Two proposed climate disclosure rules could affect your organization. Understanding what these rules would require in the future will help you get a head-start now.
Two important government entities have proposed regulations that would require companies to get serious about how they track their emissions and climate risk. In March of 2022, the US Securities Exchange Commission (SEC) proposed a new climate disclosure regulation, affecting almost all publicly traded companies. Likewise, the Department of Defense (DOD), General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA) have proposed a similar rule for suppliers to the federal government. Both proposals are currently under consideration.
In an effort to maintain consistency across reporting frameworks, these rules are in line with the Task Force on Climate-Related Financial Disclosure (TCFD). In 2015, the G20 (Group of 20 – the intergovernmental forum that works to address global economic issues), created the Financial Stability Board (FSB) to monitor and make recommendations about the effects of mounting climate-related risks on the global financial system. The FSB, in turn, created the TCFD to develop consistent and coherent guidance for companies around the world to report their climate risk.
What is Climate Disclosure?
Climate disclosure by a company or organization is the public release of climate-related risks and opportunities affecting a business, including operations, emissions balance sheets and future profitability (i.e. how would the business perform in a 2-degree C temperature increase world). Disclosures are intended to provide information that may affect public confidence in a company, as well as increase the company’s internal awareness and understanding of climate risk to enable better risk management and strategic planning.
The Proposed Regulations
Any regulation inevitably has supporters and detractors, and these are no different. If approved, they may be challenged in court and delayed. However, regardless of the fate of these proposals, the general trend toward transparency, disclosure and ESG (Environmental, Social, Governance) remains strong. For your business or organization, that means understanding and preparing to act on these proposed rules now would be wise, even if they are challenged.
Here’s a basic breakdown of the two proposals currently under consideration with the federal agencies. For the full proposals and more information about each of them, we encourage you to visit the associated links below.
The US Securities and Exchange Commission (SEC) Building in Washington, DC
SEC Climate Disclosure Rule
This proposed rule, based on recommendations from the G20’s Task Force on Climate-Related Disclosures (TFCD) would require SEC registrants (publicly traded companies) to provide information to the SEC about GHG emissions and financial impacts they expect climate change to have on their business operations. The purpose of this rule is to satisfy growing investor, insurer, banker, and consumer demand for information regarding the impact of climate change on their investments.
Some specific requirements:
- Disclosure of climate-related risks that are likely to have a material impact on business or consolidated financial statements
- GHG emissions metrics (Scopes 1 and 2): This includes third-party attestation (proof) within one fiscal year of rule finalization for certain types and sizes of organizations
- GHG emissions metrics (Scope 3): Smaller Reporting Companies (SRC’s) would be exempt from this requirement. Larger reporting companies would be granted a phase-in period and would not be required to provide attestation.
The decision on the Climate Disclosure Rule is expected to be made sometime in Q2 of 2023. If the rule is finalized, compliance for the largest organizations will begin in 2025 to cover 2024 emissions data.
FAR Climate Disclosure Rule
This rule has been proposed by the Department of Defense, General Services Administration, and NASA. These three organizations jointly manage the Federal Acquisition Regulation (FAR). FAR is “the primary regulation for use by all executive agencies in their acquisition of supplies and services with appropriated funds.”
If finalized, this regulation would require suppliers of the federal government (major and significant contractors) to disclose their Scopes 1 and 2 emissions, complete the CDP (Climate Disclosure Project) Climate Change Questionnaire, and set a science-based target (SBT) if they don’t already have one.
Exemptions:
- Significant contractors ($7.5-50M in contracts) would not have to complete the CDP report or set an SBT
- Higher education institutions, tribal-owned companies, non-profits, and entities deriving at least 80% of revenue from the government are exempt from this rule
If this rule is finalized, compliance would begin in 2025 (reporting 2024 emissions data).
Getting Started In The Meantime
While we wait for a final ruling from both agencies (expected to be released soon), your company can start looking for partners to help you with accounting and reporting, if you don’t already have the internal resources to do so. In fact, the Wall Street Journal reports that 70% of surveyed companies plan to comply with the proposed SEC rule regardless of whether it’s finalized. In any case, the sooner your business can create and implement a decarbonization strategy, the more prepared you’ll be to reach your goals and be ready for whatever policy is eventually put in place.
If you’re looking for experienced guidance in navigating this new and evolving climate policy terrain, Coho’s team of experts can help.
