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The United States SEC Climate Disclosure Rules

The recent U.S Security and Exchange Commission's (SEC) proposed rule changes on climate-related disclosures could be the first step on the road to a greener US economy.

Michael Darnaud

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A short timeline of US Sustainable Finance

In January 2010, the US Environmental Protection Agency (EPA) began to require that large emitters of greenhouse gases report data about their emissions, which prompted the SEC to issue related guidance on this front.

Since then, more and more regulations and guidance have been released. For example, in August 2019, SEC Commissioners signaled the value of establishing detailed climate risk disclosures to investors. Shortly following this, in May 2020, the Investor-as-Owner Subcommittee of the SEC advisory committee recommended that ESG disclosures should be mandated by the SEC.

Then, on the 4th of March 2021, in a momentous shift towards accelerating the shift to a greener US economy, the SEC announced the introduction of a task force in the Division of Enforcement, focused specifically on tackling climate and ESG issues. The task force has already shown its teeth by issuing fines of up to $1.5 million to US financial institutions for ‘misstatements and omissions’ on their ESG considerations.

On March 21st, 2022, the Securities and Exchange Commission (SEC) released proposed rule changes that would require companies to include climate-related disclosures in their periodic financial reports. These proposed amendments will effectively clamp down on unfounded claims by funds on their ESG credentials and enforce more standardisation of such disclosures. 

  • The first is on fund names. It establishes that for a fund to have a sustainability-related title,  80% of the value of its assets in those investments must be in line with its names and investment policies.
  • The second is on investment practices which would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus.

All relevant parties had until mid-June 2022 to submit comments and proposals related to the proposed rule changes, which drew in over 10,000 responses. The final ruling is expected to be issued early 2023, rather than at the end of 2022, as it had been previously expected.

The proposed rules were issued in parallel to a proposal by the International Sustainability Standards Board (ISSB) for 2 new rules on general sustainability disclosure requirements, and climate-related disclosure requirements respectively. These proposed rules drew in more than 1,300 comments, and have left a number of corporates and financial market participants wondering about the interoperability of the two sets of standards.

A breakdown of the Proposed Rules

The official proposed rules document states that companies will need to disclose information not only about their governance of climate-related risks and risk management processes but also about the number of climate-related risks they’ve experienced, which have had or are likely to have a material impact on their business. It also requires them to disclose how climate-related risks have affected or are likely to affect their overall strategy, business model, and forecast.

Furthermore, they will need to report the impact of climate-related events (severe weather events and other natural conditions) and transition activities on their consolidated financial statements, as well as on their financial estimates and assumptions.

According to SEC Chair, Gary Gensler, this “proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. This proposal thus is driven by the needs of investors and issuers." 

The rule applies to all US 10-K form filers and foreign private issues that file 20-F forms with the SEC. Large companies would have to file their report as of the fiscal year 2023 (i.e. filing year 2024), while smaller companies would have a one-year grace period until the fiscal year 2024.

Three Categories of Disclosure

The SEC is proposing three main categories of disclosure:

 

Material climate impacts and strategic implications

  1. Companies would disclose risks from physical climate-related threats (e.g., fires or floods) by location and by the share of assets exposed to this.
  2. Companies would disclose the transition risks (regulatory, technological, market, or reputational) over the short, medium, and long term.
  3. Companies would disclose strategic, financial, and operational impacts and their governance and risk management processes.

 

GHG emissions (in absolute terms and in terms of intensity per unit of revenue and product)

  1. Companies would report on (audited) Scope 1 and 2 emissions, and on Scope 3 emissions if they are material or a target has been set.
  2. Companies would report on how they came to these estimates and what the GHGs are covered.

 

Targets or transition plans

  1. Companies would need to report on existing targets for emission reductions, energy use, nature conservation, or revenues from low-carbon products.
  2. Transition plans should achieve those targets and include information on the use of offsets/credits/internal carbon prices etc.

How does this compare with the EU Regulations?

The climate disclosure standards in the UK, EU, and IFRS’s draft of ISSB share both a number of similarities and a number of differences, which can be highlighted below:

Similarities:

  • Across the board, each set of standards puts a strong focus on governance.
  • All have the TCFD (Task Force on Climate-related Financial Disclosures), as a model, with its well-defined principles around governance, strategy, risk management, targets, and metrics.

Differences:

  • IFRS (International Financial Reporting Standards) are broader than the SEC standards: IFRS requires Scope 1, 2, and 3 emissions (whether material or not). IFRS requires forward-looking analysis for decarbonization.
  • The SEC is narrower in scope, while the prescription is greater due to the United States using Generally Accepted Accounting Principles (GAAP) rather than IFRS.

Overall, the SEC disclosures focus on three main categories, namely: material climate impacts and strategic implications, GHG emissions, and targets and transition plans. While some KPIs within these categories are likely to be narrower, there are key overlaps with the EU Taxonomy requirements and ESG assessment.

These overlaps are already supported by the Greenomy platform. That being said, as the SEC rules evolve, Greenomy's objective is to incorporate the new requirements into its solution, to enable an interoperable and all-encompassing reporting platform.

Greenomy

Greenomy helps corporates, credit institutions, and asset managers measure, disclose and improve their sustainability levels according to new EU sustainable finance standards (EU Taxonomy, SFDR, and NFRD/CSRD) and global taxonomies. We are a one-stop sustainability reporting software, generating substantial time and cost savings. 

For more information about our Global Outreach services, reach out to our North America representative at: Michael.Darnaud@greenomy.io or book your demo here to trial our solution today.

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