SEC Climate Risk Disclosures: What it means for companies and what business leaders should do next

The SEC just proposed amendments that would enhance and standardize companies’ climate-related disclosures for investors, including greenhouse gas emissions and exposure to climate change risks. For several years, companies have viewed climate as important to business, and many organizations have made net zero commitments and provided reporting to share information about emissions and their pathway and milestones to transition.?

Now, regulators, investors and other stakeholders are increasingly asking for comparability, consistency and higher quality in ESG reporting, and SEC rulemaking is a step in that process.?Climate information can be material to a company’s risk profile and long-term value creation. And as that information is publicly reported it’s our belief that stakeholders should expect the same quality they expect from financial disclosures.

This much-awaited step by the SEC will help foster comparable, consistent climate information. This is critical. Trust in the quality of information is necessary for a complex society to function, and markets operate most efficiently when there’s reliable, quality information stakeholders can use to make more informed decisions.?

While an SEC proposal is the beginning of the rulemaking effort and the Commission will need to gather and consider public input and adopt a final rule before any new disclosure requirements go into effect, business leaders should pay attention now. Here’s what businesses should consider in the coming weeks and months.

What does this mean for companies?

Under the proposed guidelines, publicly traded companies would likely need to disclose climate information—in their 10-K—that was previously considered voluntary. To meet these new requirements, many businesses will likely need to transition to investor-grade and tech-enabled reporting to dramatically accelerate their climate change reporting processes, while implementing effective governance and internal controls.

While the SEC won’t be in a position to adopt final rules until a later date, we expect the SEC is likely to remain focused on advancing rules which address:??

• Overarching discussion about the prospective risks and material impacts on the business, strategy and outlook caused by climate change, potentially for compliance with the Task Force on Climate-Related Financial Disclosures (TCFD) disclosures
• Reporting Scope 1 and 2 greenhouse gas emissions and material Scope 3 emissions
• Additional qualitative and quantitative climate risk disclosures, including the financial impacts?
• Governance of climate-related risks and risk-management processes
• Requirement to support plans to comply with companies’ advertised environmental claims (e.g., net-zero commitments)

What companies should do next

Businesses are at different points in their ESG journey—some companies may already have strong internal controls and data-quality measures in place, while others are starting from the beginning. But no matter where a business is in its nonfinancial reporting journey, here are a few things every company may want to consider:

1. Assemble the right ESG team: Work to ensure the proper people and controls are in place to gather data from across the company and assign responsibilities to the right people. The finance function has the expertise to oversee accounting, controls and reliability of ESG information while sustainability teams have the deep subject matter experience and context. And some organizations may need to assess whether they have people with the necessary expertise in the proper roles, and if not, will need to address any knowledge gaps through upskilling or hiring to make sure they have the right team in place. A cross-functional ESG team can move the company toward a single set of norms and standards that will create accountability for ESG performance—making it possible to share investment-grade ESG information across multiple channels.?
2. Understand where you are: Make sure you have the ability to gather and report the data that regulators will expect. That means defining a set of ESG metrics for internal and external reporting. Business leaders will need to clearly define metrics, their scope and boundaries, what systems the information comes from, and who the owners are inside the company. To do so, companies should gather baseline data to compare current performance against future goals and milestones.?
3. Connect ESG strategies, milestones and reporting to the company’s overall business strategy: Remember, ESG reporting should not be an exercise merely to tick a regulatory box, but to create sustainable advantage and value. Set an overarching approach to ESG. It should be supported by a clear tone from the top, with the CEO and leadership team committed to encourage buy-in across the entire organization. Business leaders should look for opportunities to differentiate themselves by addressing their stakeholders’ priorities, but keeping in mind that their priorities may be different and evolving over time. Companies should establish proper governance to confirm their ESG reporting structures support revenue-generating opportunities (e.g., new products, services, markets) as they reduce their carbon footprint and increase climate resilience.?
4. Include corporate directors: Businesses need to engage their boards and corporate directors need to recognize the important role they play. Upskilling corporate directors—especially audit committee members—to better understand how ESG fits into the overall strategy is important in preparing them to appropriately manage governance oversight responsibilities.
5. Consider independent assurance: As companies expand ESG reporting, information—and the process for gathering it— should be rigorous enough to support accountability. The proposed rule will require external? assurance for climate-related financial statement metrics and related disclosures as part of the company’s audited financial statements. Independent, third-party assurance—that is available to the public—would provide investors and other stakeholders with additional confidence in the quality of climate information, enhance its credibility and help build trust with stakeholders.?

The past year has made climate change more real for many people. There is heightened awareness of how climate change and other ESG issues can be material to companies’ core strategy and long-term value creation. At PwC, we are also on our own ESG journey, in addition to supporting our clients through changes in the regulatory landscape. We are transparent and accountable. And we will continue to work with regulators, policy makers and business leaders to establish trusted standards that guide responsible behavior.?