SEC Expands ESG Reporting Requirements Related to Climate Risks

On March 6, 2024, the Securities and Exchange Commission (SEC) adopted new rules requiring enhanced and standardized climate-related disclosures by public companies and in public offerings. This new requirement is part of the SEC’s efforts to meet investors' demand for enhanced consistency, comparability, and reliability of information related to the financial impact of climate-related risks on an organization’s operations and risk management system to mitigate the impact.

These rules require companies to publish information that describes the climate-related risks that are reasonably likely to have a material impact on a company’s business and/or consolidated financial statements. The new rules call for a dramatic change in the nature and extent of disclosures US companies are required to make about the impact of climate change. The gathering and reporting of these incremental disclosures may require significant changes to a registrant’s systems, processes, and controls. The demand for making some climate-risk disclosures has been raised for some time now, to facilitate investment decisions based on these disclosures.

With the new rule, the SEC expects investors will receive complete, consistent, and comparable climate-related information that will enable them to make better investment decisions.

Climate-Risk Disclosures: What the New Requirements Are

As per the new reporting criterion, businesses are required to share the following information:

• Climate-related risks that will likely affect the organization’s business strategy, operations, and finances
• The real and possible effect of identified climate-related risks on the organization’s strategy, business model, and outlook
• The measures taken to mitigate the impact of the climate-related risk and the quantitative and qualitative cost as well as its impact on financial projections and assumptions as a result
• Disclose the specific measures taken to mitigate climate-related risks such as using transition plans, performing a scenario analysis, or estimating internal carbon prices
• Any climate-related risks that are overseen by the board of directors and the management’s role in evaluating and managing the climate-related risks of the organization
• The processes implemented to identify, assess, and manage climate-related risks, and how well they are integrated with the organization’s overall risk management system or processes
• What are the targets or goals set by the organization related to managing climate risks and how do they impact the company’s business, operations, and financial condition

In addition to the above, large accelerated filers (LAFs) and accelerated filers (AFs) must provide information about material Scope 1 emissions and/or Scope 2 emissions along with an assurance report at a reasonable level. They must also disclose the impact of severe weather events and other natural disasters, carbon offsets, and renewable energy credits or certificates (RECs) where applicable, and whether they were impacted by weather-related events.

These rules will become effective 60 days after the release is published in the Federal Register. Registered organizations will receive compliance dates depending on their filer status.

Preparing For These New SEC Reporting Requirements? Here are Key Challenges to Plan For

Businesses already need to comply with Europe’s Corporate Sustainability Reporting Directive (CSRD) and California’s disclosure requirements. Both regulations require comprehensive sustainability disclosure to provide greater transparency in ESG reporting.

With the SEC requirements, the companies will need to provide disclosures along with registration statements and periodic reports such as Form 10-K for domestic issuers and Form 20-F for foreign private issuers.

Although these rules draw from the disclosure framework provided by the Task Force on Climate-related Financial Disclosures (TCFD), they also differs in some ways, adding to the reporting organizations' burdens. It also lacks equivalency provisions, so despite the similarities, disclosures to other agencies cannot be directly used here.

Some of the provisions that differ from the proposal include:

• Instead of granular physical risk location, disclosing the geography of the assets is enough
• Risks will be categorized as short (i.e., within 12 months) or long-term (i.e., greater than 12 months), with no medium-term categorization required
• Companies do not have to disclose climate-related risk in their value chains unless it is material to their business, operations, or financial condition.
• Companies have to disclose the relevant expertise of the management in managing identified risks.
• The processes for identifying and assessing climate-related risks need not be disclosed.

Using Automated Systems for Efficient ESG Reporting to be SEC-Compliant

Businesses registered with the SEC will require efficiency and automation to ensure compliance with ESG requirements across different regulatory bodies. An EHS solution such as the one offered by ComplianceQuest automates the documentation process and provides safety/sustainability leaders and the management with visibility and transparency into organization-wide data to identify and manage risks.

Some of the key features of ComplianceQuest’s EHS Solution are:

• Proactively and accurately monitor and measure the company’s impact on the environment to improve performance and meet environmental and sustainability targets/goals.
• Manage, track, and analyze environmental, sustainability, and ESG metrics and gain a holistic view of your business on the Salesforce platform. Streamline data collection, verification, tracking, normalization, and analysis of key sustainability, safety, and ESG-related metrics and meet mandatory and voluntary reporting requirements.
• Track and report emissions to regulatory agencies about goals and regulatory compliance. Analyze areas for improvement and identify sustainability initiatives. Collaborate and communicate with stakeholders, suppliers, and customers in sustainability efforts.
• Identify and evaluate environmental aspects and impacts. Assess and prioritize aspects and impacts for effective management. Monitor progress toward environmental goals with performance indicators. Analyze environmental programs for improvement opportunities with reporting and analysis.
• Track climate-related risks using CQ’s Integrated Risk Management System
• Using a next-generation integrated document management system to ensure all new compliance documents are easily accessible, with seamless authenticated access and version control.

To know more about how to improve ESG reporting and be compliant with the existing and new regulations, please visit: https://www.compliancequest.com/environmental-and-sustainability-management/