SEC Rule on Climate-Related Disclosures
July 25, 2022
By Michal Morgulis
As environmental, social, and governance (ESG) concerns have become more prominent, the SEC has proposed more rules that impact firms that implement these standards, with one example being climate-related disclosures.
On March 21, 2022, the SEC proposed a rule in reference to environmental impact, requiring publicly traded companies to include climate-related disclosures in their registration statements and in their annual 10-K filings. Through awareness and problem-solving, the SEC rule on climate-related disclosures helps companies manage expectations and maintain sustainable practices.
EisnerAmper’s webcast on “SEC Rule on Climate-Related Disclosures” discussed the topic. Speakers included:
- Lourenco Miranda, managing director of ESG and Sustainability Solutions;
- Lisë Stewart, partner-in-charge, Center for Family Business Excellence and leader of the firm’s ESG Group; and
- Charles Waring, national leader, ESG Reporting.
The climate-related disclosure encompasses three areas: climate-related risks, greenhouse gas emissions and publicly set climate-related goals. Climate-related risks are important for companies to keep in mind as they may impact the bottom line. When a company’s board and senior management analyze such risks, they examine the processes in place for detecting and managing them. They also assess whether they are likely to diminish their company’s short-term and long-term business strategies – determined by the use of scenario analysis and risk-management analysis. When significant risks are discovered, a transition plan is put into action to address them.
The disclosure of greenhouse gas emissions is comprised of three different scopes. Scope 1 refers to direct emissions being produced by a company during its operations. Scope 2, indirect emissions, looks to see if a company’s source of energy stems from a renewable energy source, fossil fuels, or a combination of different resources. Scope 3 represents emissions related to a company’s value chain, from materials sourced to products delivered, and goes through a material assessment to determine if anything needs to be disclosed.
Finally, with publicly set climate goals, when a company makes them known to the general public, the SEC requires it to disclose specific details about how it intends to reach its goal. The SEC also wants to be informed of its progress each fiscal year, ensuring that it is still on track. If carbon offsets or renewable energy certificates are included in the climate-related goals, the disclosure will list amounts of carbon reduction or generated renewable energy. Interim targets, in addition to the overall goal, should be disclosed as well.
While putting together a new disclosure may seem overwhelming, it is useful to think of it as an extension of the 10-K that a company must already compile by detailing the process of identifying and assessing risks that may affect its business strategy. Going beyond the written disclosure, a company that keeps its employees updated on climate-related risks and establishes a risk management process will find itself making better, future-focused decisions for its business and for the environment as a whole.