On Monday, March 21, the US Securities and Exchange Commission (SEC) proposed a new rule that will govern and mandate emissions and climate risk disclosures.
The Enhancement and Standardization of Climate-Related Disclosures rule has been anticipated for some time, as the SEC faced pressure to begin more clearly regulating the emissions of publicly owned companies.
The proposed rule will require companies to disclose:
- Their climate-related risks, and how these risks have:
- Had or are likely to have a material impact on the company and its finances over the short-, medium-, and long-term
- Affected or are likely to affect the company’s business, strategy, and outlook
- The impact(s) of climate-related events such as severe weather, and physical and transition risks
- The process for identifying, assessing, and managing climate-related risks and whether management of these risks is integrated into its overall risk management system and processes
- Both the oversight and governance of climate-related risks by a company’s board of directors and its management
In addition, under the proposed rule, companies will be mandated to disclose their:
- Climate-related targets or goals, and transition plan, if any
- Scope 1 and Scope 2 emissions volumes, reported as separate metrics
- Scope 3 emissions and intensity (if material)
The proposed rule was modeled off the existing Task Force for Climate-related Financial Disclosures (TCFD) framework, using the emissions accounting methodology established by the Greenhouse Gas (GHG) Protocol, developed jointly by WRI and WBCSD.
The proposed rule will have a phased timeline for compliance, with all companies expected to start disclosing by their 2026 filings, with an additional one-year grace period for companies subject to the proposed Scope 3 disclosure requirements.
Bottom line for business
While the proposed rule is not yet in effect, and may be amended before it is adopted, the message is clear: mandatory emissions management, climate risk assessment, and disclosure is coming for US companies.
The concept of regulated sustainability disclosure is nothing new; organizations in Europe and abroad have been gradually ramping up to required climate disclosures through mechanisms including, but not limited to the Non-Financial Reporting Directive (NFRD), the Sustainable Finance Disclosure Regulation (SFDR), the EU Green Taxonomy, and the incoming requirement for companies in the UK, Japan, and New Zealand to report in line with TCFD.
The emerging trend of regulated ESG and sustainability reporting underscores the importance of acting to align with these guidelines before they become law. Now is the time to begin preparations through voluntary action.