Climate Disclosure Expectations Change: What a Shifting U.S. Regulatory Landscape Means for Companies

Climate disclosure is back on the regulatory agenda of the U.S. Securities and Exchange Commission (SEC).

Over a decade since it introduced initial climate disclosure guidance in 2010, the SEC is poised to mandate much stronger climate-related disclosures in corporate public filings.

Since 2010, climate action has become more prominent and urgent thanks to milestones such as 2015’s Paris Agreement and the 2021 release of the Intergovernmental Panel on Climate Change’s Sixth Assessment Report. These developments, along with the election of Joe Biden after four years of U.S. federal administration ambivalence to climate change, have positioned the SEC to mainstream the reporting of climate-related information.

To understand what new disclosure rules will likely mean for companies, it is helpful to understand how we arrived at this moment.

The 2010 U.S. Climate Disclosure Landscape

The SEC’s initial foray into climate-related disclosure requirements was its 2010 Commission Guidance Regarding Disclosure Related to Climate Change. This first step to include a traditionally “non-financial” issue in mainstream financial filings obligates companies to make climate-related disclosures under four items in Regulation S-K if necessary to ensure their public filings are not misleading. In addition, the guidance highlights four possible topics for reporting (impact of legislation and regulation, international accords, indirect consequences of regulations or business trends, and physical impacts of climate change) and describes how companies may establish materiality for determining if related information needs to be disclosed.

Today’s Landscape

A new chapter is unfolding now, a full 11 years later. Back in 2010, most corporate sustainability initiatives were in their infancy, and almost all were internally driven. Today, most major companies have more mature sustainability strategies and programs, plus they face a crescendo of calls for climate action from external stakeholders, including the Biden Administration, as well as from their own employees. Under this decidedly different landscape, in February 2021, the SEC directed its Division of Corporation Finance to review the extent to which climate-related disclosures align with the 2010 guidance. The review found that the guidance was having limited impact on disclosures, with most companies using boilerplate language of little use to stakeholders. In response, the Division of Corporation Finance published a sample comment letter in September 2021 illustrating how it will, if appropriate, inform companies that their climate-related disclosures – or lack thereof – do not deliver what the guidance intended.

Underscoring this flurry of action, Chair Gary Gensler confirmed that the SEC was developing a new disclosure rule during a July 2021 Principles for Responsible Investment webinar. Given Gensler’s statement, and with a new rule expected in the next few months, companies should start preparing now for the probable implications.

Preparing for New SEC Guidance

While what exactly the new rule will include is unknown, this should not discourage companies from doing everything possible to prepare, as those organizations that do will be better positioned to thrive under the rule once released. Below, I outline four steps to consider.

Step 1: Conduct a climate scenario analysis

Your first step when preparing climate-related disclosures should be to conduct a scenario analysis to understand the extent to which your company is exposed to different climate-related issues. Scenario analyses help do this by quantifying the risks and opportunities presented by different future climate scenarios. The information derived from your analysis can in turn be used to inform your reporting. While it is not known if the SEC will require companies to report in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) as countries such as New Zealand have, it is important to note that scenario analysis is a component of the TCFD recommendations likely to be reflected in some way. Even if TCFD-aligned disclosures are not required, TCFD’s increasing prominence may mean your stakeholders ask you to follow its recommendations regardless, making a scenario analysis well worth it.

Step 2: Familiarize yourself with existing U.S. climate-related disclosure requirements and compare them to your disclosures inside your SEC filings

For those unacquainted with the SEC’s 2010 guidance and its 2021 sample comment letter, your next step should be to familiarize yourself with their content. As you review them, think through questions that will help you better understand what they mean for your company. If you disclose climate-related information in your SEC filings, do these disclosures align with either or both? If you do not disclose climate-related information, do you have the information you need to report in accordance with them in the future? If the answer to either of these questions is no, your company should establish processes for gathering and disclosing the information needed to ensure future filings can be brought into alignment. While the 2010 guidance and 2021 letter will be superseded by the new SEC rule, building or updating your disclosures to align with them will help ensure you start from a stronger base when the new rule is released.

Step 3: Evaluate your climate-related disclosures outside of your SEC filings

One notable point in the SEC’s 2021 sample comment letter was its note that companies providing “more expansive disclosure in [their] corporate social responsibility report (CSR report) than [they] provided in [their] SEC filings” may be asked to explain the differences and the consideration they gave to disclosing the same information in both. With CSR reports increasingly central to corporate disclosure, it is important to ensure the climate-related information included aligns with your SEC filings so that an interested stakeholder – including the SEC – does not miss information included in one but not the other. Again, it is helpful to consider whether your CSR (or sustainability) report supports and aligns with disclosures made in your SEC filings, or if the same conclusions can be made by one person looking only at your CSR report and another person looking only at your SEC filings. If not, it’s important to address discrepancies between the two documents to ensure they support one another and can also stand alone.

Step 4: Plan for the SEC’s rule release now

Finally, you should ensure your company is ready for the SEC’s release of its climate-related disclosure rule by establishing clear responsibility within your organization for updating your reporting when the rule is issued. Likewise, establish a plan outlining the actions you and your company expect to need to make the updates and the time it will take to carry them out. These actions could include reviewing the contents of the final SEC rule in detail, conducting a gap analysis of your current reporting against the rule, or revising your current disclosures to be in accordance with the rule.

A New Kind of Preparation

Changes to U.S. climate disclosure regulation will come at a time when expectations for companies to act decisively on climate change are growing stronger by the day. Against this backdrop, a new kind of preparation will be required of companies, one that takes into account the financial impacts of an issue historically discussed in CSR or sustainability reports with other “non-financial” issues. Like with the fight against climate change, the clock is ticking for companies to ensure they are ready to produce regulatory-compliant disclosures that provide decision-useful information to their stakeholders. By acting now, you can avoid being caught flat-footed by the SEC’s upcoming rule and position your company to compete in a business era increasingly defined by matters once considered financially immaterial.