SEC’s Proposed Climate Disclosure Rule Has Immediate Corporate Implications
In a vote culminating years of speculation and varied preparations1, today the U.S. Securities and Exchange Commission (SEC) issued a proposed rule that would mandate specific disclosures on greenhouse gas emissions and associated climate change risks by all publicly traded companies.
The proposal, while not final, immediately cements several realities:
- Companies must have a climate strategy in place
- Companies must assign or establish an executive governance body to oversee execution of the climate strategy
- Companies must define a robust ESG data management strategy
- Investor engagement must accompany a business’s compliance approach
What the Proposed Rules Say
Monday’s vote triggered a public comment period before the SEC moves to finalize the rule. As currently written, per the SEC’s fact sheet2 on the proposed rule amendments, the proposed regulations call for:
- “Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook;
- The registrant’s governance of climate-related risks and relevant risk management processes;
- The registrant’s greenhouse gas (“GHG”) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance;
- Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements; and
- Information about climate-related targets and goals, and transition plan, if any.”
The Journey to a Standardized Climate Reporting Rule
Monday’s vote has been more than a decade in the making.
In 2010, the SEC issued an interpretive release,3 providing guidance on how existing disclosure rules applied to climate change — in essence, reminding companies of their existing obligation to disclose risks that could be material to investors. The guidance, along with rapidly evolving stakeholder demands, set course for the growth and maturation of corporate sustainability reporting. The January 2022 installment of FTI Consulting’s quarterly Resilience Barometer report4 found 86% of G20 business leaders agree they have been spending more resources on ESG and sustainability, which includes climate change. The 2010 guidance did not require disclosure of any specific climate-related metrics, leading to the current environment in which disclosures range widely and pressure has grown f5 or the SEC to mandate more specific rules.
In March 2021, the SEC6 welcomed public comments on mandating the disclosure of climate-related information and risks7, among other topics. While some sectors, such as big tech, including Apple8 and Microsoft9, voiced support for an updated rule, other industries such as energy and transportation have told the SEC climate disclosures could be misunderstood by investors who lack experience with the data.
What It Means for Companies
Its lead-up aside, the SEC’s latest vote makes clear: the tide is shifting, and companies will likely now have to provide detailed disclosures about the anticipated impact of climate change on their business.
The following represents critical next-step considerations corporations will want to take as this new paradigm shift begins.
- Companies Must Have a Climate Strategy in Place
Climate change is positioned by the SEC as a material risk for all companies in the market, demanding not only transparency around a company’s role in climate change (i.e., disclosing the company’s emissions) but also a defined strategy of how the company is addressing climate-related risks and opportunities. Long allowed to disclose climate risks as deemed suitable, according to today’s proposed rule, companies must now provide defined, transparent disclosures around how climate change could affect their business.
Companies will need to look ahead and proactively take the next step to define a strategy for how they intend to manage these risks. Climate disclosures and their accompanying strategies will need to be targeted and meaningful and abide by language set forth by the Task Force on Climate-Related Financial Disclosures (TCFD) framework. This is illustrated by the fact that Larry Fink, CEO of BlackRock, in his 2021 letter to CEOs10 asked companies “to disclose a plan for how their business model will be compatible with a net zero economy” by 2050.
Like any risk, a defined mitigation strategy suggests these risks are to be taken seriously to protect the value of the company. Strategies will need to consider all the ways in which climate change could impact value and operations, both now and in the future.
- Companies Must Assign or Establish an Executive Governance Body to Oversee Execution of the Climate Strategy
In addition to setting a climate strategy, companies must establish or assign an existing executive governance body to oversee and adhere to its execution. The goals of these committees — company boards in many cases — will go beyond current emissions-reduction promises and net zero pledges as companies will be expected to proactively assess holistic risk around climate change and identify what mitigation is required.
- Companies Must Define a Robust ESG Data Management Strategy
The ability of a company to manage the progress of its climate change mitigation efforts and its capacity to meet the SEC disclosure demands will depend on the quality of its emissions data. A strong data management protocol is key not only for climate data but for a company’s overall ESG program. Setting, transparently tracking against and achieving climate mitigation goals will necessitate the collection and management of defensible, accurate data. Companies will need to review their data collection processes and their internal controls. Data attestation by third-party auditors, currently a growing but voluntary trend11, will become a fundamental element of compliance. Enhanced data management strategies will enable companies to efficiently meet regulations, legitimize their efforts and meaningfully define progress toward goals.
- Investor Engagement Must Accompany a Business’s Compliance Approach
With all this change underway, and surely more to come, companies face a new imperative to keep their stakeholders – and particularly investors – fully informed and engaged. Such efforts will include:
- Clearly disclosing the company’s TCFD compliance, or lack thereof, along with plans to comply;
- Providing an overview of plans to comply with new SEC climate disclosure rules, especially if such actions differ from previous climate initiatives; and
- Clearly and repeatedly communicating any changes to how climate data will be reported relative to how it has been reported historically by the business.
As written, the SEC’s proposed directives will grant companies a degree of flexibility in arriving at disclosure solutions suited to their individual business model. This fact, and the ways in which companies plan to address it, should be transparently and regularly discussed as a matter of investor engagement.
Implications for Pre-IPOs
While the newly proposed rules, in name, affect only public companies, they also impact private companies en route to an initial public offering (IPO) in terms of preparation. IPO candidates should view the above checklist as table stakes for the journey they’re on, as investors — and regulators — keep close tabs.
References
[1] FTI Consulting, “The SEC Climate Disclosure Rule and the Growing Nexus Between Regulation and Corporate ESG Strategy,” Nov. 10, 2021
[2] SEC Fact Sheet: “Enhancement and Standardization of Climate-Related Disclosures,” March 21, 2022
[3] Gibson Dunn, “SEC Issues Interpretive Guidance on Climate Change Disclosures,” Feb. 4, 2010
[4] FTI Consulting, Resilience Barometer, Jan. 2022
[5] Reuters, “ESG Watch: Disclosure pressures to grow as investors push for a just transition,” Jan. 27, 2022
[6] U.S. Securities and Exchange Commission, “Public Input Welcomed on Climate Change Disclosures,” Mar. 15, 2021
[7] FTI Consulting, “FTI’s Take: The SEC’s Request for Public Input on Climate Change,” Apr. 23, 2021
[8] Reuters, “Apple backs far-reaching emissions disclosure rules,” Apr. 13, 2021
[9] Microsoft, “Microsoft submits comments to SEC on climate change disclosure,” Jun. 14, 2021
[10] BlackRock, “Larry Fink’s 2021 letter to CEOs,” Jan. 2021
[11] Journal of Accountancy, “Auditors may see increased demand for ESG attestation,” Mar. 28, 2021
| The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
©2022 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com |
