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What Does the New SEC Climate-Risk Reporting Rule Mean for Brands?

While the new mandate was scaled back from what was originally proposed, US companies must now prepare to join many markets around the world in the climate-risk disclosure game.

Finally, we have a decision from the US Securities and Exchange Commission (SEC) on mandatory climate-risk disclosure for businesses — described in many quarters as a “landmark decision.”

The final ruling means that all public companies will have to include information in their annual reports setting out the climate-related risks to their business, and what they are doing to manage those risks — including material climate targets and goals and governance processes. The mandatory rules kick in for all annual report issued for the year ending next Decembers.

The final SEC decision — which the organization’s Chair Gary Gensler said would give investors “consistent, comparable, decision-useful information” — has been scaled back from what was originally proposed after receiving “record levels” of feedback. The biggest shift is the fact that companies will not be forced to disclose their difficult-to-assess Scope 3 greenhouse gas (GHG) emissions at all.

Companies are also being given a bit more time to get themselves prepared and organized for compliance. Large companies have almost two years to provide most disclosures, three years to organise their GHG emissions information, and six years to obtain assurance over their GHGs.

So, what does all of this mean to brands? Well, there are lots of complex components to the requirements that company executives will need to read up on, understand and prepare for when it comes to disclosing certain information. Much of the information being asked for will be familiar to large businesses (separately reporting Scope 1 and Scope 2 GHGs, for instance), and some of it will be new. For example, firms will need to understand how severe weather might impact their income — providing details of investments being made to protect facilities and assets against, for example, hurricanes, sea level rises and flooding; and what sort of losses might be incurred should the company be negatively impacted. Companies will also need to show how their Board of directors and management team is structured and able to oversee the management of climate-related risks.

According to Deloitte, 97 percent of Fortune 500 companies mentioned climate change in their latest annual report. So, firms are much more aware of their relation to the climate crisis — but, by and large, current reporting focuses solely on risk factors such as increased regulation and reputational risk. The new SEC rule will demand much more expansive reporting and many companies will need to up their game and invest in their reporting teams and capabilities.

Of course, new reporting demands are good news for investors. In a statement, the Interfaith Center on Corporate Responsibility (ICCR), which represents 300 investors with more than $4 trillion under management, celebrated the SEC ruling. It also applauded the “sustained commitment” of the Commission, which has spent two years bringing “standardization of climate reporting to financial filings,” as CEO Josh Zinner put it.

Elsewhere, others lamented a missed opportunity for companies to start addressing their Scope 3 emissions — which account for the vast majority of a firm’s carbon footprint. Including supply chain emissions reporting in the rule would have increased data availability and highlighted the importance of tackling Scope 3, said William Theisen, CEO of EcoAct North America — a consultancy that helps brands with their GHG reporting: “Scope 3 emissions are a pivotal aspect of understanding a company’s environmental impact. Despite concerns about the consistency of Scope 3, this would have led to accelerated improvement in greenhouse has accounting.”

The move to drop Scope 3 reporting requirements was “not ideal; but not surprising, given the politically charged atmosphere at the moment,” according to Scope 3 collaboration guru Oliver Hurrey. But there are plenty of ways companies can begin to tackle Scope 3, regardless, he says: “There has been a big push emerging in the last few weeks by business and procurement leaders to co-develop a methodology for adding carbon pricing into the commercial evaluation criteria for tenders and supplier selection. This will create a significant competitive-advantage incentive for suppliers to baseline and decarbonize.”

As with many new pieces of regulation, the business world must brace itself for potential legal challenges to the final rule. As with most ESG-related policy, the SEC decision has become something of a political hot potato across the US — with some arguing it is simply another example of progressive politics interfering with business.

However, many commentators have said that this new rule is not significant at all, considering policy development in other parts of the world.

US companies operating overseas (or in the state of California) will be familiar with the numerous voluntary and mandatory climate and ESG disclosure schemes that have come about in the last two years. The IFRS Sustainability Disclosure Standards, and the EU’s Corporate Sustainability Reporting Directive (CSRD) and related European Sustainability Reporting Standards have had the most airtime. The SEC’s final rule has taken much of what already exists in disclosure frameworks such as the GHG Protocol and the Task Force on Climate-Related Financial Disclosures (TCFD) as its foundation. Having said that, the SEC’s requirements only relate to climate-related reporting, as opposed to wider ESG issues.

“The ruling, more or less, is pointless — because, regardless, disclosure is coming,” says Ed Gabbitas, founder of ESG consultancy EVORA Global. “Regardless of the SEC’s ruling, firms shouldn’t hesitate to draw up an action plan around sustainability reporting — especially amid growing global mandates from the EU and Asia. More and more investors are expecting to see climate disclosures; and the US rule will now raise the bar for entry.”

So, it’s time to prepare for enhanced climate-risk disclosure in the US — something that, Gabbitas adds, will require a “multi-fold strategy that may take months of preparation to establish.”