What to Look for in the SEC Climate Disclosure Proposal

By Steve Soter

The U.S. Securities and Exchange Commission is expected to announce its proposal to enhance climate disclosure rules, perhaps before the new year, after months of public comments from corporate leaders, nonprofit organizations, and others.

Based on those comments, statements from SEC Chair Gary Gensler and colleagues at the SEC, and what’s happening internationally, here’s what my teammates and I at Workiva will be looking for in the upcoming proposal.

What to expect

We expect to see:

• Mandated quantitative greenhouse gas disclosures, at least for Scope 1 and Scope 2 emissions. Scope 1 covers emissions from company-owned assets while Scope 2 covers emissions from energy purchases. We think it’s possible the rule will propose Scope 3 disclosures too for emissions beyond a company, along its value chain.
• A requirement for disclosure of assets at risk. Businesses might have to disclose their physical assets that are at risk of climate change, like buildings that are susceptible to hurricanes or wildfires, for example. We anticipate they’ll also need to disclose operations that could be at risk from climate-related government mandates or initiatives.
• A recommendation to use one of the many global ESG frameworks. SASB Standards and the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) are gaining popularity, with an increasing movement toward an international sustainability standard setter. Will the SEC name either of them in the proposal?
• Guidance or a framework to determine materiality. While the SASB already includes materiality guidance for its standards, it will be interesting to see how companies respond to whatever the SEC proposes.

3 requirements we’d be (pleasantly) surprised to see

We don’t expect to see mandates yet for:

1. Assurance by a third party. Regulated independent auditors can contribute to the reliability of financial statements, the Center for Audit Quality says, and could do the same for climate disclosures. We’re just not convinced the forthcoming SEC proposal will require third-party assurance … yet. From an investor standpoint, we’d love to be surprised.
2. Machine-readable data. Public companies and funds already have to submit financial statement information and risk/return summaries in iXBRLTM format so both humans and machines can read them. With smaller banks and companies balking at potential costs of publishing more robust climate disclosures, we’re undecided whether we’ll see a requirement for machine-readable climate disclosures right away. In the long term, anything that helps investors more easily compare data across companies at scale will help build trust, in our view.
3. Anything beyond environmental disclosure. The SEC has clearly indicated that this will be around climate disclosure, so we don’t expect much beyond that. But without question, we strongly believe that the SEC’s rulemaking will follow the lead of U.S. companies that have been shifting their attention to the “S” of ESG on their own, especially with Nasdaq passing a board diversity rule and events in the last year bringing more attention to social issues.

What to watch

There are a few other nuggets we’ll be looking for in the proposal.

• Will public companies need to include the new disclosures in a 10-Q or 10-K or in some other form?
• What exemptions to the proposed rule might there be for smaller companies?
• What industry-specific requirements will the SEC include?
• What would be the timeline for a final rule to take effect?

Don’t forget existing climate guidance

With all the speculation of new climate disclosure requirements, public companies will want to be sure they aren’t forgetting to apply existing climate guidance. Just last month, the SEC issued a “Dear Company” letter, with nine considerations on how to follow existing guidance.

Much more to come

The SEC proposal won’t be the finish line for climate disclosures.

For one thing, the public will have time to comment on the proposal before the SEC finalizes it. (Join the SEC Professionals Group’s ESG Reporting Committee if you want to talk to peers about it.) Bigger picture, international bodies that are far ahead of the United States are also revising disclosure rules. Some companies and nonprofit groups have said regulators should agree on a global standard.

That doesn’t mean organizations should stop expanding their ESG reporting. Instead, they should take steps now to strengthen ESG reporting to be more scalable, agile, and auditable.