Unpacking the Update: Understanding the SEC Final Climate Disclosures Ruling

See the SEC's climate disclosures ruling of March 6, 2024.

The Importance of the SEC Climate Disclosures Ruling

What is the Enhancement and Standardization of Climate-Related Disclosure?

The Enhancement and Standardization of Climate-Related Disclosures for Investors is a final rule adopted by the U.S. Securities and Exchange Commission (SEC) on March 6, 2024. The rule requires public companies to disclose extensive climate-related information in their SEC filings, such as annual reports and registration statements. The rule aims to provide investors with consistent and comparable information, and issuers with clear reporting requirements.

Why It Matters:

• Material Impacts on Financial Reporting: Publicly-traded companies must now include climate-related risks that could materially affect their financial status in their required annual disclosures, making climate consideration an integral part of financial planning, risk mitigation strategies, and reporting.
• Transparency and Accountability: Moving from voluntary to mandatory disclosure ensures all required companies adhere to a standardized reporting framework, increasing transparency.
• Informed Decision-Making: Investors and shareholders can make better-informed decisions with access to consistent, reliable data on climate-related disclosure and its financial impact on the business.

What this Latest SEC Climate Disclosures Ruling Entails

Core Elements of the Disclosure:

• Governance: How is climate risk overseen at the C-suite and board level?
• Strategy: What are the actual and potential impacts of climate-related risks on the organization’s businesses, strategy, and financial planning?
• Risk Management: Processes for identifying and assessing climate-related risks.
• Finance: Process for identifying and assessing the financial impacts of severe weather and climate targets.
• Metrics and Targets: Metrics and targets used to assess and manage relevant climate-related risks and opportunities.

Emissions Focus:

• Scope 1 and Scope 2 Emissions: Companies must disclose direct emissions from owned or controlled sources (Scope 1) and indirect emissions from the generation of purchased electricity consumed by the organization (Scope 2). Scope 3, indirect emissions that occur in a company's value chain, were not included in the final ruling.
• These disclosures are crucial for investors to assess the direct impact of a company’s operations on the climate.

Phased Implementation Plan:

Companies are categorized by size with varying deadlines, ensuring that each has adequate time to comply based on their operational complexity.

Impact of the SEC Ruling on Financial Reporting and Operations

The final SEC climate disclosures ruling is set to reshape the landscape of financial reporting, risk management, and operations for public companies. As organizations begin to integrate climate-related factors into their financial statements, the transparency and accuracy of reporting will improve, offering stakeholders a deeper insight into how climate risks are managed and mitigated.

Business Results and Financial Disclosure:

What This Means for Affected Companies:

• Challenges:
  • The requirement for detailed disclosure can pose significant challenges, particularly for companies that have not previously integrated climate considerations into their business models or financial reporting.
  • Accumulating accurate data for financial estimates and assumptions can be challenging.
  • Companies may need to revise their business strategies to comply with new regulations and to innovate and capitalize on emerging opportunities in a low carbon economy.

• Opportunities:
  • For companies that proactively manage and disclose climate risks, the new ruling can lead to enhanced investor trust, lower operating costs, and potentially lower costs of capital due to perceived lower risks.
  • New and timely tax incentives and federal funding are available for energy projects.
  • Better and more consistent data and reporting can lead to more effective management of climate-related risks.
  • For global companies, this ruling will support international growth and allow for better alignment with the EU and other global disclosures.
  • Partners like Legence can help you navigate these complex topics and alleviate stress for companies during the transition.

The Bigger Picture: Global and Long-Term Implications

Global Standards Comparison:

The SEC’s ruling aligns with global trends towards greater transparency in climate reporting, similar to the EU’s Corporate Sustainability Reporting Directive (CSRD) and the Task Force For Climate-Related Financial Disclosures (TCFD). Both aim to standardize disclosures to prevent greenwashing and provide clear, comparable data to investors.

Long-Term Goals:

These regulations are designed to mitigate climate change impacts by encouraging companies to lower their carbon footprints and prepare for severe weather events and longer-term climate-related impacts. Over time, this consistent reporting requirement aims to foster a more sustainable global economy that is responsive to environmental changes while providing for business growth and greater risk management.

How Legence Can Help

Expertise and Services:

• Compliance and Reporting: With a deep understanding of climate-related mandates, Legence can help businesses align their reporting and operational strategies with regulatory expectations. Legence’s sustainability advisors help companies understand the risks and opportunities associated with these challenges and then can help set targets, provide insights and roadmaps into how to address them.
• Sustainability Audits: Legence offers comprehensive services such as conducting greenhouse gas (GHG) inventories and supporting companies through the assurance process. These services help companies meet the new requirements. Additionally, they gain from enhanced sustainability practices.  
• Sustainability Program Strategy, Design, + Implementation: This service focuses on creating tailored sustainability programs that integrate seamlessly into existing operations, enhancing a company's environmental and social impact through strategic planning and execution.
• Green Building Certifications: Legence assists companies in achieving certifications like LEED and BREEAM, which recognize and validate efforts in constructing and maintaining green, energy-efficient buildings.
• Climate Risk Assessment, Mitigation, and Disclosure: This involves evaluating potential climate risks, devising strategies to mitigate these risks, and ensuring transparent disclosure to meet regulatory and stakeholder expectations.
• Data Management and Analytics: Legence provides advanced data management solutions, quality control, and analytics to accurately track and report on sustainability metrics, helping companies with insights for making data-driven decisions to improve their environmental footprint and financial performance.

The Bottom Line

The SEC climate disclosures final ruling represents a significant step forward in the integration of climate-related risks into financial reporting. It challenges companies to augment their strategic and financial planning as well as their operations in line with their environmental impact and provides investors with critical information needed to make informed decisions.

Key Takeaways:

• Enhanced transparency and accountability in financial reporting.
• Improved investor confidence and potentially lower capital costs for compliant companies.
• Alignment with global trends towards standardized, rigorous climate reporting.
• Opportunities for cost-savings through the implementation of energy-efficient solutions.

Companies are encouraged to proactively engage with the requirements of the SEC ruling. By leveraging the expertise of trusted partners like Legence, organizations can comply with these new regulations, and they can strategically benefit from them, positioning themselves as leaders in sustainability and corporate responsibility.

Find Out How Legence Can Help You