SEC Climate Disclosure Rules Are Expected in October 2023: Here’s What You Need to Know

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With the comment period closed, we’re expecting the Securities & Exchange Commission (SEC) to issue its ruling on its disclosure, The Enhancement and Standardization of Climate-Related Disclosures for Investors sometime in October 2023. This disclosure is one of a number globally put forward to formalize and harmonize climate disclosures for the business community.

The final set of SEC Climate Disclosure rules remains to be seen, but companies anxious to begin preparations can look to the draft proposal from last year for guidance as a starting point. And while there has been pushback, considering the overwhelming support from investors and recent comments from SEC chair Gary Gensler, it seems unlikely that we’ll see a significant pivot from the agency’s original proposal to the final ruling.  Here’s what we know today from the proposal.

Who Will Have to Disclose?

One of the complaints from some government representatives and trade organizations is that the new disclosure will put a new and undue burden on small business operators. The scope of the framework is only those organizations registered with the SEC. Most small and family-owned businesses aren’t included in the scope of the disclosure requirements.

Nonetheless, while smaller businesses and those not registered with the SEC will not be directly impacted by the proposed frameworks, they may still be required to start providing more detailed and quantifiable ESG data to support those who are reporting. 

Because the proposed disclosures include Scope 3 emissions in the value chain, both from suppliers and customers, non-SEC-registered companies may still find themselves having to pull operational and emissions data to satisfy other organizations they work with.

Why Is the SEC Mandating Climate Disclosures?

Sustainability reporting and ESG are not new for most publicly traded companies. The rising demand for this information from investors, stakeholders, and customers means that many companies already prepare some kind of annual sustainability report. In fact, 90% of S&P companies publish sustainability reports.

The aim of the SEC proposal on climate change is to standardize these reports into a format and using data that can easily be accessed and interpreted by the SEC and investors. With so many different ESG frameworks out there, it can be hard to consistently compare data across reports. 

Some of the feedback on the proposed climate disclosures is that the SEC does not have the authority to mandate this type of reporting. Yet SEC-registered organizations have been providing details on litigation and other business costs related to environmental compliance since the 1970s. Reporting on climate-related risks and opportunities can be seen as an extension of that 50-year-old mandate.

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Why Is Consistency So Important?

The demand for climate disclosures is only growing. Financial managers responsible for trillions of dollars in investments have called for reporting consistent with the Task Force on Climate-Related Financial Disclosures (TCFD) and GHG Protocol so they can make responsible climate-informed decisions.

Including climate-related financial disclosures is becoming standardized globally. The TCFD is part of the expert panel currently developing standards for the International Sustainability Standards Board (ISSB). 

Businesses may be familiar with the ISSB’s parent organization, the International Financial Reporting Standards Foundation, which also administers the International Accounting Standards Board (IASB). IASB’s accounting standards are adopted around the globe and, with input from organizations like the TCFD, it is expected the ISSB standards will be too.

What Is Included in the SEC Climate Disclosure Rules?

The detailed climate reporting requirements proposed will be discussed more broadly below, but in general, the rules would require organizations to disclose:

  • The role and responsibility of corporate governance in relation to identifying and managing climate-related risks
  • Potential and actual impacts of climate-related risks on business operations or financial performance over the short-, medium- and long-term
  • How climate-related risks have, will, or might impact business strategy and outlook
  • Processes for identifying, assessing, and managing climate-related risk and a description of how these processes are integrated into wider risk management systems
  • The impact of climate-related events, like severe weather, or transition activities, like changing business operations to mitigate climate-related risk, on financial statements
  • Scopes 1 and 2 GHG emission metrics, with additional Scope 3 reporting where the organization has documented Scope 3 emissions reduction targets
  • Any climate-related targets, goals, or transition plans

There has been some pushback on the optional nature of some of these disclosures. We have talked about the softness of these requirements before. Scope 3 emissions can account for 50% or more of total emissions, so making the reporting of these optional can dramatically impact the effectiveness of emissions reduction initiatives.

Similarly, disclosing climate-related risks without connecting them to targets can mean these disclosures will be viewed as more of an accounting initiative than one that will drive any meaningful change. 

