What will the new SEC climate proposal mean for your business?
Companies woke up to a new climate reality this week. Climate disclosure, once a concern of only the most progressive companies, will soon impact every listed company under new guidance from the Securities and Exchange Commission (SEC). Neal Fenwick, Chief Financial Officer at Acco Brands, summed up the impact of this new regulation when he , “Since it’s the SEC, we are going to have to do it.” Clearly, the transition from optional to required disclosure has significant impacts for companies and investors. In this brief, we examine the regulation to analyze what it means for you.
How did we get here?
History of SEC Climate Regulation
The SEC last issued climate change guidance in 2010. This guidance required companies to make climate change disclosures under Regulation S-K when climate change could have a material effect on their business. For the past decade, however, this guidance has primarily resulted in cursory disclosures in Risk Factors that have become standardized and not decision-useful.
Recognizing the gap in reporting, in May of 2021, President Biden signed an Executive Order on Climate-Related Financial Risk. This order asked the Treasury and Financial Stability Oversight Council to draft a report identifying actions to reduce climate change risks. In response to this order, SEC Chair Gary Gensler assembled his staff to thoroughly analyze historical climate-related disclosures in public company filings and prepare a mandatory climate risk disclosure rule proposal.
Although Chairman Gensler and President Biden have been taking important steps, they have not been blazing an entirely new trail. Disclosing climate-related risk exposure has been required in the European Union for listed companies of more than 500 employees since 2018, and under the EU’s ,Sustainable Financial Disclosure Regulations (SFDR) all large asset managers will be required to report on sixteen key ESG indicators (including Scope 1-3 emissions) across their investments for the 2022 calendar year.
There has also been significant work done by independent bodies like the Task Force on Climate-Related Financial Disclosures (TCFD) to create reporting standards. Their framework is actively being phased in by the UK Government with mandatory TCFD disclosure for banks and insurers in 2021, and publicly quoted companies and large private companies following suit in 2022. Investors have become increasingly climate sophisticated as well: over half of global AUM resides in funds tied to climate goals through investor commitments to the Net Zero Asset Managers Initiative, and with over $12 trillion in AUM across 140 GPs and LPs and over 1,400 investee companies committed to reporting emissions into ILPA’s ESG Data Convergence Project.
What did the SEC announce?
Gary Gensler introduced the SEC’s new climate proposal by noting that it 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.”
To operationalize these commitments, the SEC guidelines require that companies include new details in their annual reports, comprising:
1. Qualitative disclosure around climate governance, risk management, and strategy:
- Progress against public climate pledges and emissions targets
- Approach to managing climate-related risks
- Material relationship of climate-related risks to their business
- Impact of climate-related risks on business strategy and outlook
- Impact of climate-related events on current financial statements
2. Quantitative disclosure around carbon emissions generation:
- Direct and Indirect greenhouse gas emissions(Scope 1 & 2)
- Scope 3 emissions (if material)
- Emissions intensity factor (i.e., emissions per employee/revenue)
- Internal price of carbon
When will SEC disclosure requirements kick in?
Emissions disclosure requirements will be phased in between 2023 and 2027. Large Accelerated Filers ($700M+ market cap) must begin reporting Scope 1 and 2 emissions in 2023, and Scope 3 emissions in 2024. Accelerated and Non-Accelerated Filers must begin Scope 1 and 2 reporting in 2024, with Scope 3 emissions starting 2025.
After a three-year transition period, companies would be required to deepen the credibility of their reporting by providing reasonable assurance over Scope 1
and 2 emissions disclosures. With regards to Scope 3 emissions, as currently constructed, new regulations would include carve-outs based on company size: smaller
reporting companies, defined as companies with less than $250 million of public float, would be exempt from Scope 3 reporting for the time being. The regulation would also provide large companies with an initial safe harbor from litigation on potentially misreported Scope 3 emissions, due to concerns around the difficulty of accurate value chain measurement expressed by several large companies such as Microsoftand Alphabet during the SEC’s consultation period.
What does this mean for you?
The new SEC proposal has already begun to alter the ESG landscape. For public companies who face material climate risks the meaning is clear – you need to prepare. While the regulation is still under review and won’t come into force for several years, starting to measure your carbon footprint now will set you up to capitalize on these changes. Waiting to build an ESG accounting practice until the last minute will carry legal and reputational risk.
While the initial commentary on this proposal has focused on its impact on large public companies, we believe that all companies will need to react to this shift in policy. Below, we highlight two key examples outlining this extended impact:
1. Suppliers and Vendors to Public Companies
Under the new SEC regulation, public companies will have to provide specific updates on their climate commitments. If a company has made a net-zero supply chain commitment, their suppliers will need to take climate action or risk losing business.
