On March 6, the Securities and Exchange Commission (SEC) adopted new rules aimed at enhancing and standardizing climate-related disclosures for public companies. This move comes amidst growing investor interest in environmental, social, and governance (ESG) factors and increasing murmurs around potential mandatory ESG regulations.
SEC Chair Gary Gensler had this to say, “These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”
Let’s break down what these new rules mean for your firm!
Understanding the New SEC Rules
The new SEC rule requires publicly traded companies to disclose more comprehensive information about climate change’s impact on their business.
Per the SEC’s fact sheet, “The final rules will require a registrant to disclose:
- Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
- The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
- If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
- Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
- Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
- Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
- Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
- For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
- For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be a the reasonable assurance level;
- The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
- The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
- If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.”
While the new rules focus specifically on climate disclosures, it’s seen as a potential steppingstone towards broader ESG regulations. With ESG investing on the rise, investors are increasingly demanding transparency on environmental, social, and governance practices. The SEC’s move signals a growing recognition of the importance of ESG factors in financial markets.
What Your Firm Needs to do
To ensure compliance with the new SEC rule, firms can take proactive steps, such as:
- Assessing existing policies and procedures to identify areas that need adjustment to meet the new disclosure requirements.
- Establishing methods for gathering and documenting climate-related data to support the required disclosures.
- Integrating climate risk assessment into existing internal controls and risk management frameworks.
- Training relevant personnel on the new disclosure requirements and data collection procedures.
- Ensuring clear communication and reporting channels exist between the board, management, and relevant departments regarding climate-related risks and disclosures.
By proactively adapting their compliance programs and focusing on robust data collection and reporting processes, firms can ensure they are well-positioned to comply with the new rule and navigate the evolving landscape of ESG regulations.
COMPLYing with COMPLY
The SEC’s new climate-related disclosure rule represents a significant change for publicly traded companies. While it presents challenges, it also offers an opportunity to demonstrate leadership in sustainability and transparency.
COMPLY is here to help your firm navigate these changes and ensure compliance with the new regulations. Our team of compliance consultants can assist with various aspects of your firm’s compliance program, including policies and procedure management, such as:
- Identifying areas in your existing programs that need adjustment to meet the new disclosure requirements.
- Guiding you in establishing efficient methods for gathering and documenting climate-related data.
- Offering support in updating your internal controls and training your employees on the new requirements.
- And more!
By partnering with COMPLY, you can gain the expertise and resources needed to comply with the SEC’s new rule, confidently navigate the evolving regulatory landscape, and demonstrate your commitment to environmental responsibility and transparency to investors and stakeholders alike.
Ready to explore how COMPLY can help your firm? Let’s talk!