However, since most of the impacted organizations are already completing some kind of ESG reporting under another framework, the hope is that they will already have targets and goals documented, which may make a Scope 3 reporting requirement an easier pill to swallow.

When Will the SEC Ruling and Disclosure Requirements Come Into Effect?

The dates aren’t clear, but with the 2030 Net Zero deadline looming, we’re expecting the first round of reports to be required soon. 

The SEC is expected to issue its ruling in October 2023, with reports for the largest filers due potentially as soon as 2024 for the 2023 fiscal year. Additional companies would be phased in for a 2025 deadline, and the smallest companies would file their first reports in 2026.

How Will SEC Climate-Related Disclosures Be Reported?

Similar to what has been proposed in other jurisdictions, climate-related disclosures to the SEC will be included in annual financial statements including Securities Act or Exchange Act registration statements and Exchange Act annual reports. Climate disclosures would go in a separate and clearly identified section of the report.

In addition to quantitative disclosures, reports will need to include a narrative assessment of climate-related risks and opportunities as part of management discussion and analysis (MD&A). 

What Climate Risks Will Be Reported to the SEC?

The SEC is currently defining two types of climate-related risks that should be considered and included in reporting. These are physical and transitional risks.

Physical risks are those that pose an actual tangible risk to business operations. These might be issues like facilities located in areas prone to drought, wildfires, or hurricanes, which continue to grow in intensity every year. 

Along with documenting the nature of the physical risk, the report will also need to provide details of the location where the risk exists or could exist. These details include the physical address for a facility, along with the size and number of employees who work there. 

Transitional risks are those that may occur as a result of efforts to reduce climate impacts or market changes resulting from a more climate-conscious economy. These might include production downtime as a facility is retrofitted or operations are relocated. They might also include changes in consumer buying habits that leave a company vulnerable until they can adapt.

Regardless of whether a risk is identified as being physical or transitional, organizations should disclose not only actual risks, but potential ones as well. As we’ve learned through the COVID-19 pandemic, market and business conditions can change nearly overnight, and companies need to be prepared to address potential risks quickly.

Identifying Material Risks

A critical element of risk disclosure is a materiality assessment. The scope and scale of ESG reporting can quickly get out of hand if boundaries aren’t clearly defined up front, and the payback for risk management declines rapidly if time and energy is spent on risks that may seem manageable but have little material impact on an organization’s operations.

A climate risk materiality assessment takes into consideration two elements: the importance of the risk to business operations and to external stakeholders. These stakeholders could be investors or the community at large.

Priority should be given to risks that are material to both business and stakeholders. If there is additional bandwidth to address them available, additional risks can be added to the disclosure too. 

Materiality also takes into consideration issues like time horizons. One risk might be high priority to stakeholders, but is only likely to become an issue over the medium term, while another may be lower priority, but with impacts that will be felt in the near future. In this case, the second risk might be more material initially while the first would be addressed at a later date.

Ultimately, the SEC—following Supreme Court rulings—views materiality as the degree to which a risk would influence an investor’s decision to purchase or sell securities, or how they would vote as a shareholder. 

If you’re not sure how to go about identifying material climate-related risks for your organization, check out our Materiality Workbook for additional guidance.

What Climate Impacts Will Be Reported to the SEC?

One of the challenges in disclosing climate-related risks is that they are largely hypothetical. A hurricane may impact operations at a plant near the Gulf of Mexico. Market demand for low-carbon products may accelerate dramatically in the next 1-5 years. 

It can be easy for companies to reiterate boilerplate scenarios in each annual report, without providing any meaningful information.

This is where it is important to also document known and quantifiable climate-related impacts, particularly carbon dioxide and other GHG emissions. This could include impacts on:

  • Business operations
  • Products or services
  • Suppliers or customers up and down the value chain
  • An organization’s ability to mitigate climate-related risks or adopt new climate-friendly technologies
  • Funding for research and development

By not only disclosing risks but also impacts, the reporting company will provide a narrative discussion of how these impacts have affected their financial statements, similar to what is already required for MD&A as described above.

What About Carbon Offsets or Renewable Energy Credits?

