US regulator publishes draft plans for mandatory climate risk disclosures

24th March 2022

US companies registered with the Security and Exchange Commission (SEC) could be forced to report the climate-related impacts of their business under plans announced by the regulator this week.

The proposals would see publicly-listed companies provide climate disclosures in their registration statements and periodic reports, including information on how events such as severe weather could impact their financial health.

They would also be expected to disclose data on greenhouse gas emissions across their operations and supply chains, and relevant risk management processes.

It is hoped that the reporting obligations – which are open to public comment for 60 days before a final vote at the SEC – will provide investors with consistent and comparable information when making investment decisions.

“Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognise that climate risks can pose significant financial risks to companies,” SEC chair Gary Gensler said on Monday.

“Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release.”

The regulations are part of the Biden administration’s focus on forcing listed companies to address climate change and standardise disclosure rules for the first time.

Specifically, they will require companies to disclose:

  • Governance of climate-related risks and relevant risk management processes
  • How any climate-related risks identified have had or are likely to have a material impact on its business over the short, medium or long term
  • How any climate-related risks have affected or are likely to affect strategy, business model, and outlook
  • The impact of climate-related events and transition activities on consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

The proposed rules would include a phase-in period for all registrants – with the compliance date dependent on the registrant’s filer status – and an additional phase-in period for scope 3 emissions disclosures.

Sustainability research firm, Verdantix, estimates that the changes could result in $6.7bn (£5bn) of spending over the next three years on consulting, legal, assurance and digital solutions.

However, this could pose an challenge for issuers who may struggle to find the internal and external experts to implement a robust management system for climate disclosures.

Verdantix CEO David Metcalfe said: “The SEC proposals will bring about a seismic shift in the US market, not just in the disclosure of climate risks and opportunities, but also in how that information is used by financial markets participants.”

Image credit: iStock

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