Investing in Transparency: Unpacking the SEC’s Climate Disclosure Overhaul—Part 3

Note: Enforcement of the SEC’s climate disclosure rule was issued an administrative stay by the Fifth Circuit Court of Appeals, temporarily halting implementation of the disclosure regulation until further court rulings. The lawsuits have now been consolidated and, per lottery, are being heard in the Eighth Circuit Court of Appeals. The Fifth Circuit has dissolved its temporary stay; it remains to be seen if the Eighth Circuit will pause the regulations again.

On March 6, 2024 the SEC voted with a 3-2 approval on the Enhancement and Standardization of Climate-Related Disclosures for Investors. The initial proposed rule was first introduced in 2022 and ignited a highly contentious debate from the market, resulting in over 24,000 comments from a wide array of people and perspectives. The final rule mandates climate risk disclosure in regulatory filings by thousands of public companies and in public offerings. The SEC believes that investors should have an understanding of, or at the very least access to information on, the impacts of climate change on financial performance and risks that affect their investments. According to a recent survey, 90% of investors agree that reporting regulations enable them to make more informed investment decisions.

This is the final article in a 3-part series exploring the key elements of the climate disclosure overhaul, the final rule, implementation timelines, legal challenges already facing the rule, and much more. In part 1 we covered the major components of the rule and important disclosure dates. Part 2 explores the major elements that did (and didn’t) make the final rule and the legal challenges it is already facing. In part 3, we share actionable tips to help your organization begin preparing for implementation of the SEC’s new disclosure rule.

Preparing for the SEC Climate Disclosure

The rule leaves many outstanding questions for companies to interpret, however, one thing is clear: climate data is now being treated and regulated with the same rigor as financial data. Companies now need to follow suit by managing and reporting climate data with the same degree of coordination as they do with their financial data disclosures.

Study Your Reporting Obligations

It is in your company’s best interest to be proactive in understanding what disclosures are required of your organization under the new SEC rule, as well as how these new requirements overlap with, or diverge from, other disclosure obligations such as the EU’s Corporate Sustainability Reporting Directive (CSRD), California’s Climate Accountability Package (SB 253 and SB 261), and the International Sustainability Standards Board (IFRS S1 +S2). Companies will need to understand how key dates fit into an overall compliance timeline for the other climate-related regulations. Don’t get caught by stakeholders looking for how your company will meet their disclosure requirements.

Establish and Coordinate a Cross-Functional Team

Climate reporting is cross-functional and demands inputs from various departments throughout an organization. This is because the data required for disclosures is often highly decentralized. Since the new SEC rule is integrating your climate data with your financial data, your finance team and ESG team will need to be highly coordinated. A great place to start is by assessing your organization’s existing capabilities to understand your gaps, where you need to dedicate resources or seek external expertise, and to inform a plan for compliance. 

Measure Organizational Emissions

Large accelerated filers (companies with public floats of $700M or more) and accelerated filers (companies with public floats of $75M to $700M) will need to measure scope 1 and 2 emissions. They will also need to create assessment methods for determining whether those emissions are material, and therefore subject to disclosure. 

If your organization is new to measuring emissions, become familiar with the standards of the Greenhouse Gas Protocol (GHGP)—the primary and most widely used international standard for measuring and managing emissions. The core focus of creating an GHG inventory of your scope 1 and 2 emissions will be the data collection process. In fact, one of the primary challenges in creating an inventory is that data is very decentralized. It is typically located in different internal and external systems, in different functions of an organization, and possibly across different countries, which requires multiple stakeholders to work together. You will need to identify emission sources, develop data collection procedures and tools, gather and review the data, use estimates to fill gaps, and ultimately quantify emissions using emission factors from well-established sources.

Carbon accounting software helps to streamline and automate the data collection and analysis process. These tools calculate emissions, identify emissions hotspots, track progress, and generate reports in line with international standards and reporting frameworks. Importantly, they also have automatic checks and built-in audit trails that capture the steps of your data collection and processing, which assists in the accuracy, integrity, and completeness of data. Meticulous documentation of your carbon accounting is imperative from complying with the SEC’s disclosure requirements.

Create Rigorous Internal Controls

Reporting on climate data requires strict governance to ensure accuracy and prevent errors. Effective internal controls create an oversight system that develops efficient collaboration, leads to more credible reporting, and ultimately builds confidence in climate disclosures. Internal controls should be documentation of the data, processes, methodologies, systems, assumptions, materiality thresholds or assessments, and estimates used to prepare an inventory. Consider following the EPA’s Inventory Management Plan guidance for structuring your carbon accounting documentation and COSO’s recently released guidance on Internal Control Over Sustainability Reporting (ICSR).

How Climate Vault Solutions Can Help

Accessible Emissions Measurement

Carbon accounting can be time-intensive,complex, and difficult –but it doesn’t have to be. The Climate Solutions Platform streamlines data collection, measurement, management, and carbon reporting across scopes 1, 2, and 3 emissions. With its simple to navigate interface, it provides actionable insights to reduce your organization’s time, emissions, and costs. 

Data Quality

Ensuring accurate and complete data is core for your SEC reporting. When working in the Climate Solutions Platform, uploaded data is immediately and automatically reviewed for possible issues. Users have the ability to filter for questionable inputs or errors, are notified about any data gaps over a calendar year, and can create documented mapping rules so the software learns your data structures. These automated features reduce risks of inaccuracy and manual errors.

Audit Readiness

As data is uploaded, the platform automatically applies climate inputs, like deeply researched emission factors from well established sources, and our algorithm calculates your emissions. Data is stored and associated with your calculations so that you can quickly and seamlessly provide a clear audit trail for your SEC disclosure assurance processes.

Climate and Financial Data Integration Is Here

The new wave of disclosure regulations coming from the SEC and California mark a pivotal moment in climate reporting, and are not designed to impose an undue burden. If not already occurring, the new regulations are forcing climate conversations within the highest levels of leadership so that climate action strategy is at the core of every business. By requiring organizations to disclose their climate-related risks and actions, these laws empower stakeholders to assess companies’ environmental performance and drive progress towards decarbonization and a better planet for us all.

Don’t let the complexities of the SEC’s Enhancement and Standardization of Climate-Related Disclosures, and other climate regulations, hold you back from exceeding your business goals while making real climate impact. Get in touch with our team today to discover how our measurement and climate action solutions can help you meet disclosure requirements with confidence. 

Note: Climate Vault is not offering legal advice. While the information in this article pertains to legal issues, it is not intended as legal advice or as a substitute for the particularized advice of your own counsel.