The SEC Climate Disclosure Proposal Explained - ESG & Climate News
A personal reflection to start this edition: after many years of working in the sustainability field, the news this week was an inflection point. More than 90 percent of the companies in the S&P 500 already report sustainability information. So why all the excitement? Sustainability has (finally) crossed the threshold into the mainstream of global commerce. And, this change means that capitalism will align with the needs of people and our planet. Yes, this is one of those times that will define the future.
Holy S*&!...The SEC Issues Groundbreaking Climate Disclosure Proposal
As the war in Ukraine continues to send shockwaves through the world and global markets, ESG and climate news was hit by a seismic market shift from the Securities and Exchange Commission (SEC). On Monday, the Commission approved a monumental climate disclosure proposal by a 3-to-1 vote.
The proposal, if adopted, will require US public companies to report their greenhouse gas emissions, exposure to climate risks, and how they plan to minimize these risks. Former SEC director, Meredith Cross called the plan “the most extensive, comprehensive and complicated disclosure initiative in decades.” It “raises the bar for all companies'' and marks the first time American businesses are forced to make these substantial disclosures in mandatory filings.
The SEC proposed:
Reporting of scope 1 and 2 emissions by all filers via a based on size of the company. Larger companies would also have to disclose scope 3 emissions (emissions from the value chain) that are financially material or if the company has set a GHG emissions target which includes scope 3 emissions.
Disclosure of a company’s governance and strategies for management of climate-related financial risks – starting with the board and executive management.
‘Accelerated Filers’ and ‘Large Accelerated Filers’ would have to provide limited assurance initially, transitioning to reasonable assurance of the Scopes 1 and 2 GHG emissions disclosures.
Disclosure of any climate targets the company has set (such as net zero goals) as well as a description of how the company plans to meet the target and measure progress.
Disclosure of the climate-related and transition-related impacts on the filers' financial condition. (Physical and transition-related impacts are described well in this).
The SEC allowed 60 days for public comment on the proposal, after which they will assess the input and put forward a final ruling later in the year. If all goes to plan, larger companies will submit climate disclosures in 2024 for their 2023 fiscal year.
Greenwashing Be Gone
A major rationale for this rule is to end the practice of ‘greenwashing’ - where companies extol their ‘green’ credentials without much substance to back it up. The rule will create a standardized framework for companies to report progress toward climate targets - taking aim at the many net zero commitments which do not add up.
Don’t Panic, Do Prepare
With all the noise surrounding the 500+ page proposal, former SEC Sr. Counsel for Climate and ESG, Kristina Wyatt provided some calm clarity. Her overall message is don’t panic, do prepare. In her interview this week with GreenBiz, she remarked that the only thing that surprised her in the proposal was, “how much it's gone according to plan.” Her unique insights can also be found in the Wall Street Journal and this Quartz article.
One thing is clear: sustainability reports won’t cut it anymore. As this GreenBiz article lays out, the data in sustainability reports is often based on spreadsheets and can vary in quality and completeness. When the rule goes into effect, companies will need reliable (i.e., assured) information, disclosed in a consistent format with digital (i.e., XBRL) taxonomy. The days of the spreadsheet are over - enterprise software will be needed to ensure accurate, transparent carbon accounting.
Persefoni CEO and co-founder, Kentaro Kawamori, weighed in on the preparedness theme with his open letter highlighting the key takeaways from the SEC’s proposal and providing pointers on what companies should do next. His letter offered interactive online resources as well as a webinar with Kristina Wyatt and Steve Soter of Workiva (the leading SEC reporting software platform).
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Persefoni is the leading Climate Management & Accounting Platform (CMAP). The company’s Software-as-a-Service solutions enable enterprises and financial institutions to meet stakeholder and regulatory climate disclosure requirements with the highest degrees of trust, transparency, and ease. As the ERP of Carbon, the Persefoni platform provides users a single source of carbon truth across their organization, enabling them to manage their carbon transactions and inventory with the same rigor and confidence as their financial transactions.