The much-anticipated climate disclosure proposal from the Securities and Exchange Commission (SEC) was released on March 21. The SEC’s detailed 534-page proposal (here’s the fact sheet for a shorter read) on climate-related disclosures has significant implications for companies in the U.S.
“Once this proposal has been adopted, it wouldn’t be far-fetched to say that the new climate-disclosure rules can fundamentally change how businesses operate,” says Frank Meehan, CEO at Equilibrium. For starters, it seeks to mandate that publicly traded companies track and report on greenhouse gas (GHG) emissions from their own operations as well as from the energy they consume and to obtain independent certification of their estimates. But the proposal shares guidelines on a range of climate-related efforts and initiatives.
While it can be tempting to dive straight into carbon accounting, doing so can leave many leadership teams overwhelmed and result in misalignment across your organization. “Yes, carbon accounting is critical, especially when it comes to the SEC proposal that explicitly talks about scope 1, 2, and 3,” says Elizabeth Tutino, ESG specialist advisor at Equilibrium. “But carbon accounting can fall flat when organizations haven’t taken stock of where they stand or haven’t understood their ESG risk landscape, which is also outlined in the proposal.”
Here are five actionable next steps for organizations and executives in the wake of the SEC’s climate-related disclosures:
1. Take Stock
The SEC calls for “The oversight and governance of climate-related risks by the registrant’s board and management.”
Whether you are getting started on carbon accounting or looking to evolve your ESG strategy to put a greater focus on climate-related disclosures, start by understanding where your organization currently stands.
Engage with your internal team of stakeholders or ESG taskforce to take stock of current efforts around reducing your business’ climate impact. Benchmark against industry peers to understand what initiatives others in the industry prioritize and evaluate the market perception of your ESG impact. These exercises can give the leadership team a more holistic picture of the organization’s climate-related performance.
2. Identify Micro and Macro Climate-Related Risks
The risk landscape and the impact it has on an organization is a big part of the SEC’s proposal. Consider these two stipulations from the proposal:
“How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
“How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook.”
Learn how evolving global socio and geopolitical risks and ESG policies impact your industry by subscribing to various news outlets, analyst coverage, and checking if your carbon reporting software provider has a way to keep you informed of the ESG and climate-risk landscape.
Another key step in risk analysis is to understand risks in your supply chain. “In order to create your own ESG or climate risk profile, it is essential to fully vet your supply chain, particularly since there are guidelines from the SEC around scopes 2 and 3,” Meehan urges. This step is critical to goal setting and understanding whether your current efforts are on track or at-risk. Most of all, it can determine the long-term resiliency of your business.
3. Run Simulations & Scenario Plan
The SEC Enhancement and Standardization of Climate-Related Disclosures states that, “If the registrant uses scenario analysis to assess the resilience of its business strategy to climate-related risks, a description of the scenarios used, as well as the parameters, assumptions, analytical choices, and projected principal financial impacts.”
Running simulations based on valid assumptions and your own “climate risk profile” is key to adopting a proactive stance to drive long-term decisions and navigate uncertainties and opportunities. Companies can adjust goals and create contingency plans are needed.
4. Embrace “Auditable” Carbon Accounting
Here are a few key guidelines from the SEC around carbon accounting and auditability:
- GHG emissions (scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (scope 2) and indirect emissions from upstream and downstream activities in a registrant’s value chain (scope 3), if material, or if you have set GHG emissions target or goal that includes scope 3 emissions.
- Your processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into your company’s overall risk management system or processes.
Through these guidelines in the new proposal, the SEC seeks to address the increasing investor need for more consistent, comparable, and reliable information about how companies address climate-related risks across operations, strategy, and financial plans. “It isn’t just a question of carbon accounting and frameworks with the new proposal, it is a question of auditability,” Tutino says.
Several organizations still depend on legacy solutions or spreadsheets to manage their ESG data. This proposal calls for robust, real-time data management and reporting. Most of all, it calls for increased transparency and auditability. Organizations need a single source of truth for their climate data across organizational silos now more than ever.
5. Remember Carbon is Just the Beginning
It is easy to default to carbon accounting when it comes to climate disclosures, but there are more facets to consider — for instance, water disclosures. “Companies will need to embrace robust systems and processes when it comes to tracking, accounting, reporting, and moving the needle on all things ESG,” Meehan says.
The SEC’s proposal is just the tip of the iceberg when it comes to ESG policy in the U.S. Companies will need to prepare for an increasing number of global ESG mandates and policies in the coming months and years.
Future-proof your ESG reporting with Equilibrium, a next-gen, end-to-end ESG solution that goes beyond carbon accounting to help companies move past static spreadsheets and legacy solutions. Equilibrium enabled companies to measure, benchmark, and report on ESG success across areas including decarbonization, DEI commitments, supply chain labor practices, and regulations with ease. Equilibrium integrates ESG data, reporting, disclosure, and simulations and enables you to gain a 360º view of ESG performance by combining internal and supply chain data with external data on your ESG perception.
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