As part of disclosures on climate impacts, the report also needs to include details on carbon offsets or renewable energy credits (RECs) used, if any. This will not apply to organizations across all sectors, but is an important element to discuss because the use of these provides important context regarding how organizations are meeting their GHG reduction targets. 

While carbon offsets and RECs can be part of a broader approach to help balance climate-related expenditures in the short- or medium-terms, as carbon reduction targets become more and more stringent, they may not be an effective management strategy long term. These types of disclosures will help investors better understand future performance in a carbon-neutral economy.

What Isn’t Included in the SEC Climate Proposal?

Words like environmentally-friendly, sustainable, low-carbon and climate-conscious often get used interchangeably when they aren’t in fact the same thing in many contexts. In relation to the SEC proposal on climate change, it’s important to understand both which terms are used and which aren’t relevant.

As a disclosure proposal, the reporting requirements reference various ways to reduce carbon intensity and emissions through approaches like:

  • Transitioning to lower carbon economies, both in terms of production and also using low emissions modes of transportation and supporting infrastructure
  • Renewable power generation and use
  • Producing and using low waste, recycled or other low-carbon-intensive consumer products and production methods
  • Setting conservation goals and target to reduce GHG emissions
  • Providing goods and services to support other efforts in the transition to the low carbon economy

In addition to tactical steps and strategies to achieve goals and manage financial performance during transitional business activities, the proposal also required documented details of sustainability governance and a narrative review of how all of this integrates into large business operations and strategy, similar to the MD&A.

But what isn’t included in the proposal are other elements of environmental and sustainability reporting that you may be familiar with. For example, forestry stewardship may be top of mind for some companies based on where they are located or their industry sector but not explicitly called out in the SEC’s proposal. 

This may require some organizations to set new targets when they were previously focused on other elements of sustainability, while others will have to look more closely at how carbon reduction is tied to other sustainability efforts.

Ready to Start?

There is a lot of overlap between the carbon and climate reporting requirements in the SEC’s proposal and other ESG standards, but they will not be fully interchangeable. If you’re already reporting to other frameworks, it won’t simply be enough to attach a copy of that report to SEC filings. 

To avoid unnecessary duplication, you need to know exactly how the SEC’s final ruling and requirements are similar to other ESG programs and where it differs. A software tool like FigBytes can be a critical element of streamlining your reporting efforts and managing staff and resources effectively and efficiently.

If your organization is likely to be impacted by the SEC’s new climate disclosure requirements, the time to start compiling information is now. To begin on the right foot, speak with a FigBytes advisor today. 

What Is CDP Reporting?

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These days, integrating environmental considerations with everyday operations has moved beyond good corporate citizenship to a critical part of managing both legal obligations and investor relations. Identifying proactive environmental performance is a key part of how investors make their decisions, and more and more they expect standardized environmental disclosures as part of annual financial reports.

Knowing where to start with environmental reporting can be daunting, and the landscape is a tangle of acronyms and competing standards designed for organizations across a multitude of sectors and regions.

Using a framework like the CDP can help streamline your efforts, and provide reporting in an internationally-recognized format that is useful to investors while also creating transparency for other stakeholders, leadership, and customers.

Who Does CDP Work With?

Many climate, sustainability, and ESG standards and frameworks are designed with specific industries in mind. They may support the oil and gas industry, or be designed for carbon emissions reporting in the real estate sector. The CDP works with organizations and groups across private, public, and institutional sectors, including:

  • Companies
  • Cities
  • Governments
  • Supply Chains
  • Investors
  • States and regions
  • Public authorities
  • Private markets

This makes it one of the most comprehensive programs out there, with resources and information available regardless of where you’re coming from.

What Is Reported to CDP?

CDP is an environmentally-focused reporting framework. Originally called the Carbon Disclosure Project, the change to the CDP acronym reflects the way the program has shifted to now include reporting under three categories:

  • Climate 
  • Water
  • Forests

Under each of these headings are a variety of questions based on your industry and size. The CDP has customized questionnaires to complete for each category, and these are updated regularly. Below are details on typical information to be included, but these will vary and should be verified before you begin data collection and reporting.

