Back in 2011 I read a book called “One Report”. The thesis of the book was that by requiring corporations to report environmental impacts alongside financial results, more sustainable operations would result. No longer would sustainability be a separate program, a secondary consideration, or simply greenwashing. Through required reporting, sustainable operations would become mainstream.

That vision could become a reality this year. The SEC (Securities and Exchange Commission) has proposed rules that would require climate related information to be included in corporate registrations and reports. According to the Harvard Law School, the proposed rules are “the most significant new public company disclosure and compliance requirements in a generation.”

Under the proposed rules the following would be required:

  • Oversight and management of climate risk.
  • Impacts of climate-related risks on the business, financials, strategy, business model and outlook over the short, medium and long terms.
  • Processes for identifying, assessing and managing climate-related risks.
  • Historical GHG emissions data, with third-party assurance.
  • Climate-related targets and goals, if set.
  • Financial statement disclosure on the financial impacts of physical and transition risks.

Some companies report these things voluntarily. The proposed rules would make these disclosures mandatory for all publicly held corporations.

Where is the motivation to do this coming from? Investors! Also lenders, insurers, and asset managers. Both institutional and individual investors are actively seeking sustainable investments. Currently these stakeholders have only inconsistent and unreliable information on corporate climate emissions and risks. The proposed rules are a response to their demands for better information.

No change of this magnitude will be unchallenged of course. According to Harvard Law, Senator Joe Manchin and nineteen Republican Senators oppose the rules. Lawsuits challenging the rules are expected, too. But because of the momentum driving these changes, neither of these are expected to stop the rules’ adoption.

The SEC is pushing hard to adopt the new rules by December of this year. The public comment period ended June 17. Compliance would ramp up in 2023 and 2024.

Based on the volume of public comments received, thought leaders expect that the final rules will be softened somewhat from the original proposal. But even if that happens, the new rules will have a significant impact on how companies oversee and manage climate emissions and risks.

Beyond the rules currently in play, investors will continue to demand corporate transparency, climate competency, reduced carbon emissions, and climate risk management. This will drive change, and is very good for all of us.

Sources:

Littenburg, Rotter, and Shapiro; Ten Thoughts on the SEC’s Proposed Climate Disclosure Rules; Harvard Law School Forum on Corporate Governance, April 30, 2022.

US Securities and Exchange Commission; Fact Sheet: Enhancement and Standardization of Climate-Related Disclosures, 2022.