The proposed rule would standardize climate-related disclosures for investors, allowing them to clarify exposure to risk and potential impact on the business operations or financial condition of the organization they are investing in.
Why the SEC’s climate disclosure rule proposal matters
This rule proposal follows global efforts in recent years to standardize climate-related disclosure requirements for organizations.
While many companies already disclose their GHG footprint, there are discrepancies with how this is reported even within the same industries. The SEC’s rule proposal aims to harmonize emissions reporting, ensuring data is comparable and transparent for shareholders, investors and the public.
If enacted, the enforceable nature of the rule proposal will also require companies who have never previously reported on their GHG emissions to do so—increasing the significance of climate-related risks to portfolio managers.
Evidence from other geographies shows the significant impact these mandates can have on emission reduction. Mandates drive action, as seen in Australia when the National Greenhouse and Energy Reporting (NGER) Act was introduced in 2007, which now includes hundreds of registrants reporting on their energy production, consumption and GHG emissions.
The United Kingdom is also taking up the mantle this year with plans to mandate UK-registered companies and financial firms to disclose their emissions, and the European Union is set to force all large companies listed on the European stock exchange to report their emissions beginning in 2024.
How will organizations be impacted if the SEC’s rule is enacted?
The SEC’s proposed climate disclosure rules are targeted at large, publicly listed US companies. The rule proposal includes some flexibility around Scope 3 emissions reporting including an exemption for smaller reporting companies.
The SEC’s climate-related proposal requirements
The SEC’s proposal is aligned with existing recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).
The SEC’s proposed rule amendments would require organizations to disclose certain climate-related information including:
- Greenhouse gas (GHG) emissions, Scopes 1, 2 and 3 (reported to an auditable standard)
- Disclosure of climate-related risk, impacts, targets and goals
- Systematic management of offsets and REC’s
- Articulation and management of a transition plan
- Finance-grade reporting aligned with TCFD
Next stage in the SEC’s rule proposal
There has been an extensive public comment period since the proposed rules were published on the SEC’s website. The agency will take those comments into consideration before issuing a final rule, which will be voted on by the SEC’s commissioners.
In its fact sheet, the SEC stated that the new requirements would be phased in over several years. The largest companies would need to start disclosing climate risks in 2023, while other firms would have until 2024.
Envizi will continue to closely monitor developments as the SEC’s climate disclosure proposal moves through consultation stages, and as further announcements by the SEC are made.
The SEC supported by ESG reporting software
IBM Envizi’s existing suite of ESG reporting solutions are well placed to support SEC’s proposed rules announced in March 2022, by supporting organizations to meet stringent ESG reporting commitments within an auditable, single system of record built on the GHG Protocol.
Scope 1 & 2 emissions disclosure
Envizi’s Scope 1 and 2 GHG Accounting and Reporting module enables the automatic data capture from a variety of sources, performs robust GHG accounting aligned with the GHG Protocol, captures custom emissions factors, and manages market-based emissions calculations.
Envizi can meet the SEC’s requirement to express these emissions by disaggregated constituent greenhouse gases in the aggregate, in absolute terms, and in terms of intensity (per unit of economic value or production).
Scope 3 emissions disclosure
Envizi’s Scope 3 GHG Accounting and Reporting module enables the capture of upstream and downstream GHG emissions data, calculates emissions using a robust analytics engine and categorizes emissions by value chain supplier, data type, intensities and other metrics to support auditability.
Climate-related risks & impacts
Envizi’s ESG Reporting Frameworks module manages the people, processes, external references and supporting documents required to:
- respond to disclosures about climate risk and impacts
- respond to disclosures about the governance associated with assessing those climate-related risks and impacts.
Managing offsets and RECs
If carbon offsets or renewable energy certificates (RECs) have been used, information about the carbon offsets or RECs, including the amount of carbon reduction represented by the offsets or the amount of generated renewable energy represented by the RECs, can be tracked in Envizi.
Alignment with TCFD
Envizi’s ESG Reporting Frameworks module includes pre-built templates aligned with frameworks such as TCFD, SASB, and GRI, which can be used as a reference point for managing a set of SEC disclosures. When the proposed disclosures have been finalized by SEC, Envizi will create a standard SEC disclosure template with links to specific disclosures in other frameworks to streamline disclosures to multiple frameworks.
Envizi’s Sustainability Program Tracking module supports module supports the ability to track and manage sustainability initiatives and efficiency programs to optimize investment decisions, define a portfolio of projects to meet targets and to verify the savings achieved from projects.