The transition from voluntary to regulated climate reporting is here, and it's affecting how companies manage their greenhouse gas (GHG) data. Climate data could soon occupy a place of prominence in your 10-K filings, side-by-side with your financial data. As the SEC works to finalize its climate disclosure rule, companies must gear up to provide investor-grade carbon emissions data — data that is often more complex to manage than traditional financial metrics. Challenges such as disparate data sources, multiple calculation methods, and ensuring consistency across reports all point to the urgent need for robust internal controls and systems.
Understanding the SEC Climate Disclosure Rule
The SEC climate disclosure rule is a significant step in addressing climate-related risks and providing transparency to investors. The rule comprises several key components:
- Greenhouse Gas Emissions: Companies would be required to disclose their greenhouse gas emissions, specifically scopes 1 and 2. Larger companies would also need to disclose scope 3 emissions if they are material or if they have established scope 3 emission reduction goals.
- Narrative Disclosure: A crucial aspect of the rule is the requirement that companies provide narrative disclosures aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) framework. This disclosure should encompass details about the company's governance structure for managing climate-related risks, how its strategy aligns with climate risks and opportunities, how it identifies and handles such risks, and the metrics and targets used for assessing and managing climate-related risks, including its carbon footprint.
- Financial Statement Note: Companies would be required to include a note to their financial statements detailing the impacts of climate change if the impact is 1% or more of a specific financial statement line item.
The goal of the SEC climate rule is to provide investors with information about reporting companies’ financial risks resulting from climate change. The SEC's approach aims to provide a standardized framework for reporting, responding to the industry's call for clarity amid the current landscape of varied ESG disclosure standards. This move towards harmonization reflects the SEC's commitment to addressing investor demands for consistent, comparable, and reliable information on climate and broader ESG issues.
What Features to Look for in SEC Emissions Reporting Software
In this evolving context, companies can't afford to be lax about the tools they use for SEC reporting. To build SEC disclosures, teams need three distinct capabilities. First and foremost, they need reliable carbon metric accounting capabilities. They also need a dependable system for managing carbon data — one that ensures teams are all working with the same information, and that it is traceable. Finally, they need a system for managing the disclosures themselves and integrating data into SEC filings.
Here's a detailed look at features that are no longer 'nice-to-haves' but 'must-haves':
- Traceability Back to Source Data: In an environment that increasingly values transparency, you must be able to show your work. It's critical that your disclosures can be traced back to activity-level emissions calculations and underlying data. This traceability not only supports compliance but also equips you to defend your disclosures against scrutiny.
- Transparent GHG Calculations: Companies will need to disclose how they arrived at their final emissions numbers. This includes explanations as to why certain activity data, calculation methods, and emissions factors were used. Transparency into what decisions were made throughout your accounting process is key, as is ensuring your accounting process is aligned with the Greenhouse Gas Protocol (GHGP). The best software solutions will organize data in a way that ensures this information is transparent.
- Single Source of Truth: Your carbon footprint comes from data across your organization, and data silos are the enemy of consistency. With disparate systems and data owners, reconciling data for accurate reporting becomes a herculean task. A unified platform that acts as a 'single source of truth' is essential for managing your emissions data systematically and credibly.
- Integration with Existing Disclosures: Given that climate data will be a part of your 10-K filings, it's crucial that your SEC reporting software can integrate this new data seamlessly with your existing regulated disclosures. This will not only streamline the process but also ensure that your climate data is accurate and complete, as it stands shoulder-to-shoulder with your financial metrics.
- Reasonable Controls for Carbon Metrics: As emissions data is added to the 10-K filing, organizations will need to ensure the information reported is accurate and can hold up in the face of regulatory scrutiny.
The SEC’s regulations necessitate a renewed focus on the capabilities required for accurate and controlled climate disclosure; something software can greatly accelerate. Features like data traceability, transparent calculations, and integrated data, accounting, and disclosure solutions aren't just bells and whistles—they're the fundamental infrastructure to develop credible, compliant climate disclosures.
The 5 Best SEC Climate Disclosure Software of 2024
*Based on Persefoni’s assessment of the carbon technology reporting landscape today.
1. Persefoni + Workiva
Built for SEC Climate Disclosure, Persefoni + Workiva sets the gold standard for regulated climate reporting with a comprehensive suite of features tailored to the SEC’s specific requirements. Persefoni brings best-in-breed carbon accounting and integrates those metrics with Workiva’s best-in-breed climate disclosure tool. Having stand-alone systems for accounting and reporting allows customers to scale these specific capabilities as required. The multi-vendor solution focuses on automating high-risk processes; it automates the transfer of data from the accounting tool to the reporting tool. This minimizes errors and streamlines workflow.
What sets this tool apart is its commitment to end-to-end transparency and traceability from both systems. Customers can also link their Persefoni carbon metrics to their SEC reporting in Workiva. Beyond enabling compliance, the Persefoni + Workiva tool elevates the quality of your climate disclosures, ensuring they are consistent, investor-grade, and that they speak the language that resonates with stakeholders who are increasingly climate-conscious.
Schedule a free demo and learn more.
