The US SEC Proposes Landmark Climate-Related Disclosures

04 April 2022 by Bibin Emmanuel
blog author

The new rule-change proposal for public companies in the US to report enhanced climate-related risks is undoubtedly a positive development for the world’s largest economy.

A recommendation to change rules relating to climate-related disclosures in the US was announced by the Securities and Exchange Commission (SEC), which would see public companies reporting on how they assess, measure and manage climate-related financial risks while being transparent about environmental challenges such as greenhouse gas emissions.

The move follows the UK, which is the first G20 country to bring such disclosures to law, with the mandatory climate requirements coming into force in April. The UK’s disclosures requirements have been based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), founded in 2015 by the Financial Stability Board (FSB) to improve and increase climate-related financial information reporting.

In the States, the SEC’s new proposal to address climate change would require registrants to include disclosures in their registration statements and periodic reports, to release vital information to investors about the impact before making decisions.

Such transparency would include the registrant’s greenhouse gas emissions (GHGs), which are commonly used to assess risk exposure.

Gary Gensler, SEC Chair, said: "If adopted, the proposal would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.

"Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.

“The proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. “

The proposed US rule changes would require a registrant to disclose numerous information including governance of climate-related risks and relevant processes to manage risk. It would need to assess how any risks have had or are likely to have a material impact on the business and consolidated financial statements, from a short-to-long term perspective.

The registrant will also be required to disclose how any identified climate-related risks have affected or are likely to affect their strategy, business model and outlook; and the impact of climate-related events and transition activities on their consolidated financial estimates and statements.

The registrant would need to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2).

It would also be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if the material or if the registrant has set a GHG emissions goal that includes Scope 3 emissions.

The proposed disclosures share many of the same features as the widely accepted disclosure frameworks, including the TCFD and the Greenhouse Gas Protocol and investors would be provided with the necessary information, via the GHG emissions disclosures proposals to look at a registrant’s climate-related and transition risks.

Bibin Emmanuel, Senior Consultant - Sustainable & Impact Investing at Acre said:“I think the US regulatory development is a positive development that the world's largest economy is finally seeking to walk the talk on climate change. This has the potential to have significant implications as it will put pressure on boards and management to focus on climate change. 

“However, while these proposed disclosures are a positive step in the right direction, we still need to do a lot more to avoid a climate crisis. The goal should be reducing emissions, not just reporting it."

Acre is an executive search, leadership development & recruitment consultancy specializing in ESG and sustainability. We accelerate the search for purpose-driven leadership by connecting organisations & individuals to the largest, most diverse community at the intersection of social, environmental and economic change.

Bibin works as a senior consultant in the London team of Acre’s sustainable finance & Impact investing practice, with a particular focus on the banking & sustainable development sector. The practice includes banks, insurers, investment managers, private debt, equity & real-asset funds, family offices, advisory firms and foundations, covering recruitment for investment roles and sustainability/ESG related positions across all other functions.