The US SEC has been all the talk lately for the latest climate-related disclosure regulation. Adopted on March 6th, 2024, “these rules require companies to publish information that describes the climate-related risks that are reasonably likely to have a material impact on a company’s business or consolidated financial statements“.
The new rules have sparked a legal backlash from all sides. The decision to remove Scope 3 reporting altogether sparked complaints of weakening the rule. At the same time, the SEC now faces a legal battle for overstepping its authority with the new rule. While the public waits for the outcome on whether this rule will be enforced, many are left wondering whether to start preparing.
The reality? Whether there is a requirement to disclose or not preparing to do so and offering this information to stakeholders will give your business an advantage in changing times.
SEC Climate-Related Disclosure Requirements
The SEC climate-related disclosure requirements cover a range of areas related to the impact of climate change on the organization. It focuses exclusively on what is material to that organization with materiality being defined as “a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view the omission of the disclosure as having significantly altered the total mix of information made available. The materiality determination is fact specific and one that requires both quantitative and qualitative considerations.“
In the footnotes of financial statements, “registrants must disclose financial statement impacts and material impacts on their financial estimates and assumptions due to severe weather events and other natural conditions” and carbon offset and renewable energy credit information. Outside of the financial statements, more information will need to be disclosed. This includes:
- Governance – Oversight of assessment and management of climate-related risks.
- Strategy, business model, and outlook – Materiality. How the business may or has been affected and any related transition plans.
- Risk management – Processes for detecting, evaluating, and managing climate-related risks.
- Targets and goals – If they materially affect or are likely to affect the business materially, further explanation is required.
- Material expenditures and impacts – Information on financial implications arising from climate risk mitigation, adaptation measures, disclosed transition plans, or progress toward stated targets or goals.
- GHG Emissions – Scope 1 & 2 emissions only if deemed material. For large-accelerated and accelerated filers. Subject to assurance.
Yes, enforcing the rule will require disclosing a good amount of information. Instead of thinking of this as an extra check box when reporting comes along though, your business should look at it as an opportunity.
The Importance of Understanding Climate Risk
At its basis, the new rule is a way for companies to communicate information with investors and other stakeholders on climate-related risks that are material to their business. As climate change progresses and the effects are felt, actively managing and mitigating risks becomes even more crucial. This is especially so in certain industries, such as real estate.
As one of the highest emitting sectors, the real estate industry faces challenges around the globe as countries look to decarbonize and meet goals. Alongside this are the physical risks. Depending on where properties are located, risks may be higher.
Regulatory bodies have put these rules into place not to force companies to do more work but to increase transparency and provide investors with all the information they need to make investment decisions. At the same time, they help companies prepare for the future. There will be more risks in the coming years as by-products of climate change. Develop a plan for addressing these challenges so that your company can continue to prosper.
Climate-Related Disclosure and a Global Business Landscape
In 2024 we live in a very globalized world. Even without regulation in our own countries around climate-related disclosures, you still may need to comply with international regulations. This could be due to either having international operations or foreign investors. With the latter, even though you may not operate under another jurisdiction your investor may want this information or need to comply with their local regulations.
As the effects of climate change continue to grow, you should expect the demand for this information more often than not.
Ensuring Your Future = Acting Now
Instead of waiting for the demands of regulatory bodies or investors, your organization can still take proactive action in understanding climate risks and opportunities. Although it can be hard to switch from the business-as-usual mindset, there are many resources to help you out along the way.
Remember, when it comes to understanding planning, tracking, and acting, data is your best friend. The ScriptString platform makes ESG data management easy. Let us automate the process and deliver you high-quality data to make informed decisions to better your business’s future. Contact ScriptString today to understand how we can make climate disclosures a little easier on your business!
