As the threats of climate change become more apparent, investors have expressed concern that they lack transparency into emissions data and climate-related risks of the companies they are investing in. A recent study has shown that over 85% of Chief Investment Officers incorporate emissions and carbon risk as part of their investment strategy. In response to this growing investor demand in the US, the SEC has proposed revised regulations that would require climate-related risks and opportunities to be included in a company’s public disclosure statement. These are changes to Sections S-X and S-K that cover financial and non-financial information, respectively. Specifically, the proposed changes will impact forms S-1, F-1, S-3, F-3, S-4, F-4, S-11, 6-K, 10, 10-Q, 10-K, 20-F which will change how nearly all companies file with the SEC. This will have significant impacts not only on public companies but also on several other private companies as well, as supplier engagement requirements will engage several private companies as well.  Here we will help you navigate all parts of this important proposed disclosure so you can be prepared when the rule is finalized.

Timeline of the SEC Disclosures

The SEC announced these proposed changes in March 2022, with three months for commentary. When commentary closed in June, they received more opposition than expected, primarily around Scope 3 requirements. The SEC has taken over a year to evaluate this feedback, and is expected to finalize the ruling in early 2024. This could make the first year of required disclosures as early as 2024, meaning the time is now to start implementing systems and processes to ensure you have the right data and are ready for reporting.

What Needs to Be Disclosed

The proposed regulations require a significant amount of information to be disclosed to give investors the confidence they are looking for. Here at SINAI, we have broken these disclosures into 3 main categories: Metrics, Risks, and Actions.

Metrics: These are measurable data points that reflect your business’s emissions performance. These include:

• Scope 1 and 2 emissions disclosures
• Scope 3 emissions disclosures (only if >40% of total GHG footprint and reporting company has >$75M in shares)
• Emissions Intensity per main economic output
• Attestation of Scope 1 and 2 emissions calculations (large and large accelerated filers only = Revenue >$100M)

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Risks: These are to identify your company's weaknesses and opportunities in a changing climate. These include:

• Physical Risks (Ex: Increased risk of flooding or severe weather at coastal facilities)
• Financial Risks (Ex: Severe weather may impact company output or performance)
• Market Risks (Ex: New climate conditions may change consumer behavior)
• Supply Chain Risks (Are any of your suppliers vulnerable to the changing climate)
• People Risks (Will a changing climate add risk to any employees or communities)

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Action: These are to highlight the steps that your business is taking to mitigate the risks of climate change and lower your emissions

• Carbon Reduction Targets and how they were established (Required if used)
• Current and planned use of RECs and Carbon Offsets (Required if used)
• Decarbonization Pathway Analysis and rationale for preferred pathway (Required if used)
• Investment Strategy (Required if relevant)
• Governance of Transition Activities (Required)

Streamlining Disclosures

There is a lot of information that needs to be disclosed here, so the sooner you can track and organize this information, the more prepared you will be. The SEC has shared that they estimate the disclosure to cost a large company as much as $600,000 per year if they are starting from scratch. But the cost of inaction is significantly higher. In 2022, the SEC issued over 760 corrective actions with more that $6.4B in non-compliance penalties. This is on top of significant reputation risk of non-compliance. Investors are excited about these disclosures as it gives them more confidence that they are investing in companies that are embracing ESG Principles. Studies have shown that 92% of consumers prefer supporting a company with sustainability in mind, and 88% of studies show that the stocks of companies embracing sustainability outperform their competition year over year. This means the time is now to start preparing for this disclosure and to position your business to take advantage of sustainability offers.