Climate Disclosures

When thinking about climate reporting, many people go immediately to carbon emissions quantification, and while this is an essential part of a CDP report, it’s not the only factor to consider. Other elements to report are:

  • Governance – Reporting organizations need to provide details on leadership commitment and competence related to climate-related issues. This includes information on who has expertise and responsibility for climate-related policies and action items, and what incentives are provided to employees to improve climate-related performance.
  • Risk and opportunities – Organizations should be prepared to discuss their processes for identifying and addressing climate-related risk and opportunities. This includes identifying the people responsible, as well as the risk to any investments or portfolios, and how these risks are mitigated.
  • Business Strategy – World governments and the business community have made pledges under the Paris Agreement to reduce carbon emissions to the point where global temperature increases will not exceed 1.5℃ by 2030. Under the CDP, reports need to include strategy details on how businesses will transition to meet this goal and eventually reach carbon neutrality.
  • Targets and performance – Once climate change targets are set, CDP reports will need to include annual updates on how those targets are being met, what is impeding performance, and what changes will need to be made in the coming year to ensure targets are reached.
  • Emissions methodology – In order for investors to make informed decisions using emissions data, they need to know they’re comparing apples to apples. CDP reports need to include information on the methodologies used to calculate emissions, any changes from previous years, and how changes to business activity might impact data quality.
  • Emissions data – Reporting organizations will need to provide gross numbers for global Scopes 1, 2, and 3 emissions, as well as information on any excluded emissions including a rationale for this exclusion.

Depending on your sector, you may also be required to complete disclosures on topics like energy use, carbon pricing, or biodiversity.

Water

Water quality and water scarcity are critical concerns for businesses, governments, and everyday people around the world. The CDP’s water disclosures help companies understand and reduce their dependence on freshwater sources, including throughout their value chain. These disclosures include:

  • Current state – Reporting organizations provide information on the volume of water withdrawn, discharged, and consumed over the year, including how much of that comes from scarce sources and where data gaps exist, including in the value chain.
  • Business impacts – If business or organizations have experienced any actual detrimental water-related impacts or been involved in any compliance or legal actions related to water use or discharge, these are reported here.
  • Procedures – Under this disclosure, organizations report their procedures for water-related risk assessments both in their operations and within their value chain. Additional questions are asked for water-intensive or higher-risk industries like chemicals, food & beverage, and oil & gas.
  • Water risk and opportunities – Since CDP is often used as a decision-making tool for investors, organizations need to report not only real business impacts, but also potential risks and opportunities and how these are identified and managed. Facility-level accounting may be required if risks are identified.
  • Governance – As with climate disclosures, water disclosures require documentation on leadership responsibility and competence. This includes information on how C-suite employees or board members are incentivized to address water management, and how water risks are documented in financial reports.

Forests

Forests disclosures document an organization’s use and dependence on forest commodities and the risks and opportunities related to this. Disclosures include:

  • Current state – Reporting organizations will need to document the forest-related products they buy, produce, use and sell, as well as the percentage of revenue that is dependent on these products. If they own forestry land, this will also need to be documented.
  • Procedures – Here, organizations document their procedures for forests-related risk assessments for both their own products as well as within their value chain.
  • Risks and opportunities – Under this disclosure, organizations report the identified forests-related risks and opportunities that pose a substantive impact to their operations. If none are identified, a rationale as to why is to be included. In either case, the report defines what is a substantive financial impact.
  • Governance – As with climate and water disclosures, the forests disclosure requires details on board-level oversight on forests-related issues, including leadership competence in this area and how executives are incentivized to include forests considerations in their policies and strategies.
  • Business strategy – Since the CDP report is meant to be forward looking, under this disclosure, organizations will document how forests-related issues are incorporated into their business strategy going forward.

The level of detail in the forest disclosures will vary significantly by industry or the companies within an investment portfolio.

How Is CDP Reporting Used?

While conscientious and detailed environmental reporting is critical to slowing the effects of global warming and protecting fragile natural resources, the impact of the CDP goes beyond the efforts of the companies that report to it.

CDP data is a tool used by investors and purchasers when making business decisions. Low carbon opportunities and climate risks reported to the CDP are evaluated by 680 institutional investor signatories with a combined US$130 trillion in assets and more than 280 major purchasers with over US$6.4 trillion in procurement spend.

