Using the SEC climate rule to evaluate your approach to sustainability reporting

Disclosures and attestation necessitate integrated understanding of climate risk

Mar 12, 2024

Key takeaways

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A cross-functional team may integrate its understanding of climate-related risks into reporting.

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Companies will have to work through substantial subjectivity in determining materiality.

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Adding climate-risk expertise to your board may be easier said than done.

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The final climate-related disclosure rule adopted by the U.S. Securities and Exchange Commission in March 2024 presents public companies an array of challenges that center on balancing the need for comprehensive reporting with the desire for simplicity and efficiency.

At this milestone in the third wave of corporate sustainability reporting, many companies already disclose certain sustainability information in response to stakeholder calls for greater transparency. Typically, they follow established frameworks or standards, such as the Task Force on Climate-Related Disclosures or the Greenhouse Gas Protocol.

But no matter how mature your company’s reporting capabilities are, the SEC’s final rule not only enables you to assess your ability to comply, it also clears the lens through which you may evaluate how sustainability practices could strengthen your risk management and long-term business performance.

Your company may embrace the SEC climate rule as a strategic opportunity by considering the following.

Organizational strategy and direction

The final rule obliges organizations to integrate an understanding of climate risk into every aspect of business management. There’s no isolating climate from other risk management processes; it must be understood, integrated, quantified, managed and communicated accordingly.

To tackle such a comprehensive to-do list, consider how a cross-functional team could operationalize organizational insights on the environment, finance, operations, internal audit, legal and communications. With that team responsible for coordinating data collection, analysis and reporting, your organization may approach climate-related risks in ways consistent with other strategic, financial or operational risks.

Oversight and governance

The SEC climate rule requires companies to disclose information about governance processes, controls and procedures used to monitor and manage climate-related financial risks and opportunities. A description of oversight by your management team and board might include the following:

  • How and how often leadership is informed about climate-related issues affecting the business
  • How they consider climate-related issues when reviewing and guiding strategy, major initiatives, risk management policies, annual budgets and business plans
  • How they factor climate-related issues into setting the company’s performance objectives; monitoring implementation and performance; and overseeing major capital expenditures, acquisitions and divestitures
  • How they monitor and oversee progress against goals and targets for addressing climate-related issues

Assessing directors’ roles and responsibilities in the context of mandatory climate reporting may help your company determine how you might benefit from adding to leadership an individual with command of climate-related risk management issues and best practices.

Data management

The narrative and quantitative disclosure requirements in the final rule provide companies with a measuring stick for their climate data capabilities. The requirements range from corporate climate targets and carbon emissions to how climate-related events affect financial performance.

Importantly, the requirement for companies to disclose climate-related information in registration statements and periodic filings increases the legal and regulatory risk from the exposure associated with a voluntary sustainability report.

With the final rule in hand, your company may examine your climate profile and reporting capabilities accordingly. Findings may include data on energy consumption, waste, water use and other environmental metrics. Several parts of your company may need to be engaged to develop comprehensive data sets. Along the way, skill and capability gaps may come to light.

Once the sustainability data has been identified, robust data management systems are required to collect, store, share and analyze it. Software is available to support the standardization of data. Systems should be capable of generating reports in line with the disclosure requirements.

Determining materiality

Some form of the word “material” appears more than 1,000 times in the 886 pages of the SEC’s final rule. It’s the criteria for most disclosure requirements. The agency defines it on page 105 as follows:

“A matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.”

The SEC went on to acknowledge the materiality determination is fact-specific and requires quantitative and qualitative considerations. Overall, there is substantial subjectivity for companies to work through.

To that end, your company may prepare a framework for materiality assessments. The exercise may include determining the metrics and disclosures most significant to your business, while considering factors including your industry, jurisdiction, unique stakeholder group and business profile. From that, you might also glean actionable insights about your business’s climate profile.

Disclosures and attestation requirements

The SEC intends for the disclosures to provide investors with consistent, reliable and comparable information about climate-related risks affecting a company’s operations, business strategy and financial planning. To that end, a key requirement for certain companies is independent attestation of certain greenhouse gas (GHG) emissions disclosures.

Notably, the SEC omitted from the final rule the proposed disclosures involving Scope 3 emissions—emissions from upstream and downstream activities in a company’s value chain. However, large accelerated filers and accelerated filers (other than emerging growth companies and smaller reporting companies) are required to separately disclose direct (Scope 1) and indirect (Scope 2) emissions if emissions are material.

Also, following a phase-in period, GHG emissions disclosures will be subject to limited assurance—and, eventually for large accelerated filers, reasonable assurance.

Overall, the disclosure requirements are complex, and some involve nonfinancial metrics. Consider the policies and procedures necessary to accumulate the information required to be disclosed. Also think about the key language in an attestation process that could help ensure the accuracy and completeness of reported data.

Climate risk management: A strategic imperative

Whether your company is near the starting line or down the road in adopting environmental sustainability practices, the SEC’s final climate-related disclosure requirements provide an important backdrop against which you may assess your sustainability strategy and reporting—and how your people, processes and technology support it.

A cross-functional approach to environmental sustainability may help your company enhance process efficiency and streamline data management, which, in turn, can support compliance efforts, inform decisions, mitigate risk and assist in the pursuit of corporate climate goals. The SEC climate rule simply underscores this strategic imperative.

RSM contributors

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