With the announcement of a new Proposed Rule by the Securities and Exchange Commission (SEC), the US regulatory environment has taken a giant leap forward. Ignoring ESG related disclosures will soon no longer be an option for many domestic (US) or foreign SEC registrants.
The Enhancement and Standardization of Climate-Related Disclosures for Investor, summarized well in the SEC’s Factsheet, focuses on:
- Climate-related risks and their actual or likely material impact on a company’s business, strategy and outlook
- Climate-related risk governance and relevant risk management procedures
- GHG emissions, Scope 1 (direct), Scope 2 (indirect, such as purchased power) and in certain cases, Scope 3 (upstream and downstream business partners and suppliers)
- Assurance requirements related to Scope 1 and 2 emission disclosures for large and accelerated issuers
- Certain ESG related metrics and related disclosures in a note to audited financial statements
- Information related to climate-related targets and goals, and transition plans, if any
- Disclosures related to internal carbon pricing and scenario analysis, if used by the registrant
- Climate-related opportunities, if identified by the registrant, may also be disclosed
Climate-related disclosures required by the SEC will need to be made within registration documents and periodic filings, such as 10-Ks.
The SEC has not made this move hastily, with environmental focused information dating back to the 1970s and somewhat more recent guidance provided in 2010. As with other proposed rules, public comment is open for a 60-day period, prior to the SEC initiating the process to finalize the proposed rule.
Though the inclusion of Scope 3 emissions may be a surprise to some, the announcement of proposed rules by the SEC should not be a surprise. From both sides, investors and corporates, there has been a demand for standardization of metrics that are consistent and comparable for some time now, especially since ESG leaped further into the mainstream over the last two years. The SEC represents investors and the issuance of rules is sure to provide comfort to those who have also been calling for regulations to help clear away excess noise from the multiple directions that some corporations felt they had to go in, in the absence of rules.
Over the last two years we have seen consolidation of voluntary frameworks move at lightning speed, leading more recently to the consolidation of the VRF and CDSB into the, also newly created, International Sustainability Standards Board (ISSB), an entity of the IFRS Foundation. Just over a week ago, IOSCO also announced that it is also embarking on a review of the “soon-to-be- released ISSB Exposure Drafts of proposed climate and general sustainability disclosure requirements, as well as the final standards when they are produced” in an effort to “[strengthen] the organization’s commitment to increasing transparency and mitigating greenwashing’. If IOSCO decides that what the ISSB has released is “fit for purpose” they intend to “provide all 140 IOSCO member jurisdictions [the SEC is a member and sits on the IOSCO board] with the basis to decide how they might adopt, apply or be informed by the ISSB standards.” Along with the review, ISOCO will work to develop independent assurance standards as a means to build trust in sustainability reporting.
So how does this all link to the SECs announcement?
- Multiple stakeholders, including corporates and investors have been calling for standardization.
- Mergers and consolidations of standards and frameworks have been moving at lightning speed.
- Major European regulators have implemented rules related to sustainability disclosures and metrics.
While leveraging preexisting leading disclosure frameworks, including the TCFD, the SEC has now joined the worldwide chorus marching towards the integration of ESG related matters into financial statements, business strategy and outlook. The SEC, arguably the most important North American financial regulator, is now moving almost in lock-step with those on the leading edge, down the sustainability funnel. What was once an alphabet soup of sustainability is moving that much closer to being, simply, normal business. Put another way, the proposed rules by the SEC allow companies to not have to pick a reporting framework or set of standards as the SEC has begun to set the stage for how corporates will be required to report, making the decision simpler.
What is the proposed phase-in period for the SECs proposed rules? The SEC has provided, for explanatory purposes, the following table which assumes the proposed rules are adopted with an effective date in December 2022 and that a filer has a December 31st fiscal year end:
Source: SEC Fact Sheet for Enhanced and Standardization of Climate-Related Disclosures
Though Q4 does not provide services to help you measure your GHG emissions or other ESG related metrics, we are here to help with how you communicate your ESG related disclosures, through our web and event product offerings. We also have experienced IR professionals who can help you stay informed about best practices as well as drive a further focus on your ESG investor base and focused ESG targeting. Do not hesitate to reach out to us with any questions or to explore opportunities for us to help contribute to the strengthening and communicating of your ESG program.
Finally, we believe the SEC has done a great job outlining the proposed rule. We strongly urge you to review the SECs Fact Sheet, specifically the section titled Content of the Proposed Disclosures, as further background to the proposed rules.