6 Burning Questions About the SEC Climate Disclosure Rule

The U.S. Securities and Exchange Commission (SEC) has proposed a rule requiring that registrants (Entities traded on a U.S. Exchange and other entities whose securities are subject to SEC regulation) add a standard set of climate-related disclosures to their annual reporting. While the SEC Climate Disclosure Rule was expected to take effect in 2023, legal challenges and ongoing political debate have resulted in some delays. As of mid-2024, several provisions are expected to be phased in over the next few reporting cycles, though companies are encouraged to begin preparing as changes are inevitable. In the meantime, the rule has prompted significant commentary – over 11,000 viewpoints during the comment period. Below, we answer companies’ six burning questions about the SEC Climate Disclosure Rule.

Question 1: “When will the US SEC Climate Disclosure Rule officially take effect?”

Answer: Many expect the rule to take effect in the first half of 2023. However, significant political headwinds may mean the rule is directionally the same but with highly material differences in the specific requirements and the phasing-in period.

As of mid-2024, some provisions are expected to be phased in over the next few reporting cycles, though companies are encouraged to begin preparing as changes are inevitable.

Question 2: “Is it true the disclosure rule is more than a reporting requirement?”

Answer: Short answer: yes. Longer answer: the best-run companies will be ready for the SEC rule by creating a register of climate-related risks and incorporating these risks into scenario analysis for all strategic decisions facing the organization, not just climate disclosure rule reporting.

With a growing emphasis on climate-related financial risk, companies should also consider integrating these disclosures into their investor communications to enhance transparency and shareholder trust.

Question 3: “What is the challenge I hear with reporting Scope 3 emissions?”

Answer: The rule will almost certainly require accurate, audited accounting of direct greenhouse gas emissions (scope 1) before indirect (scope 2 and 3). What is more difficult is accurately accounting for scope 3, which is related to third-party greenhouse emissions. Time will not be on your side, so start work now on your process for gathering third-party data. Consider how you will gain confidence in the veracity of the data collected and what certifications and attestations could be required for different segments of your extended enterprise?

Scope 3 emissions, tied to indirect emissions from an organization’s value chain, continue to pose significant challenges for accurate reporting. Emerging best practices include leveraging technology platforms for tracking third-party emissions, using blockchain and AI to verify data, and implementing supplier engagement programs to ensure accurate and transparent reporting.

As part of your preparation, consider collaborating with third-party audit firms that specialize in environmental reporting to ensure compliance with emerging SEC guidelines and other global standards.

Question 4: “Should we build new capabilities, or can we use what we have for reporting?”

Answer: Your company should go through an evaluation process. Review your current technology and programs. Do you have an auditable reporting mechanism to collect and aggregate emissions data, or do you need to start anew? Will your process for third-party risk management include scope 3 data in a robust way, or do you need to invest in broader assessment capabilities? Can your ERM and Business Continuity programs scale to add new climate risks?

Question 5: “What is one trait that our company should develop as we prepare for the disclosure rule?”

Answer: That one trait is agility. You should expect broader ESG regulation at the federal, state and, of course, international level. This will introduce new social and governance risks and accounting, along with increased enforcement in existing risk areas such as data privacy, modern slavery, bribery and corruption, discrimination and more. 

Additionally, developing partnerships with sustainability experts or joining industry coalitions focused on climate risk can provide valuable insights into managing these emerging challenges.

Question 6: “This sounds challenging for our compliance department. Is there technology that can help?”

Answer: Consider technology that can monitor the regulatory landscape in all jurisdictions you may be regulated in or by. Budget now to invest in a configurable platform for ESG risk, sustainability, governance and learning.