While the new mandate was scaled back from what was originally proposed, US
companies must now prepare to join many markets around the world in the
climate-risk disclosure game.
Finally, we have a decision
from the US Securities and Exchange Commission (SEC) on mandatory
climate-risk disclosure for businesses — described in many quarters as a
“landmark decision.”
The final ruling means that all public companies will have to include
information in their annual reports setting out the climate-related risks to
their business, and what they are doing to manage those risks — including
material climate targets and goals and governance processes. The mandatory rules
kick in for all annual report issued for the year ending next Decembers.
The final SEC decision — which the organization’s Chair Gary
Gensler
said
would give investors “consistent, comparable, decision-useful information” — has
been scaled back from what was originally
proposed
after receiving “record levels” of feedback. The biggest shift is the fact that
companies will not be forced to disclose their difficult-to-assess Scope 3
greenhouse gas (GHG)
emissions
at all.
Companies are also being given a bit more time to get themselves prepared and
organized for compliance. Large companies have almost two years to provide most
disclosures, three years to organise their GHG emissions information, and six
years to obtain assurance over their GHGs.
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So, what does all of this mean to brands? Well, there are lots of complex
components to the requirements that company executives will need to read up on,
understand and prepare for when it comes to disclosing certain information. Much
of the information being asked for will be familiar to large businesses
(separately reporting Scope 1 and Scope 2 GHGs, for instance), and some of it
will be new. For example, firms will need to understand how severe
weather
might impact their income — providing details of investments being made to
protect facilities and assets against, for example, hurricanes, sea level rises
and flooding; and what sort of losses might be incurred should the company be
negatively impacted. Companies will also need to show how their Board of
directors
and management team is structured and able to oversee the management of
climate-related risks.
According to
Deloitte,
97 percent of Fortune 500 companies mentioned climate change in their latest
annual report. So, firms are much more aware of their relation to the climate
crisis — but, by and large, current reporting focuses solely on risk factors
such as increased regulation and reputational risk. The new SEC rule will demand
much more expansive reporting and many companies will need to up their game and
invest in their reporting teams and capabilities.
Of course, new reporting demands are good news for investors. In a statement,
the Interfaith Center on Corporate Responsibility
(ICCR), which represents 300 investors with more than $4 trillion under
management, celebrated the SEC ruling. It also applauded the “sustained
commitment” of the Commission, which has spent two years bringing
“standardization of climate reporting to financial filings,” as CEO Josh
Zinner put it.
Elsewhere, others lamented a missed opportunity for companies to start
addressing their Scope 3
emissions
— which account for the vast majority of a firm’s carbon footprint. Including
supply chain emissions reporting in the rule would have increased data
availability and highlighted the importance of tackling Scope 3, said William
Theisen, CEO of
EcoAct North America — a consultancy that helps brands
with their GHG reporting: “Scope 3 emissions are a pivotal aspect of
understanding a company’s environmental impact. Despite concerns about the
consistency of Scope 3, this would have led to accelerated improvement in
greenhouse has accounting.”
The move to drop Scope 3 reporting requirements was “not ideal; but not
surprising, given the politically charged
atmosphere
at the moment,” according to Scope 3 collaboration guru Oliver
Hurrey. But there are plenty of ways
companies can begin to tackle Scope 3, regardless, he says: “There has been a
big push emerging in the last few weeks by business and procurement leaders to
co-develop a methodology for adding carbon pricing into the commercial
evaluation criteria for tenders and supplier selection. This will create a
significant competitive-advantage incentive for suppliers to baseline and
decarbonize.”
As with many new pieces of regulation, the business world must brace itself for
potential legal challenges to the final rule. As with most ESG-related policy,
the SEC decision has become something of a political hot
potato
across the US — with some arguing it is simply another example of progressive
politics interfering with business.
However, many commentators have said that this new rule is not significant at
all, considering policy development in other parts of the world.
US companies operating overseas (or in the state of
California)
will be familiar with the numerous voluntary and mandatory climate and ESG
disclosure schemes that have come about in the last two years. The IFRS
Sustainability Disclosure
Standards,
and the EU’s Corporate Sustainability Reporting
Directive
(CSRD) and related European Sustainability Reporting Standards have had the
most airtime. The SEC’s final rule has taken much of what already exists in
disclosure frameworks such as the GHG Protocol and
the Task Force on Climate-Related Financial
Disclosures (TCFD) as its foundation. Having
said that, the SEC’s requirements only relate to climate-related reporting, as
opposed to wider ESG issues.
“The ruling, more or less, is pointless — because, regardless, disclosure is
coming,” says Ed Gabbitas,
founder of ESG consultancy EVORA Global. “Regardless
of the SEC’s ruling, firms shouldn’t hesitate to draw up an action plan around
sustainability reporting — especially amid growing global mandates from the EU
and Asia. More and more investors are expecting to see climate
disclosures;
and the US rule will now raise the bar for entry.”
So, it’s time to prepare for enhanced climate-risk disclosure in the US —
something that, Gabbitas adds, will require a “multi-fold strategy that may take
months of preparation to establish.”
Published Mar 7, 2024 2pm EST / 11am PST / 7pm GMT / 8pm CET
Content creator extraordinaire.
Tom is founder of storytelling strategy firm Narrative Matters — which helps organizations develop content that truly engages audiences around issues of global social, environmental and economic importance. He also provides strategic editorial insight and support to help organisations – from large corporates, to NGOs – build content strategies that focus on editorial that is accessible, shareable, intelligent and conversation-driving.