By: Daina Goldfinger, Communications Lead at Manifest Climate 

The U.S. Securities and Exchange Commission (SEC) is expected to drop its finalized climate disclosure rule any day now. Once released, the rule will require around 7,000 companies listed on U.S. exchanges to report climate information that’s material to their businesses in their periodic financial filings.

The SEC’s proposed version of the rule, issued in March 2022, runs to 490 pages and outlines how companies should report their climate-related risks, opportunities, governance, strategies, risk management processes, and metrics and targets. Its stipulations cleave closely to the 11 recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), the world’s premier climate reporting framework that’s supported by over 4,000 entities worldwide.

The finalized regulation is expected to be a game changer when it comes to bringing transparency on firms’ climate risks and opportunities to U.S. capital markets. It’s a culmination of years of campaigning by investors, climate activists, and policymakers that are eager to understand how climate change is affecting businesses’ bottom lines and the wider economy. Greater transparency could also help companies to better understand and manage their own climate-related risks and opportunities, as well as foster organization-wide climate competence and resilience. 

When will the SEC’s climate reporting rule take effect?

The SEC is expected to release its final climate disclosure rule in April 2023, though some speculate it may get delayed to later this year. Once announced, it’s unclear exactly when the regulation will take effect. However, investors are already pushing companies to disclose the same type of climate information that will be required by the regulator, making it imperative for businesses to start the process now.

In the proposed version of the rule, the SEC said large accelerated filers — companies with a public float of USD$700 million or more — would have to disclose their climate-related information, bar their Scope 3 (indirect) greenhouse gas (GHG) emissions, in their 2024 financial filings. Large accelerated filers would then be required to disclose their Scope 3 emissions beginning in 2025, and other public companies would be brought under the reporting regime in phases. 

The delay of the rule’s release means it’s safe to assume that these dates will be pushed back by at least a year. 

Understanding the SEC’s climate disclosure rule

U.S. public companies that fall under the SEC’s climate disclosure rule will need to understand what it entails to properly comply with the incoming requirements. While the rule will require businesses to report an extensive amount of climate-related information, there are a few key overarching data points that they need to keep top of mind. These include:

• Climate-related risks and their likely material effects on their businesses, strategies, and future expectations
• Climate-related governance and risk management processes
• GHG emissions
• Specific climate metrics and related information in their audited financial statements
• Details on their climate-related targets, goals, and transition plans

The SEC’s climate disclosure rule is part of the regulator’s broader efforts to provide investors and other relevant stakeholders with more decision-useful information on climate factors that are material to businesses. It also clearly connects the material climate impacts that companies face to broader financial risk management and strategy.

Using the SEC’s rule to implement climate disclosures

Once companies understand the full implications of the SEC’s climate disclosure rule, they need to figure out who’s accountable for compiling and reporting the requested climate-related information. Even though the rule is yet to be finalized, businesses should get their infrastructure, budgets, and capabilities ready now to be able to comply with the incoming requirements. 

While many companies may feel apprehensive about the SEC’s new rule, preparing for the imminent disclosure requirements will better equip firms for what’s next — even if the final rule isn’t the exact same as the regulator’s initial proposal. 

It’s also important to remember that good climate disclosure starts with having robust governance. While climate issues have generally been relegated to corporate sustainability and marketing teams, it’s worth recognizing that they’re organization-wide considerations that require buy-in and engagement from companies’ boards and other internal teams.

Once businesses properly delegate their organizations’ climate-related responsibilities, they can begin moving toward effectively disclosing their climate information in clear and comparable ways that are useful for decision-makers.

Investor engagement on climate reporting

The SEC’s incoming climate disclosure rule is intended to help bring transparency to capital markets in part so investors can make better and more informed decisions. But companies that will be required to report their climate-related risks and opportunities should not wait until the new rule takes effect to begin the climate disclosure process.

According to a 2023 report, climate resolutions from investors are surging at U.S. public companies, with a record 542 environmental, social, and governance (ESG) proposals getting filed this year. Of those resolutions, 23% relate to climate change, with many shareholders calling on companies to set GHG emissions reduction targets and report their progress toward meeting those targets. Other investors have called on businesses to consider climate risk when developing their strategies and to disclose their low-carbon transition plans.

As companies prepare for the SEC’s incoming rule, they should also consider pressure from investors to disclose their climate-related information. By addressing investor pressures, companies will not only be prepared for the SEC’s upcoming requirements — they will also build trust and credibility with capital providers, establish themselves as climate leaders, and develop organization-wide climate resilience.

About Manifest Climate

Manifest Climate is the leading Climate Risk Planning software that helps companies at all stages of their climate disclosure journeys. Our software helps companies identify their climate risks and opportunities and align their disclosures with global reporting requirements and standards, including the SEC’s incoming climate rule. Our platform also benchmarks organizations’ climate performance next to their peers, helps you stay on top of business-relevant climate trends, and develop internal climate competence. Get in touch with our team here.