Chapter 3: The Mechanics of the SEC Rule

[The Mechanics of the SEC Rule] Narrative Disclosures & Your GHG Footprint

September 5, 2023
September 5, 2023
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[The Mechanics of the SEC Rule] Narrative Disclosures & Your GHG Footprint

Lesson Overview

In this lesson, explore the key components of climate-related disclosures required by the SEC, covering Governance, Strategy, Risk Management, and Metrics & Targets. Learn how each pillar provides insight into the oversight structure, climate risks, strategy alignment, risk assessment process, transition plans, emissions metrics, and progress against targets, while understanding the disclosure's voluntary aspects and the role of carbon accounting software.

four pillars of SEC climate disclosure


governance SEC climate rule


Governance disclosures seek to provide investors with details about the structure, process, and even key players involved in the ongoing oversight of climate-related risk, both at the board and management level. This includes topics such as, but not limited to:

  • Description of oversight activities and committees regarding climate risk, and the frequency and channel of getting identified risks to the board
  • Identification of board members with expertise in managing climate risk
  • Description of board processes for assessing climate risk and consideration of those risks in strategy decisions
  • Similar identification of managers with expertise in managing climate risk
  • For full text of Governance disclosures, see Item 1501 of the SEC Proposed Rule
kristina wyatt expert insights
  • Governance is a foundational component of the narrative disclosures. It would not be surprising if future rules related to sustainability topics beyond climate will ask for similar disclosures related to the company’s governance structure with regard to those topics.
  • Note the proposal does not require you to hire or otherwise engage individuals with climate expertise to include on your board or in management ranks. Rather, the proposal would only require companies to inform investors if they do have such expertise in their management ranks and on their boards. If they do have such expertise, the proposal would require companies to identify such individuals and their backgrounds.
  • Similarly, the proposal would not require you to form climate-focused committees at any level – only to disclose details about those committees if they exist.

governance next steps


strategy sec climate rule

The Strategy disclosures (referred to as ‘Strategy, Business Model and Outlook’ in the Proposal) seek to provide a deeper understanding of the climate-related risks your company faces and their impacts. This includes details about the financial impacts of both physical and transition risks, and how you take those impacts into account in your business strategy and financial planning.

If the rule is adopted as proposed, you’ll be required to disclose details about:

  • Any climate-related risks reasonably likely to have a material impact on your business (in the short, medium, and/or long-term), including:
    • Asset exposure to physical climate risks (e.g. acute and chronic weather patterns)
    • Market and jurisdictional exposure to transition risks (e.g. changing stakeholder demand or regulations)
  • How financial impacts from climate-related risks are considered in your business strategy, financial planning, and capital allocation
  • Reliance on mitigation tools such as offsets and internal carbon prices
  • Resilience of your business strategy in light of potential future changes in climate-related risks
  • For full text of Strategy disclosures, see Item 1502 of the SEC Proposed Rule

kristina wyatt insights
  • Preparing these disclosures will require forward-looking assumptions and statements; remember to identify those forward-looking statements and to apply the cautionary statement required to invoke the safe harbor under the Private Securities Litigation Reform Act.
  • Use discretion when citing quantitative vs. qualitative financial impacts - your ability to provide high-fidelity quantitative disclosures is likely to evolve over time.
  • Remember, while you are required to disclose climate risks and their impacts, the rule permits you to also disclose climate-related opportunities, insofar as they are relevant to your strategy, business model, and outlook.
strategy next steps


risk management sec climate rule

While the Strategy disclosures focus on the climate risks and their impacts on your strategy, Risk Management disclosures seek to provide investors with detail about the process by which climate-related risks are identified, how they are assessed and prioritized relative to other risks, and how a determination is made to mitigate, accept or adapt to any such risk.

There is one additional disclosure in this pillar specific to a transition plan. That is, if your company has adopted a formal plan to mitigate or adapt to any identified physical or transition risks, you will disclose a description of that plan here, including the relevant metrics and targets used to identify and manage any physical and transition risks. 

kristina wyatt expert insights
  • While Risk Management disclosures are largely focused on process, you’re still required to provide some detail on your criteria when assessing risks.  Examples can be helpful to illuminate your process.
  • Once again, you are not limited to discussing climate-related risks only; you’re welcome to highlight any identified climate-related opportunities, and plans to achieve those as well. While risk disclosure would be required under the proposal, disclosure of opportunities would be discretionary. 

    • Regarding transition plans:
      • If you don’t have a transition plan, do not panic.  There is no requirement to create one – only to disclose it if you do.  You may find you will have more concrete plans to disclose over time.
      • Keep in mind that many companies are being asked by non-regulatory stakeholders (e.g. investors, customers) to describe their transition plans. Further, many companies will be required by the EU and other jurisdictions to develop transition plans. As a result, even if you don’t yet have a transition plan, it is a good time to give some thought to developing one.
      • In disclosing your transition plan, note that you will need to update your disclosure in future years to describe actions taken during the year to achieve goals set forth in the plan.
risk management next steps


metrics and targets sec climate rule

Naturally, the most notable disclosure in Metrics & Targets is your company’s GHG emissions footprint itself. If the rule is adopted as proposed, you’ll be required to disclose:

  • Total Scope 1 and 2 GHG emissions of each constituent gas, and in aggregate (as carbon-equivalent)
  • Total Scope 3 emissions if you are not an SRC AND at least one of the following is true:
    • your scope 3 emissions are deemed material; or
    • you have set reduction targets that include scope 3 emissions
  • For all scopes disclosed, your methodology and inputs for calculating such emissions

Beyond your footprint, you must disclose any other climate-related metrics you track, any targets that you have set, and provide documentation of progress you’ve made against those targets.

  • For full text of Metrics & Targets disclosures, see Items 1504 and 1506 of the SEC Proposed Rule; Item 1505 details Attestation requirements as proposed.

kristina wyatt expert insights
  • The GHG Protocol provides the most commonly used global standard for emissions calculations. It provides a common language for translating activities in which a company engages into their emissions impact. It is as if we have gone from the barter system to a common currency that enables comparison across companies and activities. 
  • The GHG Protocol enables companies to translate their activities - such as the volume of raw materials produced, airline miles flown, or electricity purchased - into CO2 equivalents. The translation mechanism can be automated, as described in the next module.
  • The proposal does not require you to set emissions targets or to perform against them. The proposal would only require disclosure of, and progress against, targets that have been voluntarily set.
  • Remember that for Scope 3 reporting (if required), the safe harbor will apply to limit liability when relying on external data, as long as good faith holds.
  • Carbon accounting software can help provide a single source of truth for both internal tracking and regulatory disclosures.
metrics and targets next steps

A shareable infographic of the SEC Climate Rule can be found here.

In our final module, we’ll close out with a check-in on your company’s SEC disclosure readiness, and introduce some tools that can help you along the way.

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