In March 2024, the Securities and Exchange Commission (SEC) took a monumental step forward in standardizing climate-related disclosures, mandating companies to provide a clearer picture of how climate-related risks affect their operations.
This development reflects the shift towards sustainability and climate awareness in business, aligning the US more closely with global standards. Similar strides have been seen in the European Union with the Corporate Sustainability Reporting Directive (CSRD) and in the US at a state level with California's SB-253 and SB-261.
By introducing its own climate disclosure rule, the SEC is not just responding to domestic calls for greater transparency, but is also playing a critical part in elevating US corporate climate disclosures to the rigorous levels observed in other advanced economies, underscoring the importance of treating climate impact with the same seriousness as financial performance.
At Pulsora, we understand the complexity this may bring to your business. As your partner in enterprise sustainability management, we're here to guide you through these changes, helping you navigate the requirements with ease and confidence. In this post, we explain the essentials of these new requirements, who they apply to, and how companies can prepare.
Why does this matter?
Investors, stakeholders, and regulators are increasingly recognizing that climate-related risks can significantly influence a company's financial performance and strategic direction. Whether it's the physical damage from climate-induced natural disasters or the transitional risks associated with moving towards a low-carbon economy, the financial implications are profound. The new rules aim to ensure that companies provide a comprehensive view of these risks and their management strategies.
What companies are affected by the SEC’s climate disclosure requirements?
The new rules apply to all companies obligated to file registration statements and annual reports with the SEC. This includes both domestic and foreign companies, irrespective of their size. It also encompasses public companies, certain asset-backed issuers, and foreign private issuers.
Consequently, if your company falls into any of these categories, you need to take note of these rule changes and adjust your reporting practices accordingly.
What does the SEC require companies to disclose?
The SEC's final rules on climate-related disclosures mark a significant shift towards increased transparency and accountability in how businesses report their climate-related risks and efforts. Let's delve deeper into each of the primary requirements to understand what they entail for your business.
Climate-related risks and their impact
Businesses are now mandated to disclose climate-related risks that have materially impacted or are likely to impact their operations, strategy, financial condition, and future outlook. This requirement emphasizes the need for companies to conduct thorough risk assessments that consider both current and future climate-related scenarios.
- Current impact: If a climate-related event or condition has already affected your business operations or financial performance, details of these impacts must be disclosed. For instance, if a severe flood disrupted your supply chain causing significant financial losses, this needs to be reported.
- Future impact: Companies must also consider and disclose potential future risks. This involves analyzing how changing climate policies, technological advancements, or shifts in consumer preferences towards more sustainable products might impact your business model and financial performance in the long run.
Governance and risk management
The governance of climate-related risks and the processes for managing these risks are under the spotlight. Companies must demonstrate how their governance structures are equipped to handle the complexities of climate-related challenges.
- Board oversight: Detail how the board of directors oversees climate-related risks and opportunities. This might include discussions on board-level committees responsible for sustainability, frequency of climate-related discussions during board meetings, and how climate risks are integrated into the company's overall risk management strategy.
- Management's role: Clarify the role of management in assessing and managing climate-related risks. This involves outlining the internal processes for risk identification, assessment, and integration into the company's strategic planning and decision-making processes.
Strategies, targets, and goals
Transparency about your company's strategies, targets, and goals related to climate change is crucial. The disclosures must cover both the qualitative and quantitative aspects of your climate initiatives.
- Mitigation and adaptation activities: If your company has undertaken activities to mitigate or adapt to climate-related risks, you must disclose these efforts, including any significant expenditures and how these activities impact your financial estimates and assumptions.
- Climate-related targets or goals: For companies that have set climate-related targets or goals, the rules require a comprehensive disclosure of these objectives, the strategies to achieve them, and the financial implications of pursuing these goals. This could include commitments to reduce GHG emissions, increase renewable energy usage, or achieve net-zero emissions by a specific date.
