Decoding the New SEC Rules on Climate: What You Need to Know
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Lisa Spivey,
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Kate Azima,
Director of Partnerships & Marketing
programs@northerncalifornia.nacdonline.org
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About The Event
A special thank you to our wonderful host and moderator Emily Liggett (board director, Ultra Clean Technology, Materion Corp., King Philanthropies, and Purdue Research Foundation) and our expert panelists Justin Femmer (partner and climate go-to-market lead, PwC US) and Rich Goode (principal of environmental, social, and governance services, PwC) for sharing their invaluable insights on the topic of the latest US Securities and Exchange Commission (SEC) rules on climate and what board directors need to know.
Key Takeaways
Draft Disclosures Vs. Final Ruling
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Though being challenged in court, and despite potential appeals, your companies should be prepared for these to come into effect in the new year (effective date Jan. 1, 2025).
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Scope 3 rules for supply chain emissions were removed.
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Reporting on scope 1 and 2 emissions will need to be filed by 2026.
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Assurance requirements deferred until 2027.
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Reporting of greenhouse gas emissions (GHG) will no longer coincide with 10-K filings; it will now be possible to file in Q2.
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The SEC rule applies to financial impacts that affect at least 1 percent on operating profit within the financial statement reports. This can include losses due to extreme weather and other climate-related expenditures.
SEC Disclosures Vs. Other Climate Regulations
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California-based companies should already be compliant with California's regulation AB 1310, with SB 253 and SB 261 coming into effect in 2026, which will require companies to assess and disclose climate-related risks.
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The Corporate Sustainability Reporting Directive (CSRD) in Europe is far more extensive than the SEC rules and has a social risk component to it that the SEC does not.
Thinking Strategically About Climate Regulations
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Companies need to reassess their strategies, investments, and disclosures considering evolving regulatory landscapes and stakeholder expectations.
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Board directors should initiate discussions to determine the company's level of investment in climate-related issues.
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Some companies may opt for minimal disclosure to align with their strategy while others may leverage climate reporting as a differentiator.
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Decision-making should align disclosures with overall strategic goals and differentiation efforts.
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Companies aiming for climate leadership may choose more comprehensive disclosures to distinguish themselves in the market.
Penalties for Not Disclosing
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Reporting climate information in SEC regulatory filings (vs. non-SEC voluntary disclosures) raises the stakes for officers and board directors as proscribed by the Securities and Exchange Act of 1934.
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Recent examples like the German Deforestation Rule demonstrate the financial impact, with fines reaching 4 percent of operating profit for nondisclosure.
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Presenting climate reporting critically with a focus on high return on investment is essential for board members to garner support if they are on a split board.
Taking Inventory
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Boards should ensure management conducts a thorough inventory of previous pledges and commitments to maintain consistency—what we are measuring and purporting about current performance, future commitments, and the underlying methods and assumptions we are using.
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The previously stated climate goals and plans established by management to achieve those goals should be evaluated periodically: Are the goals achievable and at what costs? Are we comfortable that we have the optimal selection of projects and/or investments to achieve the goals and the optimal timeline? What assumptions or scenarios may cause us to rethink or potentially adjust our plans, considering broader business factors and considerations?
Analyzing Risk
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Understanding the varying levels of risk in climate reporting is crucial for effective analysis.
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Factors such as regulatory compliance costs, investment needs, reputational risks, and physical and transitional risks should be considered.
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Companies need to decide whether to front-load climate efforts or wait for potential cost savings from emerging technologies, new processes, tax incentives, and potential changes to regulations—the assumptions and implications of these decisions are important to understand.
Materiality
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Materiality refers to the significance of climate-related information to investors, stakeholders, and financial performance.
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Some compliance with the SEC rules can be deemed unnecessary for some businesses if they can prove why to the SEC.
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Build a flowchart to assess the relevance of climate considerations to the business in relation to investor, supplier, and customer inquiries if this is your strategy.
Human Resources and Reporting Structure
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Establish a dedicated committee or "Center of Excellence" for sustainability reporting with specialized operators.
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There was debate over whether climate reporting should report to the chief financial officer for compliance or maintain strategic influence. Many companies are hiring ESG Controllers, who are typically people with a finance background who have upskilled on sustainability reporting and regulations.
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Each company should decide on the reporting structure, with a chief sustainability officer potentially playing a key role in advancing the agenda.
The Role of Technology
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Technology plays a critical role in ensuring data consistency and transparency for climate reporting required for assurance.
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Investment in technology is essential; there is an ecosystem of new, niche vendors in the market, as well as vendors with already-established footprints in organizations already like Oracle and SAP— solutions for most companies will be a combination of tools.
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The return on investment on data investments is not just about compliance; consider the impacts of having better data and analytics around climate to inform management decisions and strategy.
Useful Resources
Thank you to our generous sponsor for hosting this event: