The SEC issued a regulatory proposal on March 21, 2022, that would mandate public companies disclose climate-related information within registration statements and annual reports, such as Form 10-K.
There has been public speculation about the final rule expected to be voted on in October 2023, although the SEC has yet to set a firm date. Delays have been connected to the SEC considering changes to the Scope 3 greenhouse gas (GHG) disclosures.
Scopes as Defined in Proposal
The proposed rule divides greenhouse gas (GHG) emissions into three categories:
- Scope 1 emissions. Direct GHG emissions from operations owned or controlled by a registrant
- Scope 2 emissions. Indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling consumed by operations owned or controlled by a registrant
- Scope 3 emissions. Indirect emissions from upstream and downstream activities in a registrant’s value chain not accounted for in Scope 2 emissions
Background on Proposal and Disclosure
The proposal specifically focuses on GHG emissions, how climate risks are managed, climate risk scenario analysis, transition activities, and the financial impact of severe weather and other natural events
The SEC climate disclosure is designed to give investors access to information to assess climate-related risks and opportunities that may impact the company’s financial performance and business operations.
What Disclosures Would Be Required?
The following table describes various disclosure-requirement elements under the proposed rule. After receiving thousands of comment letters, the SEC is likely to incorporate this feedback from the rule-making process into its final requirements.
SEC Climate-Change Disclosure Requirement Breakdown
Who Is Impacted by the Proposal?
The SEC Climate Disclosure proposal would directly require public companies to be in compliance with the proposed regulation and indirectly impacts private companies if the proposal’s Scope 3 disclosure criteria remains unchanged.
If you’re a private company that’s part of a public company’s value chain, the public company may ask for detailed GHG emissions data for the public company’s Scope 3 reporting. The SEC is aware of the indirect implications Scope 3’s reporting has for private companies. However, if there are no changes to the Scope 3 proposal disclosure requirements, private as well public companies need to keep a close eye on the SEC climate disclosure proposal.
How to Prepare for Updated Rule
To get ready for the final SEC rule, companies should take the following steps:
- Assemble a cross-functional team of individuals to identify key internal stakeholders critical to the reporting process. This team will be responsible for reporting metrics but also overseeing the control and reliability of related ESG data.
- Complete a current state assessment to evaluate the state of your organization’s data related to each of the disclosure components identified in the table above.
- Complete a process gap analysis to identify areas of misalignment with your organization’s existing climate disclosure reporting and the aims of this disclosure requirement. Develop a plan to enhance current processes and internal control structures over disclosure data.
- Understand the company’s risk profile related to the qualitative disclosures listed above, including use of carbon offsets, credits, or renewable energy credits or certificates (RECs).
- Understand how the board exercises their oversight and set climate-related goals for related to the governance disclosure component in the associated table above.
- Create an inventory of your company’s GHG emissions for adherence to Scope 1, 2, and 3. In doing so, you should accurately calculate and track emissions for GHG disclosures note above. Develop and manage a strategy to reduce those emissions.
- Engage a third party for assistance in implementing the rules or for assurance services to satisfy potential attestation requirements.
More ESG strategy and reporting guidance can further help your organization proactively prepare for future reporting requirements beyond the SEC’s proposed rule.
We’re Here to Help
If you have questions about the proposal updates or how they might impact your organization, please contact your Moss Adams professional.
Additional Resources