SEC Climate Disclosure Proposal Signals a Broader Reporting Shift

Climate-related disclosure relies on reliable data, analysis, and clear reporting processes.

The SEC’s proposed requirements are one part of a growing global effort to bring climate-related risks and opportunities into mainstream business and financial reporting.

Climate regulation is coming—whether companies are ready for it or not.

In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed rules on climate-related disclosures that would require public companies to include specified climate-related information in registration statements and periodic financial filings. If adopted, the proposal would require disclosures about climate-related risks that are reasonably likely to have a material effect on a company’s business, results of operations, or financial condition, along with certain climate-related financial-statement metrics and greenhouse gas emissions information.

The SEC proposal reflects a growing demand for “consistent, comparable, and decision-useful information” about climate-related financial risks. It would require companies to address governance, risk-management processes, strategy, emissions, and the financial effects of climate-related events and transition activities.

The proposal draws on the widely used recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), but it could take climate reporting further into the realm of mainstream financial disclosure. As South Pole’s overview of the SEC proposal explains, companies may need to assess and communicate the potential financial effects of physical and transition risks—not simply describe their climate commitments or sustainability goals.

From reporting framework to business process

For companies, the practical challenge is not limited to preparing a disclosure document. It is developing the data, governance, and analytical processes needed to understand climate-related risks and opportunities in the first place.

The TCFD framework provides a useful starting point because it connects climate considerations to four core elements of business decision-making: governance, strategy, risk management, and metrics and targets. It also distinguishes between physical risks, such as extreme weather and changing environmental conditions, and transition risks associated with policy, technology, markets, and changing consumer expectations.

The SEC proposal would add a more prescriptive financial-reporting dimension to this work. Companies may need to identify where climate-related events and transition activities could affect revenue, operating costs, asset values, insurance, capital expenditures, cash flows, financial assumptions, and long-term business strategy.

A practical first step is to identify available data, clarify internal ownership, and assess where climate-risk analysis can be incorporated into existing risk-management and planning processes. This work requires coordination among finance, sustainability, operations, risk-management, and executive teams.

A global climate disclosure landscape

The SEC is not the only organization moving forward with climate and sustainability disclosure standards.

As the Wall Street Journal reported, the International Sustainability Standards Board plans to finalize proposed climate and general sustainability disclosure standards in 2023. The ISSB aims to establish a global baseline of investor-focused sustainability information, while allowing individual jurisdictions to determine whether and how to adopt the standards. Companies are also watching how the ISSB standards may interact with the SEC proposal and other national and regional reporting requirements.

Meanwhile, the European Union is advancing broader sustainability reporting standards. As Bloomberg Tax reported, the proposed European requirements would extend beyond climate-related financial risk to cover a wider set of environmental, social, and governance issues. The reporting burden could be significant, requiring companies to collect and evaluate hundreds of potential data points.

These approaches are not identical. The SEC proposal and the ISSB’s proposed standards focus principally on information relevant to investors and enterprise value, while the EU’s emerging standards take a broader view of companies’ environmental and social impacts. For multinational companies, the result could be multiple reporting requirements with distinct materiality tests, disclosure scopes, and implementation timelines.

Preparing for overlap

Companies do not need to wait for every rule to be finalized before preparing. A practical first step is to understand what climate-related information is already available, where the gaps are, and how existing risk-management and financial-planning processes could support more consistent disclosure.

Useful questions include:

• Which physical and transition risks could materially affect the organization’s operations, assets, supply chain, customers, or financial performance?

• What data is available to assess greenhouse gas emissions and climate-related financial impacts?

• Who is responsible for identifying, evaluating, and communicating climate-related risks?

• How do climate considerations inform governance, strategic planning, capital investment, and enterprise risk management?

• Which disclosure frameworks are most relevant to the organization’s investors, markets, customers, and operations?

So, it is not just the SEC that is moving forward with climate and sustainability reporting requirements. Understanding the overlaps—and the important differences—among emerging frameworks can help companies focus their efforts, reduce duplication, and prepare for changing expectations.

Greene Economics can help you make sense of the regulatory landscape and evaluate how evolving climate-disclosure requirements may affect your operations.