The prevailing global Environmental, Social and Governance (ESG) headwinds and the SEC’s stated determination to implement climate-disclosure requirements clearly show the direction of travel for companies in the US. However, the ongoing controversy surrounding certain specifics of the SEC’s proposal, in particular whether businesses should be required to report on the greenhouse gas emissions associated with their supply chains (Scope 3), has led to uncertainty as to when the final rule will actually be published and the form it will take.
The postponement of a decision on the final SEC climate-disclosure rule risks increasing the uncertainty for business of the scope of the final decision. It leaves businesses in limbo, aware they will eventually be required to report, but without the detail. Despite the current lack of information, businesses taking no action to prepare do so at their peril. Companies adopting a head-in-the-sand approach and doing nothing risk a rush to comply when the final rule is adopted. In fact, wider investor pressure to report on climate impact, regardless of the SEC’s final decision, means businesses should be using this time to begin putting in place the processes and systems needed to accurately report on their exposure to climate risks.
Taking the initiative
A recent industry poll showed over two-thirds of large companies in the US aren’t waiting for the final decision from the SEC to get started on climate disclosure and would continue to report regardless of the SEC’s final ruling. This demonstrates the recognition amongst many business leaders that climate-related information is something that investors, stakeholders and consumers are increasingly demanding. The introduction of the SEC climate-disclosure rule will level the playing field for businesses that are already disclosing. Those waiting for the final ruling before taking action risk being left behind both in terms of compliance and public opinion resulting in reputational damage that can be financially ruinous.
Impacts on global disclosure landscape
Ultimately, a delay to the adoption of the SEC’s climate-disclosure rule will not impact the steps being taken in other jurisdictions to expand the scope of ESG reporting and improve the interoperability of emerging standards. The EU’s Corporate Sustainability Reporting Directive (CSRD) requirements and the forthcoming International Sustainability Standards Board (ISSB) standards both build on the framework established by the Taskforce on Climate-related Financial Disclosure (TCFD) and mandate a greater array of disclosure requirements. Significant effort has gone into ensuring that the two standards, which will apply in different jurisdictions, will require similar data points as each other, helping international businesses to avoid duplicating data gathering and reporting.
Embedding climate-disclosure rules in the US will support multinational companies to address these extra-national requirements. US-based global businesses should be aware, in particular, of the reach of the EU’s CSRD rules, which will apply to certain non-EU businesses operating within the bloc and will require climate disclosure covering the full global group. Postponement of the SEC rule risks drawing companies’ attention away from the ESG compliance winds blowing in from across the Atlantic.
Taking preparatory steps to be SEC climate-disclosure ready
In light of a postponement to the SEC rule, businesses should not seek to look the other way and do nothing. For a business unfamiliar with climate disclosure, gathering the requisite data and reporting on it will require a not-insignificant effort, particularly if Scope 3 emissions reporting requirements do make it into the final rule. Using the breathing space a potential postponement provides, socialising the less-contested requirements across the business and stakeholders, gathering the requisite data, and beginning the process of analysing the company’s exposure to climate risk is essential preparation for future business success.