SEC proposes groundbreaking mandatory ESG and climate-related disclosures for public companies

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Andries Verschelden Co-founder & CEO
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What is the SEC ESG disclosure mandate

Today the SEC proposed a groundbreaking rule for climate-related disclosures for public companies in the U.S.  The agency’s commissioners voted 3-1 in favor of the proposal to report on various ESG criteria and will now open it for a period of public comment.

The SEC ESG proposal mandates publicly traded companies to measure and report on standardized climate-related risks, including greenhouse gas emissions from their own operations (Scope 1), as well as from the energy they consume (Scope 2), and to obtain independent certification of their estimates. In some cases firms also would be required to report greenhouse gas output of both their supply chains and consumers’ (Scope 3) emissions. Companies would have to include the information in SEC filings such as annual reports.

If enacted, the SEC ESG rule will mark the most sweeping overhaul of corporate disclosures in decades and put the U.S. on closer footing with other developed countries set to begin mandated emissions reporting over the next three years. This proposal comes on the heels of the creation of the International Sustainability Standards Board (ISSB), nestled within the expertise and credibility of the IFRS Foundation, and widely expected to become the globally accepted ESG standards setting body.

What you need to know about the coming SEC ESG climate mandate

  • What criteria will need to be met for a public company to be affected?

While it’s unclear how wide-ranging the SEC’s disclosures rules will be and whether they would impact every publicly traded company, it’s likely to affect most filers. The current proposal requires companies to provide climate-related information when they register as a public company with the SEC and in their annual filings. Private companies would be involved insofar as public companies have to make their private business partners and contractors report emissions if Scope 3 emissions are to be included.

  • What will the disclosures need to look like or comply with?   

The proposed rules would require disclosures on Form 10-K about a company’s governance, risk management, and strategy with respect to climate-related risks. Moreover, the proposal would require disclosure of any climate-related targets or commitments made by a company, as well as its plan to achieve those targets and its transition plan, if it has them. 

  • What is the implementation timeline to be used? 

The draft proposal will be subject to public feedback on the proposed rules for 60 days and is likely to be finalized later this year. If approved, emissions disclosures would be phased in between 2023 and 2026. That said, most companies will want to start implementing their climate reporting roadmaps now with pressing legislature on the horizon.

  • Will Scope 3 emissions be included in the required disclosures, or will it be limited to Scope 1 and 2?

Under the proposed rules, Scope 3 emissions (from upstream and downstream activities in a company’s value chain) will only be mandated for the companies that have a made a public target announcement around Scope 3 or if such emissions are financially material to investors. The SEC said the Scope 3 requirement would include carve-outs based on a company’s size and smaller reporting companies would be exempt from Scope 3 disclosures. 

Why companies and investors benefit from standardized ESG reporting

Some companies already disclose their greenhouse gas emissions, as well as those from their suppliers, however, the U.S. lacks clear standards on what exactly companies must report to their investors when it comes to climate impact and risks. This mandate aims to change that, as it would allow investors to judge how well a company is prepared for the future costs of a warming planet against a standardized set of climate measures. The mandate would allow consumers to decide how well a company is performing against a standardized set of climate measures that shape their purchasing decisions. These rules empower regulators to acknowledge climate change as a risk to global economies and financial systems.

Chairman Gensler has on multiple occasions stressed his commitment to “consistent”, “comparable” and “decision-useful” information, as well as the need for “ESG disclosures that are as easy to read as the non-fat label on a milk bottle.

Good.Lab can help your company start planning for the standardization of ESG and climate-related disclosures

As an ESG data company, Good.Lab develops software and delivers strategic services to supercharge ESG performance – including the tools to measure greenhouse gas emissions for Scopes 1-3 covered by pending the SEC disclosures.

Our team is already helping a growing number of companies comply with these issues today and we are positioned to help your company prepare for long-term business resilience as related to climate-risks before any disclosure transition becomes mandatory.

Reach out to start a conversation with our team of ESG and sustainability experts today!