Public Affairs & Government Relations

The SEC Climate Disclosure Rule and the Growing Nexus Between Regulation and Corporate ESG Strategy

When then-Acting SEC Chair Allison Herren Lee began to seek public input on corporate climate disclosure rules in March, speculation ignited around the potential for a major policy shift that could impact public U.S. corporations. And current SEC Chairman Gary Gensler has stated publicly multiple times this year – most recently before the House Financial Services Committee in October – that the agency would initiate a comment period by early 2022 at the latest.

Many anticipate that if, and when, finalized, the new rule may represent the most significant SEC guidance in over a decade. The direction of this rule will continue to be closely followed, particularly given the heightened focus that management teams and boards are placing on ESG and sustainability-related proxy matters in response to rapidly evolving demands from investors and other stakeholders.

For the first time, publicly traded companies may need to provide climate disclosure beyond the standard of reporting based purely on materiality, initially set forth in SEC’s 2010 guidance. This 2010 guidance did not require disclosure of any specific climate-related metrics, mandating disclosure of climate information only to the extent that issuers deemed such information material.

Based on recent comments from Chairman Gensler, the new rule may impact climate disclosure requirements for U.S. companies in a range of potentially impactful ways, such as:

  • Whether climate disclosures should be made via the form 10-K in the issuer’s annual report, or elsewhere through some other reporting mechanism;
  • The potential for mandated disclosures of company progress toward publicly stated climate goals;
  • Whether companies will be required to make scenario analysis disclosures highlighting how they would adapt and respond to various climate-related events; and
  • How companies should disclose their Scope 1 emissions (generated from direct company operations), their Scope 2 emissions (generated through electricity consumption), and if and how companies may be required to disclose Scope 3 emissions (generated across the entire value chain, including product end use).

While recent and growing interest in ESG from the investment community and general activism trends have moved the needle on board composition, corporate disclosures and sustainability commitments, the upcoming rulemaking demonstrates how another key stakeholder – federal regulators and policymakers – are seeking to influence this space.

Beyond the forthcoming SEC climate disclosure rule, additional regulations are evolving. Earlier this year President Biden issued an executive order encouraging regulators across federal agencies to assess climate-related financial risk to the financial stability of the federal government and to the U.S. financial system. Congress continues to consider legislation that would increase ESG disclosures. And globally, new research shows that 30% of companies across the G20 expect to be investigated by regulatory or government bodies in the next 12 months regarding their ESG practices.[1]

Given the activity surrounding potential updates to climate disclosure rules, many companies are working to further enhance their ESG strategies and disclosures while also anticipating what may come next.

Organizations must weigh both the risks and benefits to any changes they make with respect to these strategies as well as to any related commitments and reporting metrics. For example, disclosing companies could be at risk of litigation or heightened investor activism if they are perceived to have misrepresented climate risk disclosures. Issuers can address some of these risks by diligently reviewing all disclosed material, ensuring that information filed with the SEC aligns with all other public related disclosures.

Companies can also ensure they are positioned for success by leveraging ESG frameworks and standards in their reporting that are most likely to align with potential future regulations. While the space is rapidly evolving, the TCFD climate reporting framework and the SASB standards for sustainability disclosures are both seeing rapid adoption relative to other standard setters and may be well-aligned with future regulatory requirements, particularly in the U.S.

It’s reasonable to expect that the SEC’s new climate rule will allow for flexible interpretation by reporting companies across their sectors; however, the best defense is good offense. Undertaking a focused, credible and data-driven ESG and sustainability disclosure strategy will position any company for less risk and more opportunity, regardless of the specific guidance ultimately issued in the SEC’s final rule.

Put another way, companies that stay aligned with and ahead of the quickly evolving ESG expectations of their most critical stakeholders – including federal regulators and policymakers – will strengthen the resiliency of their businesses.

 

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.

FTI Consulting is an independent global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities. ©2021 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com

[1] FTI Resilience Barometer, Sept. 2021

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