The time has finally come. For the first time, the SEC will now require public companies to report ESG metrics along with their annual financial disclosures, further signaling the connection between climate risks to financial outcomes. Out of all of the preexisting ESG frameworks, this TCFD-modeled proposal requires U.S. companies to provide information on the climate risks facing their businesses, their plans to address the risks, and specific GHG emissions metrics.
The impact of the SEC’s ruling will be felt by many. Connecting the impact of climate-related events to financial statement line items will enable investors and the general public to make better-informed decisions about their investments and the associated risks. Disclosing ESG metrics will also shed light on the extent to which companies will be able to manage and adapt to situations brought on by climate change, including severe weather events and risks related to the coming transition to a low-carbon economy.
In this article, we’ll outline the types of information and metrics required for disclosure in the SEC’s proposal. Then, we’ll review the key dates to help you prepare for this 2024 effective disclosure date.
The SEC’s detailed proposal outlines the following 8 disclosure categories:
- Climate-Related Risks
Definitions of climate-related risks to businesses, the significance or materiality of said risks to business, and proposed time horizons for addressing said risks.
- Climate-Related Impacts on Business Strategy and Future Outlook
A description of how businesses have considered the impact as a part of their strategy, financial planning, and capital allocation. This includes outlining the way in which RECs, carbon offsets, and internal carbon prices help companies best align with said climate strategy. Companies must also disclose their resilience strategies, and in doing so use predictive analytical tools such as “scenario analyses” that assume different global temperature increases, ranging from 1.5-3 degrees Celsius.
- Governance: Board & Management Oversight
A description of how the board and upper management oversee and manage climate-related risks from within a company.
- Risk Management
The risk management controls and processes in place to effectively identify, assess and manage climate risks and transition plans
- Financial Statement Metrics
The overall financial impact of climate-related risks including: financial estimates and assumptions, and inclusion of climate-related metrics in financial statements
- GHG Emissions Metrics
This includes overall GHG emissions, the calculation methodology, and related instructions, and Scope 3 Emissions Disclosure Safe Harbor that protects companies from a legal liability or penalty if not met.
- Attestation of Scope 1 and 2 Emissions
A third-party provider must verify Scope 1 & 2 emissions data within 2-5 years after the disclosure compliance date and depending on the type of assurance (i.e. “Limited” or “Reasonable” Assurance)
- Targets and Goals
Any climate-related targets or goals such as energy, water, and emissions reductions must include a description of the scope, unit of measurement, defined baseline, and how the company intends to meet its goals.
Below is a list of disclosure and compliance dates to take effect in 2024 for the 2023 FY period and beyond.
|Registrant Type||Disclosure Compliance Data||Disclosure Compliance Data||Financial Statement Metrics Audit Compliance Date|
|All Proposed disclosures including GHG emissions metrics: Scope 1, Scope 2, and associated intensity metric, but excluding Scope 3||GHG emissions metrics: Scope 3 and associated intensity Metrics|
|Large Accelerated Filer||Fiscal Year 2023 (Filed in 2024)||Fiscal year 2024 (filed in 2025)||Same as disclosure compliance date|
|Accelerated Filer and Non-Accelerated Filer||Fiscal year 2024 (Filed in 2025)||Fiscal year 2025 (filed in 2026)||Same as disclosure compliance date|
|SRC||Fiscal year 2025 (filed in 2026)||Exempted||Same as disclosure compliance date|
While the SEC’s reporting disclosures may require companies to devote more resources to monitoring their climate-related risks and environmental impact, these investments are likely to prove beneficial in the long term. Investors and the general public will enjoy greater transparency, and companies will gain a new level of certainty about the regulatory expectations they face.
Of course, the SEC’s ruling also represents a huge win for the ESG professionals and climate champions who have been advocating for a single disclosure for many years. In all, the SEC’s ruling – along with many other market dynamics – will continue to help accelerate our transition to a low-carbon economy.