In April 2023, the US Securities and Exchange Commission (SEC) is expected to finalize a new rule that will require publicly traded companies to disclose climate-related information. If passed, the rule could have cascading effects, helping to bring transparency to capital markets and setting a baseline for future climate-related disclosure requirements.
The SEC’s rule, which was first proposed in March 2022, is partly based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), a globally recognized framework that outlines how companies should report their climate governance, strategies, risk management processes, and metric and targets.
In short, the rule tells companies to disclose their:
- Climate-related risks and the likely material impacts on their businesses, strategies, and future expectations;
- Climate-related governance and risk management processes;
- Greenhouse gas (GHG) emissions;
- Certain climate metrics and related information in their audited financial statements; and
- Information on their climate-related targets, goals, and any transitions plans
Since the SEC’s proposal dropped, there’s been discussion and debate around what it could mean for businesses. To help unpack the disclosure rule, Manifest Climate published a white paper that explains its main provisions and how companies could be affected. Here’s what we learned:
Companies should think beyond climate-related metrics
The SEC’s rule will require businesses to think about their climate disclosures as more than just metrics. While tracking greenhouse gas (GHG) emissions is important, companies will also need to consider their climate strategies, oversight, and governance frameworks.
Instead of thinking of climate information as something that belongs in sustainability reports or brochures, businesses should look at this data as part of their financial risk disclosures. The SEC makes it clear that climate risks and opportunities need to be at the core of companies’ financial discussions. Moreover, the SEC’s rule could also force more teams across companies to be climate competent and conscious, which is something that has been commonly relegated to corporations’ sustainability and marketing departments.
Investor pressure may encourage businesses to take climate action
The SEC’s rule will only force companies to disclose climate-related information and will not require businesses to take action or develop transition plans with respect to climate risks. However, disclosures that do not include this information may signal to investors that an organization is not doing enough to address its climate risks. This may in turn encourage investors to move their capital elsewhere.
Investor pressure on companies to improve their climate reporting is nothing new, and has been growing since the launch of voluntary climate disclosure frameworks, like the TCFD or the Partnership for Carbon Accounting Financials (PCAF). However, The SEC’s rule could push businesses to pursue action to address climate risks if they’re concerned that failing to do so will cause their share prices to drop or investors to withdraw their financing.
The rule will also reveal whether companies’ climate targets and goals are legitimate as it will increase the quantity and quality of comparable information on these.
Private companies could adversely be affected
While the SEC’s rule will only apply to businesses that are publicly traded on US exchanges, there are a number of ways that private companies could experience spillover effects. For instance, public corporations that fall under the rule may ask their private company suppliers to provide them with emissions data in order to meet their own reporting requirements.
However, private companies would not be compelled to produce these disclosures. Still, it’s important for private companies to pay attention to the climate disclosure ecosystem and reporting requirements since this information is of interest to companies in their value chains and to investors.
Climate disclosures must be data-driven and understood by auditors
Climate change is both a business risk and opportunity. As a result, organizations need to think about how they’re considering, managing, and responding to climate change. They must also think about what climate risk and opportunity means, in addition to how their current risk management procedures could address climate risks.
Firms need to be driven by data when it comes to producing their climate-related disclosures. Internal risk management teams will play a large role in aggregating the necessary climate risk data, but businesses will also need to make sure their auditors and accountants understand what’s in the SEC’s rule so that they can properly prepare.
The SEC’s climate disclosure rule could influence and shape other climate reporting requirements both within the US and internationally. Central bank regulators and stock exchanges around the world are already beginning to adopt the recommendations of the TCFD to ensure companies’ climate disclosures are consistent and comparable.
Moving forward, one question concerns how US trade associations, state legislators, and other stakeholders will respond to the final rule. In comment letters to the SEC, many have announced their opposition to the additional disclosures and it’s expected that some will fight against its implementation through the courts.
Nevertheless, the final SEC rule will signal that the momentum behind increased climate risk disclosure is not going away.
How Manifest Climate can help you prepare
If you need to align your disclosures with the SEC’s rule, Manifest Climate can help. Our Climate Risk Planning solution embeds intelligence to help companies manage, understand, and communicate their climate-related financial risks and opportunities. Our powerful software allows users to evaluate their organizations’ alignment with different climate disclosure frameworks and standards, including the SEC rule. Request a demo to learn more.