In March, the United States Securities and Exchange Commission (SEC) proposed enhanced climate and greenhouse gas emissions disclosures to alert investors to potential financial risks related to environmental issues that affect public companies.

Responding to investors’ concern about how climate-change events could affect public companies, the SEC is calling for rules that would require businesses to report greenhouse gas emissions for the first time and detail how climate change risks may impact their business. 

The public has until May 20 to comment on the proposed recommendations.

Julie Mclaughlin, Managing Director of A&M’s Energy practice sat down with Paul Chapman, Managing Partner and Co-Head of HC Group, and host of the HC Insider Podcast, to discuss what the proposed rules entail and their potential implications for public companies, including those in energy and commodities. 

Listen to the podcast here or read below for a summary of the interview.

What's Included in the Proposed Rules?

Under the proposed rules, public companies would be required to disclose potential risks associated with climate change impacts on their business in annual reports. The SEC has proposed the climate disclosure reporting obligations be rolled out between 2024 and 2026 for prior fiscal year filings. The rules would also mandate public companies to report their greenhouse gas emissions as well as the energy they consume.

Greenhouse gas emissions are segmented by where they are created in the value chain and are referred to as “scopes.” Scope 1 requires disclosure of direct greenhouse gas emissions while Scope 2 rules require companies to disclose indirect emissions from purchased electricity or other types of energy. 
Scope 3 emissions are considered the most controversial because they refer to those emissions generated by a company’s suppliers and customers. A number of trade groups and companies consider the proposal to measure and report Scope 3 to be too onerous. 

How Did These Proposed Rules Come About?

The SEC’s mandate includes setting disclosure requirements for public companies for areas deemed pertinent to a company’s financial health.

When SEC Chair Gary Gensler publicly talked about the proposal in April, he referenced a group of asset managers controlling $130 trillion in assets who have been pushing for public companies to disclose climate risks. Some of the largest companies in the U.S., such as Apple, Coca-Cola Co. and Procter & Gamble, voluntarily disclose emissions across all three scopes, but more than two-thirds of public companies in the U.S. don’t.

Also, private investment groups are pushing for emissions and climate change disclosures. 

The latest move follows a growing trend starting in the 1970s, and later, to the first disclosure requirement for environmental risk in 1982. More recently, under the Obama administration in 2010, the first guidance on climate change risks was issued.

Finally, consumer perceptions and preferences have changed regarding sustainability and other environmental practices.

Once the comment period is closed, it’s unclear how long it will take for the rules to be finalized, but experts have suggested they could go into effect as early as 2023 or 2024, depending on which rules are adopted.

Who’s Best Situated to Act if the Rules Are Adopted?

The companies who have voluntarily adopted the recommendations of the 2017 Taskforce on Climate-Related Financial Disclosures (TCFD) report will be better prepared to respond to the proposed SEC rules on climate disclosures. That taskforce was established by the UN Environment Programme’s Financial Stability Board, an international body promoting financial resiliency.

For some public companies who haven’t adopted the TCFD framework, they’ll find it a heavier lift to put necessary processes in place to meet the proposed rules. Additionally, if the final rules include reporting requirements for scope 3, large and small companies will have to roll up their sleeves and determine how far up and down the value chain they need to go in order to measure their emissions.

The heaviest burden will fall on carbon-intensive industries that haven’t measured their emissions or identified their carbon-related risks.

Bottom line: If a company does not already have a climate risk disclosure strategy, they will need it in short order. 

What Are the Best Strategies to Prepare Companies?

Regardless of what gets approved, this will have a significant impact on companies. Public companies that have not implemented the TCFD framework fall into two different categories and require different approaches to get ready:

Category 1: Public companies who have already made announcements about decarbonization or net zero emissions goals/targets and that will be obligated to detail their plan under the proposed rules. For these companies, the most important task is creating a comprehensive roadmap (if they have not already) to achieving the goals.

Category 2: Public companies that have not announced a target nor implemented the TCFD framework, should embark on a multistep process to:

1. Gather the right data within the company and ensuring its fidelity
2. Develop a strategy based on the data that optimizes cost-benefits while achieving the company’s goals 
3. Establish governance and risk management people and processes to ensure effective implementation of the strategy and associated reporting
4. Evaluate performance and adjust strategy if necessary 

How Will All the Work Get Done?

Organizations will have to rethink their human resources to effectively measure the data needed for disclosures under the proposal. Will an adopted proposal require a Chief Climate Officer? Many companies already have high level roles to shepherd environmental, social and governance (ESG) initiatives, so it’s possible the emission and climate change disclosures become part of that role also. Companies will need to hire professionals focused on climate issues to develop the processes and gather the required data. 

Ultimately, it’s about finding the right solutions for the size and purpose of the organization. Many companies will need a blend internal and external resources to balance commitments and comply with the proposed rules.