What Is the SEC Climate Disclosure Guidance?
In March 2022, the US Securities and Exchange Commission issued Release No. 33-11042, which proposed updated rules to enhance and standardize climate-related disclosures for investors. The SEC Climate Disclosure 2022 proposal would require domestic and foreign registrants with the Securities and Exchange Commission to include certain information related to climate policy on registration statements and periodic reports such as Form 10-K. The required information would include the following:
- Climate-related risks and their probable or actual material impacts on the registrant's company, strategy, and outlook
- Registrant governance or risks and corresponding risk management processes
- Greenhouse Gas (GHG) emissions
- Climate-related financial statement metrics
- Climate impact targets, goals, and transition plans, if any
Climate-related risks pertain to climate-associated events and conditions that can impact the registrant's financial statements, business operations, or value chains. Greenhouse gas emissions include direct emissions from a company's production and indirect emissions from a company's utility providers or supply chain partners.
These proposals echo policies many companies already follow based on common disclosure frameworks such as the Greenhouse Gas Protocol and the Task Force on Climate-related Financial Disclosures (TCFD). Such disclosures aim to promote net-zero practices where the amount of carbon companies generate is balanced by what they remove from the environment. This objective reflects the goal of the Paris Climate Accords to keep global temperatures from exceeding 2 degrees Celsius above pre-industrial levels. The upcoming SEC rule update is a regulatory effort to promote this goal by providing transparency to investors about companies' climate policies.
Five Key Elements of the SEC's Climate Disclosure Guidance
The proposed climate disclosure updates would require SEC registrants to report information about several key elements, including:
- Materiality: Information investors should be informed about regarding the impact climate-related events and conditions such as wildfires, hurricanes, and floods could potentially have on a company's finances, operations, and financial reporting
- Physical risk: The potential impact of climate-related events and conditions on a company's assets and operations
- Transition risk: The potential impact the transition to a low-carbon economy could have on a company's business, operations, and financial reporting
- Risk management: What companies are doing to assess and manage climate-related risks
- Compliance with laws and regulations: What companies are doing to comply with laws and regulations related to climate change
These are just a few highlights of the proposed disclosure update. The full text of the original proposal is 490 pages long, and adjustments are still being debated and finalized. Consult a professional such as an environmental compliance advisor, with detailed questions about the impact on your company.
Three Benefits of Complying With SEC Climate Disclosure Guidance
Companies can benefit in various ways, from adhering to SEC climate disclosure guidelines. Some of the biggest benefits include the following:
1. Improved Risk Management and Decision-Making
Internally, the actions required to comply with SEC climate disclosure guidelines force you to review climate-related risks to your company and your energy efficiency and develop strategies for addressing any issues you uncover. This leads to better risk management and decision-making, which protects you from threats while simultaneously improving your operational efficiency and cutting costs.
2. Increased Transparency and Credibility
Disclosing your climate risk management actions to the public through the SEC provides transparency and accountability, increasing your company's credibility. You're not just saying you're addressing climate risks; you're demonstrating it publicly with regulatory authorities confirming your disclosures.
3. Enhanced Investor Confidence
The fact that you're taking steps to manage climate-related risks and being transparent about it gives climate-conscious investors reason to be more confident in your company. This enhances your brand's reputation and can help you attract capital.
In addition to these benefits, staying in compliance with SEC guidance helps you avoid potential regulatory obstacles to your business growth, both today and in the future.
Three Common Pitfalls to Avoid when Complying with SEC Climate Disclosure Guidance
When pursuing SEC climate disclosure compliance, it's important to follow best practices to avoid common pitfalls. Here are three of the most prevalent mistakes to avoid:
1. Underestimating Materiality
Full disclosure of materiality is vital under investment law. Failure to consider all potential climate-related risks to your company can lead you to overlook information you're legally obligated to include. To avoid this, work with a professional using a comprehensive checklist of factors to consider.
2. Inadequate Disclosure
Adequate disclosure requires you not only to claim commitment to risk management but to demonstrate your commitment by assessing risk and developing a plan to address it. Follow through on your disclosure by detailing how you plan to manage your identified risks.
3. Lack of Consistency
Climate disclosure isn't a one-time event but an ongoing process where you document your progress in achieving climate-related goals over time. Report your results consistently on a regular schedule using standard disclosure frameworks to provide objective benchmarks.
These pitfalls are especially easy to fall into if you're trying to achieve compliance through your own resources. The best solution is to get professional support from experienced advisors and enterprise-quality automation.
Streamline Your SEC Compliance With carbmee
Complying with the SEC's climate disclosure guidance can be complex and time-consuming, but it's necessary. You can streamline the process by working with a carbon management software provider to automate the process of collecting and analyzing data on your greenhouse gas emissions and other environmental impacts.
The carbmee carbon management platform can enhance your ability to effectively manage and mitigate climate-related risks. We help you streamline your data collection and analysis procedures, set and track emissions reduction targets, and report your results consistently in a transparent manner that complies with SEC's guidance. We also provide a knowledge base and answers to FAQs to help you answer your compliance questions. Book a free product demo to see our solution and discuss your company's climate compliance needs with one of our industry experts.
