurred and impacts on financial estimates and assumptions.
4. Filing Requirements: Climate-related disclosures must be included in registration statements and Exchange Act annual reports filed with the SEC.
5. Location of Disclosures: Companies can provide the mandated climate-related disclosures in a separate section of their filing or incorporate them into sections like Risk Factors, Description of Business, or Management’s Discussion and Analysis. They can also incorporate by reference from another Commission filing if it meets electronic tagging requirements.
6. Electronic Tagging: Companies must electronically tag climate-related disclosures in Inline XBRL.

Additionally, the rules specify that:

• Scope 1 and Scope 2 GHG Emissions: Certain larger registrants must disclose their Scope 1 and/or Scope 2 emissions when material, along with an attestation report covering the disclosure of these emissions.
• Financial Statement Effects: Companies must disclose the financial statement effects of severe weather events and other natural conditions, including costs and losses.

The compliance with these rules will be phased in, with the timeline depending on the company's filer status and the content of the disclosure.