2. Salesforce Net Zero Cloud
Salesforce Net Zero Cloud offers a unique blend of adaptability and robustness. As a product of one of the tech industry’s titans, it brings to the table considerable expertise in data management and analytics. While not exclusively built for climate disclosures, its versatile suite of features can be customized to meet SEC requirements, making it a flexible option for companies looking to keep all their data solutions under one umbrella.
3. Microsoft Cloud for Sustainability
Microsoft Cloud for Sustainability is another generalist tool that has made significant strides in catering to the burgeoning demand for climate reporting. Backed by Microsoft's vast ecosystem of data solutions, this platform offers a scalable and integrated approach to managing both financial and sustainability metrics. It represents a good fit for companies already invested in Microsoft's suite of office and data management tools.
4. Envizi
Envizi focuses on holistic sustainability management, offering a range of functionalities that extend beyond climate reporting. Its strength lies in its modular approach, allowing businesses to add on functionalities as they grow and their sustainability reporting needs evolve. Though it may require some customization to fully meet SEC climate disclosure requirements, its flexibility and scalability make it a strong contender in the space.
5. Sphera
Sphera differentiates itself by specializing in Environmental, Social, and Governance (ESG) performance metrics, which include but are not limited to climate disclosures. Its robust ESG data management and high-quality reporting tools offer companies a holistic approach to sustainability. This makes it particularly valuable for organizations that are looking to go beyond mere compliance and make ESG a core part of their business strategy.
Each of these platforms offers a unique set of capabilities, but all aim to address increasing demands for robust climate disclosure. Choosing the right one will ultimately depend on your specific needs, the complexity of your operations, and your long-term sustainability goals.
FAQs
Will the SEC Climate Rule be Mandatory?
Yes, the U.S. Securities and Exchange Commission (SEC) is expected to make the Climate Rule mandatory for affected entities once it is finalized. This means that failing to comply with the rule could lead to penalties, sanctions, or other legal actions as enforced by the SEC. The agency’s objective is to bring transparency and consistency to the reporting of climate-related risks and opportunities, thereby enabling investors to make better-informed decisions.
Who Would the SEC Climate Rule Apply To?
The SEC Climate Rule targets publicly traded companies that are required to report to the SEC. This includes US-based public companies as well as Foreign Private Issuers — certain companies that are incorporated outside the United States and have less than 50% of voting shares owned of record by US residents (or meet certain other criteria as defined in the SEC rules).
What is the timeline for implementation?
Narrative TCFD-based disclosures and financial impact information will be required first, and then GHG metrics will be phased in after that. TCFD-based climate risk disclosure and financial statement effects will be required starting in 2026 for LAFs, 2027 for AFs and 2028 for smaller reporting companies and emerging growth companies. Disclosure of material Scope 1 and 2 emissions will be required beginning in 2027 for LAFs and 2029 for AFs.
How does the final rule differ from the proposal?
- TCFD-based disclosures remain largely the same, however, they are “less prescriptive”, subject to materiality, and the provision regarding disclosure of board member’s climate expertise has been removed
- Scope 1 and 2 disclosures only apply to LAFs and AFs are subject to a materiality filter (NAFs, SRCs and EGCs are exempt)
- Scope 3 was omitted from the final rule
- The proposal provided for assurance of Scopes 1 and 2 emissions for Accelerated Filers and Large Accelerated Filers The assurance provision remains for Accelerated Filers and Large Accelerated Filers where they disclose Scopes 1 and 2 emissions (i.e., where they have determined such emissions to be material). Both AFs and LAFs will be required to obtain limited assurance within 3 years of initially disclosing their GHG emissions. LAFs will be required to obtain reasonable assurance within 7 years of their initial disclosure of Scopes 1 and 2 GHG emissions
- The proposal provided for inclusion of a note to the financial statements addressing climate impacts on financial statement line items. This provision was amended in the final rule to only require a note to the financial statements related to severe weather events or the costs associated with the purchase of carbon offsets or RECs to meet the company’s climate goals.
What Should My Company Do Now to Prepare for the Rule?
Preparing for the SEC Climate Rule involves more than just complying with a new regulation; it represents an opportunity for companies to integrate climate risk management into their overall business strategy. Businesses need to focus on building capacity to collect, calculate, and report on their GHG emissions data in a way that sets them up for audited disclosure. As we move from a voluntary reporting landscape to a regulated one, emissions data will be treated in a similar manner to financial data, including increased financial and legal internal review as well as third-party assurance. Companies will need to be confident in their reporting and be able to show their work.
By ensuring emissions data is traceable, transparent, and reliable, your company will not only be better prepared to meet the upcoming SEC Climate Rule — it will be able to manage carbon more efficiently and effectively.
Do more with SEC climate disclosure software
As we transition to a more regulated environment, companies should take steps to upgrade or implement robust SEC disclosure software solutions. With the SEC's proposal expected to be enforced in the near future, now is the time to ensure your climate data can meet investor and regulatory demands.
Ready to start your journey towards robust, compliant, and investor-grade climate reporting?
Learn more about how Persefoni can help you prepare for SEC climate disclosure.
