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Earth Day surprise: Financial regulators want your climate data, and you can’t ‘greenwash’ it  

Three actions companies can take now to prepare for the SEC climate-disclosure rules.

Earth Day surprise: Financial regulators want your climate data, and you can’t ‘greenwash’ it  
[Source Photo: idcde/iStock/Getty Images Plus]

This Earth Day is different. Countries, companies, and financial institutions have all made net zero emissions pledges in record numbers in the last year. Investors are demanding climate disclosures, and regulators are following suit. And they don’t just want big, aspirational statements about how “green” their companies are. They are asking for data, strategies, and plans. The era of greenwashing is coming to an end as environmental concerns have crossed a threshold into mainstream financial reporting.

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Last month, the U.S. Securities and Exchange Commission (SEC) issued a proposal requiring public companies to disclose concrete information about their financial exposure to climate risk and their strategies to address that risk.

But there is more than risk. There is also opportunity. BlackRock CEO Larry Fink emphasized this in his 2022 letter to CEOs—that the next thousand unicorns, or startups worth $1 billion or more, “won’t be search engines or social media companies; they’ll be sustainable, scalable innovators.” The SEC proposal invites, but doesn’t require, companies to discuss their material climate-related opportunities in their filings. However, this isn’t an invitation to greenwash. Any discussion of opportunities will need to be backed up with facts.

The backstory

This has been building for a long time. Back in 2010, the SEC issued guidance for companies to disclose “material climate change risks.” Some companies responded, but not many.

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Then, in 2015, the Paris Climate Accord was adopted by every nation on earth, creating a path to limiting global warming to 1.5 degrees Celsius. The same year, the G20—20 of the world’s most-developed economies—established the Task Force on Climate-Related Financial Disclosures (TCFD), creating a global framework for reporting climate risks.

Things began to move at light speed in 2020. In January, Larry Fink’s letter to CEOs proclaimed “a fundamental reshaping of finance,” pointing to sustainability as the new standard for investing. In May, the SEC’s Investor-as-Owner subcommittee declared that the SEC should readdress climate change reporting.

In February and March 2021, the SEC solicited public input on climate change disclosures. In response to that request for public comment, more than 550 unique comment letters were submitted, with three out of every four supporting mandatory climate-disclosure rules. Later in the year, SEC Chair Gary Gensler directed staff “to develop a mandatory climate-risk disclosure rule,” which has now been proposed.

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Consistent, reliable, comparable disclosure

Sustainability reporting isn’t new. Most larger companies currently publish sustainability reports. But these tend to contain anecdotal information and aspirational statements without much hard, verified data. This doesn’t serve investors very well. It also doesn’t allow those companies, which are taking meaningful steps to tackle climate change, to stand out and shine. All that is likely to change with the new regulatory proposals.

What should companies do now?  In a word: Prepare

The SEC’s proposal has been characterized as “the most comprehensive and complicated disclosure initiative in decades.”  While it can be complex, there is time to prepare for the new rules.

  • Get your governance in order, then check for gaps

The first step is to ensure your board and appropriate members of senior management are thinking about climate-related financial risks. In many cases, this will involve education to help them understand what climate change might mean for the company and how to build a strategy to address the risks and opportunities.

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Next, take stock of what your company is already doing. Since most companies already publish sustainability information, it’s likely there is a program in place. Review your current reporting practices against the SEC proposal to assess gaps, and create a work plan to fill the gaps.

  • Measure your carbon footprint

The emerging regulations and investor pressure all point in one direction: Companies need to calculate their greenhouse gas emissions. Most companies will start with their Scopes 1 and 2 emissions (direct emissions and indirect emissions from the generation of purchased electricity).

Scope 3 emissions (indirect emissions from the company’s value chain) are a significant part of the total footprint and also more challenging to measure. Most companies are likely to take a step-wise approach, starting with Scopes 1 and 2, and high-level Scope 3 data—then moving into more granular Scope 3 data over time.

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  • Develop a climate strategy with goals

Measuring your carbon footprint is just the starting point. The next step is to build a strategy to tackle climate risks. These might be physical risks impacting operations in areas subject to severe weather, flash flooding, or wildfires. They could also include longer-term risks, such as drought, sea level rise, or decreased fertility of land.

Climate risks can also stem from the transition to a low carbon economy. For example, companies should consider the impacts of potential carbon taxes on their bottom line. On the flip side, as Larry Fink pointed out, if you have climate solutions, you stand to make a lot of money.

Any strategy worth its salt has goals. Climate goals are typically stated as X amount of carbon reduced by year Y. Recently, many companies and financial institutions have established “net zero” goals. Companies’ efforts to transition to lower-carbon goods and services will be an important part of their strategy for meeting these goals. Surely, carbon offsets will also play a role.

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The SEC’s proposed rule, combined with international regulations and investor demands, make it clear that companies should take action now to address climate-related risks. It will take time and effort, but experience has shown that going through the process can create substantial value for companies and their investors. Most importantly, it’s far more than a compliance exercise: It’s essential to our future.

Tim Mohin is the chief sustainability officer for Persefoni. Formerly, Mohin served as the chief executive of the Global Reporting Initiative and is the author of Changing Business from the Inside Out. He also held sustainability leadership roles with Intel, Apple, and AMD, and worked on environmental policy within the U.S. Senate and U.S. EPA. 

Kristina Wyatt is deputy general counsel & SVP of Global Regulatory Climate Disclosure for Persefoni. Previously, she was at the U.S. Securities & Exchange Commission, where she served as senior counsel for Climate & ESG to the Division of Corporation Finance.

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