More Rules Could Be Coming For Reporting Climate Risks

With ESG standards top of mind across the globe and regulations around these issues expanding, the United States is looking to create more requirements when it comes to companies reporting climate risks. 

In March 2022, the U.S. Securities and Exchange Commission (SEC) released a proposed rule change to require certain climate-related disclosures that would keep companies accountable to their environmental impacts while also giving investors an apples-to-apples comparison for making investment decisions. 

If passed, the requirement would change reporting climate risks from a nice-to-have to a steadfast obligation for companies. With similar proposals popping up across the world, organizations hoping to stay competitive will have to get on board. 

What is the new SEC proposal? 

The new SEC rule proposal, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” would make it a requirement for companies to report some climate-related disclosures, including in their periodic reports and registration statements. These compulsory updates would need to include information about climate-related risks that, according to the SEC, “are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.” 

Under the proposal, climate-related risks and metrics that will be required to report would include: 

• Scope 1, 2 and 3 emissions, including greenhouse gas emissions
• Carbon offsets
• Governance of risks and management processes
• How risks are likely to create a material impact on the business and its strategy, business model and outlook
• Possible events (such as severe weather) that could impact the business and what that would mean for its finances 

Why is it happening now? 

Sustainable practices continue to rise as a priority for businesses, investors and consumers, not only in the United States but throughout the world. 

According to experts at global management consulting firm McKinsey & Company, by 2025 up to $5 trillion will be invested in sustainability, while $11 trillion in assets will be retired. Similar to the dawn of digital, they predict big shifts in the standards in which companies compete, with sustainability practices as one of those new foundations.

The SEC rule proposal, if passed, would provide a more regulated way in which businesses share their progress and plans as sustainability continues to be prioritized. According to an SEC Commissioner, these proposed rule changes are already behind the curve in what investors require: 

“While other jurisdictions and independent bodies have made significant strides to provide investors and companies with a basic framework for climate-related disclosures, for too long we have left the U.S. markets to rely solely on outdated and outmoded guidance. 

“In that vacuum, companies and investors fend for themselves. Companies do not know which regime to follow, what information to disclose, and how best to disclose it. Investors try to figure out how to compare different regimes, how to use discordant information, and how to discern whether it’s even accurate. All the while, these data have become more important than ever to investors as they make their investment and voting decisions.”

The United States is not alone in creating new regulations. Similar rules are being discussed across the globe, including in the EU, United Kingdom, Hong Kong, Japan and New Zealand. 

Even if the new SEC proposal isn’t passed, it’s fair to say all roads in the global economy are leading to a more regulated reporting process when it comes to climate-related disclosures. 

What does this mean for companies? 

In short, the new SEC proposal would mean companies must comply with the standardized way of reporting and disclosing information and data in areas of the business that impact the climate. These climate-related risks and disclosures have been outlined and include GHG emissions, scenario analysis, climate-related targets and goals, plus much more. 

Moreover, it will become critical for businesses hoping to stay competitive to not only “talk the talk” when it comes to being sustainable to actually showcasing the steps they’re taking to get there. As investors will have a standardized way to compare these metrics across organizations, it will be clear to them which businesses are making strides in sustainability and which are falling behind.

The SEC is reviewing comments and public input related to the proposal before making a decision whether to adopt the rule. Whatever the outcome, it’s clear investors are turning a discerning eye to how businesses are working toward becoming more sustainable – and companies are going to have to be accountable to these standards to stay afloat. 

How DevonWay can support

If your organization isn’t yet tracking its Environmental, Social, and Governance (ESG) data, now is the time to get started. DevonWay’s software is designed to both track ESG metrics and implement performance initiatives to reach your sustainability and ESG goals. Leading standards like GRI and Task Force on Climate-related Financial Disclosures are already built-in to make compliance more clear – and new ones are being added as they are passed. See what DevonWay can do for your organization and help you stay ahead of the curve.