The Enhancement and Standardization of Climate-Related Disclosures for Investors

The Enhancement and Standardization of Climate-Related Disclosures for Investors

The U.S. is implementing climate-related disclosure requirements through the SEC's new rules. The SEC's final rule, titled "The Enhancement and Standardization of Climate-Related Disclosures for Investors," mandates that public companies disclose specific climate-related information in their registration statements and annual reports. Although these requirements will be implemented in stages, with different requirements coming into effect at different times based on the type of filer, public companies are advised to start considering them now.

Key elements of these requirements include:

Disclosure of Climate-Related Risks: Companies must provide qualitative disclosures about material climate-related risks, their governance, risk management processes, and the potential impacts on their strategy, business model, and outlook. This includes both physical risks (e.g., extreme weather events) and transition risks (e.g., regulatory changes).

Greenhouse Gas Emissions: Large accelerated and accelerated filers are required to disclose Scope 1 (direct emissions) and Scope 2 (indirect emissions from energy usage) greenhouse gas (GHG) emissions if they are material. Smaller reporting companies (SRCs) and emerging growth companies (EGCs) are exempt from these emissions disclosures. The rules do not mandate Scope 3 emissions (indirect emissions in a company’s value chain) disclosures, which were initially proposed but later excluded.

Financial Statement Disclosures: Companies must disclose certain climate-related impacts in the footnotes of their audited financial statements, such as the costs and losses associated with severe weather events, if these impacts exceed specified thresholds.

Compliance Timeline: The implementation timeline for these disclosures varies based on the type of filer. For instance, large accelerated filers will need to start disclosing most of this information for fiscal years beginning in 2025, with additional requirements for GHG emissions coming into effect later.

These new rules are designed to provide investors with more consistent, comparable, and reliable information about climate-related risks and impacts, aligning U.S. disclosure practices more closely with international standards such as those set by IFRS.

How to Prepare

To prepare for the SEC’s climate-related disclosure requirements, companies can take several proactive steps to ensure compliance is manageable and efficient. Here’s a detailed plan:

1. Understand the Requirements: Familiarize yourself with the SEC’s final rule and its specific requirements, including the scope of disclosures on climate-related risks, GHG emissions, and financial statement impacts. Determine whether your company is classified as a large accelerated filer, accelerated filer, or falls under other categories such as EGCs or SRCs.
2. Establish a Cross-Functional Team: Create a team comprising members from legal, finance, sustainability, and operations to oversee the preparation process. Assign specific tasks to team members, such as gathering data, performing risk assessments, and drafting disclosures.
3. Data Collection and Management: Identify and compile data related to GHG emissions, climate-related risks, financial impacts, and transition plans. Utilize software or systems to track and manage GHG emissions and climate-related financial impacts. Ensure these systems can support the detailed reporting required.
4. Conduct a Gap Analysis: Compare existing disclosures against the new requirements to identify gaps. Check the availability and accuracy of data needed for disclosures, such as emission inventories, financial impacts, and risk assessments.
5. Develop and Test Processes: Ensure that internal controls over financial reporting (ICFR) and disclosure controls and procedures (DCPs) are robust and can support climate-related disclosures. Conduct climate scenario analysis to assess the resilience of your business strategy and use this analysis to inform your disclosures.
6. Enhance Governance and Training: Educate the board of directors and senior management on the new requirements, their implications, and their roles in oversight. Establish or refine governance structures to ensure that climate-related risks are effectively managed and monitored.
7. Draft and Review Disclosures: Start drafting the required disclosures, including those on risks, governance, strategy, GHG emissions, and financial impacts. Engage external consultants, such as Solaris, to review your drafts and provide feedback on compliance and completeness.
8. Engage Stakeholders: Keep investors informed about your progress and plans for compliance with the new requirements. Work with suppliers and other partners to gather necessary emissions data and support your disclosures.
9. Prepare for Assurance Requirements: Understand the phase-in requirements for GHG emissions assurance and prepare to obtain the necessary levels of assurance (limited or reasonable).
10. Stay Informed and Adapt: Keep abreast of any changes or additional guidance from the SEC or other regulatory bodies. Be prepared to update your disclosures and strategies based on new information, feedback, or regulatory developments.

Starting these preparations early will help ensure that your company can meet the SEC’s climate-related disclosure requirements effectively and with confidence.

How Solaris Can Help

Hiring Solaris to assist with climate-related disclosures can offer several significant benefits:

1. Expertise and Knowledge: Solaris brings specialized knowledge and experience in environmental, social, and governance (ESG) reporting and regulatory compliance. We remain current with evolving regulations and best practices, ensuring that companies meet the latest requirements.
2. Efficiency and Time-Saving: Solaris can help streamline the data collection, analysis, and reporting processes, reducing the time and effort required from internal teams. We can manage the entire disclosure project, ensuring that deadlines are met and that the project stays on track, allowing internal teams to focus on core business activities.
3. Risk Mitigation: Solaris can help identify potential compliance risks and gaps in current reporting practices, providing strategies to address these issues and avoid regulatory penalties.
4. Strategic Insights and Competitive Advantage: Solaris can provide insights into how climate-related risks and opportunities can impact the company’s long-term strategy and operations, helping to align sustainability goals with business objectives.
5. Training and Capacity Building: Solaris can train internal staff on best practices for climate-related disclosures, building the company’s in-house expertise for future reporting needs. By working with Solaris, companies can establish ongoing processes and systems for continuous improvement in their ESG reporting and sustainability practices.

These benefits highlight the value of leveraging external expertise to navigate the complexities of climate-related disclosures, ensuring compliance and enhancing the company’s sustainability performance.

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