The CDP meets the requirements of the Task Force on Climate-related Financial Disclosures (TCFD). Programs like the CDP and organizations like the TCFD aren’t simply about compliance or good corporate citizenship. They’re actively shaping the future of business and how investment decisions are made.

In addition, reports submitted to the CDP are publicly available through the CDP website. This helps meet transparency requirements within governance disclosures and may also meet further public reporting requirements in broader ESG programs. To view reports, one needs to register an account, but even without one, anyone can search for reports based on geography and view submissions along with CDP Scores.

What Is a CDP Score?

No one likes a failing grade, but the CDP Score is an important part of tracking a reporting organization’s progress to achieving their environmental goals and improving their overall sustainability performance year-over-year.

The CDP assigns a score to each submitted report by category, so an organization’s climate change report may have a different CDP Score than their forests report. And while scores can (and hopefully should) improve over time, the CDP stresses that achieving an A grade does not mean the organization has achieved its environmental goals, only that it has the policies, awareness, and competences in place to achieve them and demonstrate leadership over time.

Scores are given to each disclosure and are, broadly speaking, as follows:

  • F – This is a Failing score where the necessary information has not been disclosed.
  • D-/D – This is the Disclosure level score. A D- or D score indicates that a disclosure has been made, but that it perhaps doesn’t include the level of detail needed to show a real awareness of the implications of the disclosure on a business’s operations or organizational strategy into the future.
  • C-/C – This is the Awareness level score. Here, the organization has moved beyond simple disclosure and shows a better-documented awareness of how the information disclosed has real implications for both the current state of operation and future planning.
  • B-/B – This is the Management level score. Moving beyond awareness, now the reporting organization has taken real action to manage its environmental impacts. The company has moved past data gathering and is now actively managing risks and seeking opportunities to improve its environmental performance.
  • A-/A – This highest score is the Leadership score. The organization is showing true environmental leadership. Their disclosures show best practices and how environmental considerations are fully integrated into strategy and policy. The definitions for leadership follow the recommendations of the TCFD Accountability Framework.

As mentioned above, CDP scores are publicly available for anyone searching for reports on the CDP website. This is meant to incentivize reporting organizations to strive toward higher grades as new annual reports are filed.

Benefits of Reporting to the CDP

As climate and environmental-related disclosures become an increasingly important consideration in investment decisions, reporting to the CDP and programs like it are a standardized way of documenting your environmental performance for investors and may even be mandated by capital partners and financial institutions. 

Beyond investor requirements though, there are a number of additional benefits for organizations submitting public environmental reports. These include:

  • Improved reputation – Whether you’re a corporation or government entity, showing conscientious environmental performance and particularly improvement over time improves your reputation with customers, stakeholders, and even your own employees.
  • Greater competitive advantage – One of the major benefits of improved reputation and more access to investment is business growth and greater competitive advantage.
  • Documented progress and benchmarks – Claims to sustainability are a de facto feature of most corporate and institutional websites these days. Having a well-documented and independently-verified and scored environmental report validates these claims and documents your successes.
  • Future-proof your operations – The term “future-proof” comes up in many environmental reporting frameworks, but the truth is completing the CDP’s environmental risk assessments helps uncover previously unknown risks within an organization and in the value chain.
  • Proactively manage regulatory obligations – New environmental regulations are emerging all the time, particularly as we approach the 2030 date to limit global temperatures to a 1.5℃ increase. Building a CDP-compliant reporting program proactively reduces the workload when new legal obligations arise.

Fully embracing a program like the CDP takes reporting organizations beyond vague and largely unquantifiable claims of sustainability and moves them toward real documented action that can only benefit them over time.

Need Help?

Reporting to the CDP can be a labor-intensive undertaking. There is a lot of information to collect from multiple parties, departments, offices, and even from customers and suppliers. If your organization is new to environmental reporting and you need to manage your learning curve, or if you want to streamline your data collection, a software partner like FigBytes can help.

FigBytes is a CDP-accredited partner. Our platform will help you keep track of the data you need to compile, use verified methodologies to quantify environmental impacts like carbon emissions and water discharges, and provide a report that is CDP-compliant and can be customized as you need. If you’re ready to get your CDP reporting program off on the right foot, contact a FigBytes team member today.