Preparing for the SEC Climate Disclosure Ruling: The Board’s Central Role

On March 6, the US Securities and Exchange Commission (SEC) adopted a landmark ruling to standardize Climate-related disclosures, generating  implications for companies and investors alike and obliging them to prepare for a long-term change to corporate reporting.

Dissent over the SEC’s proposed policy has done little to dampen investors’ demand for consistent and comparable Sustainability information, and regulatory thresholds impacting large American companies are already in place through the European Union’s Corporate Sustainability Reporting Directive (CSRD) and the California Climate Bills. Indeed, under the CSRD, all organizations listed in an EU-regulated market with 500 or more employees must start reporting in 2025 with data for the 2024 financial year. Other large companies will be required to do the same in subsequent years, followed by small and midsize enterprises. Similarly, California’s rule requires any company generating an annual revenue of over $1 billion doing business in the state of California to measure and publicly report Scope 1 and 2 greenhouse gas emissions starting in 2025 and begin disclosing Scope 3 emissions starting in 2027.

About the new SEC rule

The SEC first announced its proposal to require US public companies to include Climate-related disclosures in registration statements and periodic reports in March 2022. After nearly two years of debate, there has been ample room for speculation as to what to include in the final ruling. In brief, however, apart from striking the Scope 3 emissions disclosure requirement, much of what was initially proposed has been retained. Furthermore, even if the SEC’s rule is further stalled in its enactment or struck down by an appeals court, the surge of domestic investor pressure as well as pressure from supply chains and customers will ultimately oblige companies to report key Climate data. 

In essence, the disclosure requirements seek to provide investors with Climate-related information that is consistent, comparable, and decision-useful in investment decisions. At a high-level, businesses must include specific information on their registration statements and periodic reports, such as in Form 10-K. The final disclosure rules will require listed companies to standardize information about:

• Direct greenhouse gas emissions (GHG) – Scope 1 (this is relevant for large accelerated filers and accelerated filers)
• Indirect emissions from purchased electricity or other forms of energy – Scope 2 (this is relevant for large accelerated filers and accelerated filers)
• Climate risks, both physical and transition, with quantitative and qualitative components (leveraging best practices as laid out by the TCFD framework)
• Governance processes for identifying, assessing, and managing Climate-related risks and relevant risk management processes
• Certain Climate-related financial statement metrics and related disclosures as a note within audited financial statements
• Details of Climate-related targets, goals, and transition plans, scenario analysis if any

Corporate boards will have to consider the following

If adopted as proposed, the amendments would impose significant reporting requirements on registrants, which in turn would increase compliance costs and require additional time and attention from management. Although the proposed rules contain various phase-in periods depending upon filer status, there are steps (outlined below) that public companies can begin taking today to prepare for the new rules.

First, companies should evaluate their current readiness levels by answering 10 key questions:

1. What are our significant near- and long-term Climate risks?
2. What are current structures do we have in place to oversee Climate-related risk? Which processes do the board and management rely on?
3. Does the full board oversee the process, or does a committee have responsibility? Is that documented?
4. Does the board or committee have the expertise it needs to oversee Climate-related risks and opportunities?
5. Do all tiers of management have sufficient expertise to implement ESG and Climate initiatives to improve the company’s disclosure readiness?
6. What types of Sustainability and Climate training or education do board members need?
7. How does management’s current risk identification and evaluation process incorporate Climate-related risks? What level of detail is shared with the board by management?
8. Is our Climate-risk reporting robust and frequent enough to enable the board to assess the impact on business strategy, risk management, operations, and financial oversight?
9. Have we engaged with outside experts and auditors to secure a credible attestation report?
10. Do we have a data strategy to streamline ESG, Climate, and Sustainability reporting?

Key takeaways for board members:

• Attacked focused on ESG reporting have done little to dampen investor’s demand for consistent and comparable Sustainability information
• Strong regulatory pressures beyond the SEC, CSRD and California, are sufficient enough for large corporates to continue to advance ESG and Sustainability targets and initiatives
• Similar to requirements for board education on cybersecurity, investors and regulators may require disclosing on the education and training afforded corporate directors and officers
• Corporate boards should review their broader ESG and Sustainability roadmaps and build a shared vision of where they are going and how they will get there

Additional Telesto resources:

Find additional information on how to get started with ESG, Sustainability trends, the role of the Audit Committee in ESG, and build topical familiarity with our ESG Glossary as well as Telesto’s ESG Maturity Model.