Why the US SEC’s proposed climate disclosure rules are a game changer | Article | ING Think

The SEC is in the business of protecting the investor, but some see these disclosure requirements as top-heavy and a burdensome environmental, social and corporate governance  oversight, framed in a way that makes it deemed necessary to secure full disclosure to investors.

Those that genuinely wish to show their fair credentials can far too easily be met with scepticism, as in the end there is no fair play arbitrator.

Greenwashing has been the bane of the industry, especially in the US where there has not been a framework to latch on to, even a preliminary one.

Decisions made need to be carried out with full knowledge of the subject matter at hand, even if coming from an advisory committee.

Under the most recent proposal, the SEC chose to mandate companies to disclose Scope 3 emissions, but only if these emissions are material to a public company and/or are included in the company’s climate targets.

Emissions reporting will also be mandated in phases, with the largest companies – those with more than $700m worth of shares – required to start reporting Scope 1 and 2 emissions from the fiscal year 2023.

The discussion about Scope 3 emissions is important because Scope 3 emissions account for between 65% to 95% of a company’s total emissions, and there is a growing belief that effectively managing a company’s Scope 3 emissions will be key in the global decarbonisation process.

Although carbon offsetting markets, either mandatory or voluntary, are expanding globally and will continue to boom, some argue that they could be used by corporates to delay their own decarbonisation efforts.

While acknowledging the importance of carbon offsetting, the SEC has decided to require companies to report carbon offset information separately if it is included in their climate plan.

The SEC is also proposing to require public companies to disclose information about how climate-related risks will materially affect their financial statements, business models, and business outlook in the short, medium, and long term.

This requirement would help investors better understand what a company’s climate-related physical and transition risks are; it could also encourage the company to better prepare itself to mitigate these risks.

The largest companies will be asked to provide reasonable assurance starting in the fourth year after the initial Scope 1 and 2 emissions disclosure compliance date.

The inclusion of Scope 3 emissions in its rule proposals, as well as the specified requirements for carbon offsetting, climate-related risks, and assurance, shows the SEC’s vision to establish a comprehensive and detailed climate reporting framework for US public companies.

With more climate-related data required to be reported in a standardised and comparable way, the SEC points to a more effective allocation of capital to companies or projects with higher performance or greater progress in managing sustainability.

Now that the draft rules have majority support from the SEC commissioners, they will enter a 60-day period for public comments before the commission makes any further changes and finalises the rules.

Estimated costs of compliance, especially the cost to report Scope 3 emissions, could also become a point of debate, as the SEC is mandated to establish regulations that are cost-effective.

The upcoming midterm elections in November will likely not have significant disruptive effects on the direction of the SEC’s proposed climate disclosure rules.

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