What to Expect From the SEC’s Climate Disclosure Rule

The U.S. Securities and Exchange Commission (SEC) is expected to release its long-awaited climate disclosure rule this fall, and businesses are preparing for change. The intent is to create a framework for companies to make climate-related disclosures in a way that is standardized and allows for comparison. 

“I think it is helpful to frame the SEC proposal not as a climate proposal, but rather as a proposal to enhance and standardize climate-related financial disclosures,” said Emily Pierce, chief global policy officer at the carbon accounting firm Persefoni and a former SEC lawyer involved in developing the proposed rule. 

What's different about the SEC climate disclosure rule?

The SEC’s forthcoming climate disclosure rule has been over a decade in the making. In 2010, SEC staff issued guidance stating that climate change could impact business operations as it carries material risks that affect financial performance, Pierce said. And anything that could impact financial performance should be communicated to investors.

Five years later, the investor demand for information was growing steadily. “By 2015, there was a collective concern about investor demand for sustainability information,” she said. “Investors were not getting the information they were asking for, and the marketplace was inefficient.” 

The Task Force on Climate-Related Financial Disclosures (TCFD) rose up to meet that demand shortly after the Paris climate agreement was adopted in 2015. “TCFD developed helpful disclosure frameworks for governance, strategy and risk management processes," as well as metrics and targets to measure a company's greenhouse gas footprint, Pierce said.

“TCFD is a market norm, but it wasn’t always complete and comprehensive, and it didn’t allow for comparison," she explained. "The SEC was inspired by the TCFD framework that investors and companies have found useful.”

What do we know about the new rule?  

The SEC's proposed rule covers how companies communicate their climate-related risks. Companies will be required to disclose material risks, including physical risks and transition risks, related to climate change. These may include sea-level rise, more frequent extreme weather events and wildfires, or changes in government regulation and consumer demand. 

Importantly, the rule will not initially apply to all companies, but will be phased in over time. “Phasing is an important part of the proposal, because it’s our way of managing implementation,” Pierce said. “We have to strike the balance between investor protection and creating a rule that is feasible for companies to implement. I think the most likely scenario is that, if it is finalized this year, companies will need to gather data next year for fiscal year 2025.”

The rule will also hold companies’ feet to the fire for claims made about net-zero and emissions reductions. If a company has a public target related to cutting emissions, the SEC will require additional disclosures and obligations related to that target. 

“A lot of companies calculate their greenhouse gas emissions today,” Pierce said. “But they do it in a way that does not have as much control over their data, calculations, and outputs compared to what they would have in their financial calculation reporting. When you’re making information investor-grade and compliance-ready, you should bring lessons you have learned from the financial space into the carbon accounting space.” 

Emissions created by a company's direct operations — Scope 1 emissions — and emissions associated with the company’s purchase of energy — Scope 2 emissions — will need to be externally assured, Pierce said. But smaller companies will not need to disclose value chain emissions from assets the company does not own — Scope 3 emissions — unless they set an emissions target for Scope 3, she predicted. 

What's next?

The climate disclosure rule should not contain any surprises compared to the SEC's current proposal, Pierce said. But the timing of release will be later than anticipated, due to the unprecedented number of public comments and feedback. Many analysts agree it will be released this fall.

“To be ready for climate disclosure, companies need to bring discipline and processes to their broader corporate thinking about governance, strategy and risk management,” Pierce said. “Additional discipline and processes will help them communicate about what they’re doing.” 

A lot of companies are already thinking about these issues, calculating their emissions and gathering the necessary information, Pierce said. “There are market rewards to decarbonizing, and they see the value in that. We will see an increase in the market rewarding sustainable behavior, whether it is in access to capital, customer preference, more business-to-business relationships or consumer demand."

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