Because the SEC included Scope 3 emissions in their guidance, the impact for suppliers will extend even beyond those customers with specific supply chain commitments. To report accurately on their upstream Scope 3 emissions, companies will need to engage their suppliers to accurately measure their carbon footprint.
We have already seen frameworks like CDP (formerly the Carbon Disclosure Project) recognize the criticality of a seamless reporting relationship between B2B customers and their suppliers for accurate disclosure (over 15,000 supplier disclosures requested to date), and we expect this trend to significantly accelerate with this new regulation.
2. Private Equity and Venture Capital Firms
Private markets follow public markets. This is especially true when those private companies consider going public as an exit opportunity. We expect that newly listed public companies will be responsible for climate disclosure, and accordingly will need to establish ESG accounting practices while still private. Fran Seegull, president of the US Impact Investing Alliance, notes that for private companies “these [SEC] disclosure requirements will require getting your house in order” and could be “the tide that lifts the floor of reporting.”
Beyond the public market incentive, investors in debt markets and LPs invested in Private Equity and Venture Capital firms will look to secure similar level of detail
now available to their public market counterparts. This investor pressure will trickle down to every portfolio company.
As CDP’s rapid uptake galvanized public companies and their suppliers to report on emissions in recent years, we’re beginning to see private market frameworks emerge to standardize this data collection. The ESG Data Convergence Project, spearheaded by CalPERS, the Carlyle Group, and a consortium of institutional investors among the Institutional Limited Partners Association (ILPA), has already set out six core ESG metrics for investors to report on across their portfolios (including renewable energy consumption and Scope 1, 2 and 3 emissions), with its inaugural reporting for the 2021 calendar year set to conclude by the end of April.
Altogether, this means that Suppliers must take similar actions as public companies and begin to measure their carbon footprint. Private Equity and Venture Capital firms must also act now to prepare their portfolio.
How can Green Project help you on your sustainability journey?
Streamlined Internal Reporting
Green Project is positioned to help you capture this new climate opportunity by building a comprehensive, efficient, and compliant ESG accounting practice. Particularly for firms early in their sustainability journey, our SaaS platform and climate expertise will allow you to collect all the important environmental information across your operations without burdening your team with the challenging, labor-intensive task of managing ESG data in-house.
Our software cuts through the cost and complexity of collecting, processing, and reporting emissions data via automated data collection, intuitive dashboard analytics, and instantly generated reports to share with the SEC as well as relevant investors and ESG frameworks. We make it simple to access your business’ carbon footprint through a series of secure API integrations—across your utility providers, financial accounting software, ERP systems, and travel management systems—to automatically calculate your emissions in compliance with leading carbon accounting frameworks. We also prepare a downloadable audit trail for your internal monitoring and external assurance purposes.
Once we’ve processed your data, we’ll provide you with access to your dashboard where you can track your emissions over time, drill down on high impact emissions sources or facilities, define your carbon reduction goals, connect with carbon offset & renewable energy credit providers, and instantly download and export reports. We also provide an integrated data collection hub covering key social and governance questions from major reporting frameworks, with customizable metrics based on the relevant KPIs for your business.
Supply Chain and Portfolio Management
If you’re looking to stay ahead of your Scope 3 emissions mandate, Green Project has built out industry-leading digital tools to facilitate engagement, data sharing, and reporting across public company’s suppliers, vendors, and portfolio companies.
You can receive access to investor or supply chain dashboards, where all you have to do is invite relevant companies in your ecosystem to our platform and monitor their onboarding progress – we’ll handle the rest. From your management dashboard, you can then view all connected suppliers or portfolio companies’ ESG performance in a unified platform, drill into an individual company’s data, see aggregate totals by fund or supplier type, and download & export company-level reports for submission to the SEC and other leading frameworks (e.g., CDP, ESG Data Convergence Project).
We are currently assisting many private equity and venture capital firms submit portfolio performance data to ILPA’s ESG Data Convergence Project, and working alongside major purchasers to engage harder-to-reach suppliers for CDP reporting. If our solutions seem like a good fit for your business’ climate needs, we would be happy to offer a free 2021 baseline assessment for up to three supply chain or portfolio companies, as well as complementary access to a roll-up dashboard providing all onboarded companies’ emissions data.
If we can help with further questions about this proposal or the role that GPT can play in preparing your company for this new environment, please reach out to our team.