In this lesson, explore the mechanics of the SEC Climate Disclosure Proposal, focusing on the three required disclosure components: narrative disclosures about climate-related financial risks, assurance of Scope 1 and 2 emissions, and a note to consolidated financial statements.
It’s time to delve into the mechanics of the SEC Climate Disclosure Proposal – specifically, the new climate-related disclosures your company will now need to include in future annual reports on Form 10-K or 20-F and in registration statements if the rule is adopted as proposed. We mentioned earlier that the Rule itself is relatively straightforward when distilled to its essential parts, so here’s an overview.
The Rule requires three distinct components of disclosure to be incorporated into your SEC filings:
First, the SEC-required narrative disclosures will collectively convey how your company is set up to measure, monitor and mitigate the financial risks to the company posed by climate change. These disclosure requirements are rooted in and organized by the four disclosure pillars of the TCFD structure, which has been broadly adopted around the world. We’ll go into each of these pillars in this module.
It may be helpful to note up front that disclosure of your emissions footprint itself falls here under the ‘Metrics & Targets’ pillar of the TCFD structure.
Second, the Rule, as proposed, will require independent assurance of your emissions disclosure. Per the SEC, this requirement exists in order to “provide investors with an additional degree of reliability regarding not only the figures that are disclosed, but also the key assumptions, methodologies, and data sources the registrant used to arrive at those figures.”
The Proposal provides that this assurance provision:
Last, the Proposal would require disclosure in a note to the financial statements of the quantitative climate-related financial impact on any line item in a company’s consolidated financial statements, unless the impact is less than 1% of the total line item for the relevant fiscal year. This includes impacts from physical risk, transition risk, and mitigation activities related to both types of risk.
The remainder of this module will focus on understanding the required narrative disclosures.
There is uncertainty as to which portions of the rule will be adopted as proposed. However, we believe it highly advisable to begin to prepare, not only to be ready for disclosure requirements as they emerge, but also because market and regulatory forces, as well as sound financial management, include an assessment of your climate risks.
Software will play an important role in the disclosure process. Software can help create a single source of truth for your carbon accounting which will facilitate disclosure in accordance with emerging regulations in the US and abroad, and foster sound risk management.
Many companies are using the current period to onboard these solutions while the SEC works on the final regulations.
All three of these disclosure components will need to be incorporated into your 10-K filings (or 20-F for Foreign Private Issuers) and are currently set to phase-in based on company size between FY24 and FY28, according to the schedule below.
*As the Rule was not finalized in 2022, it is reasonable to assume that the timeline will push ahead by one year if the Rule is finalized in 2023. This timeline is subject to change pending timing and the SEC’s final announcement.
As you begin to incorporate all three of these disclosure components, here are a few overarching themes to keep in mind:
Now we’ll move into the four pillars of narrative disclosures: Governance, Strategy, Risk Management, and Metrics & Targets.