1 Year Later: Is your business waiting for regulation to take action?

March 21, 2023

green hourglass If your business operates in the U.S., chances are that you’ve already taken a close look at the U.S. Securities and Exchange Commission’s (SEC) proposed rule that will govern and mandate emissions and climate risk disclosures. This rule, which is expected to be finalized in Q2, comes with a lot of questions around disclosure of GHG emissions, assurance, and financial statement disclosures.

Despite all the uncertainty, as we await the final details and potential litigation that could follow the ruling, we know one thing is for certain...Corporations that start now will fare better in the end.

The prevalence of climate risk and disclosure regulations is spreading across the globe. The concept that “climate risk equals financial risk” is no longer a theory, but a reality that investors, customers, and other business stakeholders are embracing in order to create more transparency, sustainability, and resiliency. So, regardless of the outcome of the currently proposed rule, it’s not a matter of if disclosure mandates are coming to the U.S., it’s a matter of when.

We see this as an opportunity to get ahead and play offense in your ESG strategy, and technology alone will not get you there. There are three actions to take now to prepare.

1. Stakeholder Engagement

office boardroom Make sure that key stakeholders within your organization are aware and educated about the SEC’s climate ruling. The time between now and the release of the final ruling, companies have a chance to ensure that they’re involving all the right stakeholders who will ultimately play a role in adhering to these new requirements.

Align on roles and responsibilities within the organization. This includes providing clarity and accountability down to the departmental level. This may include but is not limited to: finance, risk management, accounting, corporate controller, compliance, operations, internal audit, sustainability, communications, etc.

Perform an initial data collection exercise of your current ESG reporting practice and uncover high-level gaps for improvement. Examples of data to collect include:

Climate-related disclosures – CDP, TCFD, GRI, SASB
ESG governance policies and structures
Risk identification, assessment, and management processes
Climate Scenario Analysis documentation (qualitative or quantitative)
Internal carbon pricing
Inventory Management Plan
GHG Inventory (Scope 1, 2, and 3)
Verification statements/processes
GHG targets and goals
Use of carbon offsets or renewable energy credits
Names of key competitors for benchmarking

2. Data Gap Assessment and Reasonable Assurance

Review and address key gaps and improvement areas within your data and verification process. This includes data collection and process, alignment with data owners throughout the organization, and planning and documenting inventory management. This will give your organization confidence that you’re ready for disclosure and prepare you for the shift from limited to reasonable assurance.

A key challenge that many businesses will face with SEC’s proposed rule is the timeframe of required disclosures. Historically, corporations have operated according to a timeline that required a verified inventory to be ready to report to various reporting frameworks, such as CDP or GRESB, by mid-year. The proposed SEC disclosures will shift timelines up significantly. A business’s ability to meet these aggressive, mandatory timelines relies even more heavily on their ability to create efficiencies and ensure accuracy when it comes to where data will come from, stakeholder roles and responsibilities, and processes to achieve reasonable assurance.

3. Climate-Related Risk Management

winding road through trees Incorporate a governance review assessment aligned with TCFD and CDP recommendations. This involves orchestrating a survey and follow-up interviews to understand an organization's governance processes in practice, what is planned, and how that aligns with best practices and expectations. Then, address these gaps with recommendations and actions.

Identify and develop a climate risk management strategy. At this step, you should be gathering information on potential risks from various stakeholders around the organization, documenting how to identify them, and developing recommendations for climate risk management.

The end goal is designing a comprehensive risk register, which can be integrated within the enterprise risk management team to build from in the future. This includes not only identifying a list of risks, but also functional risk owners and assessing the potential impacts of past and future events. These steps help to prioritize more impactful and emerging issues and find a plan around the most important key themes. In decentralized organizations, this exercise can build momentum, drive consensus, and connection-building.