Greenhouse gas emissions
One of the more technical aspects of the new rules is the requirement for certain companies to disclose their Scope 1 and Scope 2 GHG emissions. This part of the disclosure aims to provide investors with a clear picture of the company's direct and indirect emissions and the steps taken to reduce them.
- Scope 1 emissions: These are direct GHG emissions from sources that are controlled or owned by your company, such as emissions from manufacturing processes or company vehicles.
- Scope 2 emissions: These are indirect GHG emissions from the generation of purchased energy consumed by the company, such as electricity or heating.
For large accelerated and accelerated filers required to disclose this information, an assurance report validating the emissions data will also eventually be necessary, starting with limited assurance and transitioning to reasonable assurance over time.
When do the SEC’s climate disclosure requirements take effect?
The SEC’s final rules on climate-related disclosures introduce a phased approach to compliance, recognizing the varying capacities and resources across different companies. The timeline for when these requirements come into effect is carefully laid out to ensure businesses have adequate time to prepare and adapt to the new regulations.
Here's a breakdown of the expected compliance dates based on the type of registrant:
Large accelerated filers (LAFs)
Companies classified as LAFs will lead the compliance journey, with the first set of disclosures (excluding GHG emissions) required in 2026, for reporting on the 2025 fiscal year.
LAFs will be expected to disclose Scope 1 and Scope 2 GHG emissions starting in 2027, using data from the 2026 fiscal year. Limited assurance requirements start 3 years later, in 2030 (for data from fiscal year 2029), with reasonable assurance expected by 2034 (for data from fiscal year 2033).
Accelerated filers (AFs)
Accelerated filers (AFs), excluding smaller reporting companies (SRCs) and emerging growth companies (EGCs), follow LAFs in the compliance timeline. They will start including climate-related disclosures in their filings in 2027, reporting on the fiscal year beginning in 2026.
Accelerated Filers’ first GHG emissions reports are due 2 years after LAFs, in 2029. They have to provide limited assurance 3 years after their first emission disclosure, in 2032, but there is no requirement for transitioning to reasonable assurance, unlike for LAFs.
Everyone else
Smaller reporting companies (SRCs), emerging growth companies (EGCs), and non-accelerated filers (NAFs) have been given additional time to adapt, with most new requirements becoming applicable for fiscal years beginning in 2027. Notably, SRCs, EGCs, and NAFs are exempt from the requirement to disclose Scope 1 and Scope 2 GHG emissions, acknowledging the potential burden such reporting might place on smaller entities.
What should businesses do to prepare?
The path to compliance may seem daunting, but with the right approach, it can be navigated smoothly. Here are some steps to consider:
Assess your current state
Start by evaluating your current climate-related risk disclosures and management practices. Identify gaps and areas for improvement to align with the new requirements.
Strengthen governance structures
Ensure that your board and management are equipped to oversee and manage climate-related risks effectively. This might involve training, establishing dedicated committees, or integrating climate considerations into existing governance frameworks.
Develop robust data management and reporting processes
Creating transparent and accurate reporting mechanisms is crucial. Consider leveraging technology and sustainability management platforms like Pulsora to automate and simplify data collection, GHG calculation, and reporting processes.
Looking ahead
As the compliance dates approach, staying informed and proactive is key. The rules represent not just a compliance challenge but an opportunity to enhance your company's sustainability practices and investor communication.
At Pulsora, we're committed to helping you navigate these changes. Our platform is designed to simplify ESG data management and reporting, ensuring you can meet regulatory requirements while driving your sustainability goals forward. Let's embrace this new era of climate accountability together, turning challenges into opportunities for growth and resilience.
Embrace the change with Pulsora
As we step into this new regulatory landscape, remember that you're not alone. With Pulsora's comprehensive sustainability management platform, you can streamline your sustainability data collection, manage regulatory compliance effortlessly, and track your performance against sustainability goals with precision. Together, we can turn regulatory compliance into a strategic advantage, driving sustainability and success for your business in the era of climate accountability.
To learn more about how Pulsora can help you prepare for the SEC's climate-related disclosure rules, schedule a meeting with one of our ESG reporting and compliance experts.
