Reporting and Disclosure in the Headlights

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Reporting and Disclosure | Future Business in the Headlights

A raft of developments in the disclosure sector illustrates the hastening pace and impact of corporate reporting on carbon.

First, the long-awaited US Securities Exchange Commission (SEC) draft rule on climate disclosure has finally been released. It requires US companies to provide Scope 1, 2 and 3 emissions disclosures; any climate-related goals and progress; climate transition plans, if any; climate-related risk assessment information, including transition risk; and climate governance information.

This raft of demands will reduce costs and increase investor knowledge about climate risk and whether companies are reducing the full range of their emissions in line with the Paris climate agreement’s 1.5-degree goal.

Commentators have called the long-anticipated Climate Disclosure Rule, ‘A momentous step toward a liveable climate and a sane future, one that we’ve been working toward for years.’

Jessica Wachter, SEC Chief Economist, noted the new rules will provide greater comparability and reduce costs to investors, who currently struggle to assess information from a variety of reporting frameworks in a variety of places. She also stressed how the new rule will reduce ‘information asymmetry,’ insider trading, and investor costs by standardising the format and location of material information.

So, it all appears rosy news. As climate risk increases and the climate transition gains speed, businesses must be able to look across their supply chains and receive accurate information about whether suppliers are factoring climate risk into their business operations and business decisions, and whether they are also reducing their climate emissions. This information is critical to executives’ ability to make informed, long-term, strategic decisions.

“The new climate disclosure rule is truly a watershed moment in responding to investor demand for accurate climate disclosure,” said Danielle Fugere, As You Sow President and Chief Counsel. As You Sow campaigns for corporate transparency.

“Clear and standardised reporting of greenhouse gas emissions is the bedrock of sound investor decision-making. The new rule provides investors with more robust, complete, and comparable disclosure of risk and  emissions data to determine which companies are aligning their business activities with Paris targets and minimising transition risks.”

Believing in Better

SEC Commissioner Allison Lee believes that maintaining effective disclosure regimes is a major part of the SEC’s job. It has a responsibility to investors to accurately price risk, she said, adding the agency has a responsibility to make sure markets are based on facts too.

She pointed out many climate risks have already materialised and are having a negative impact on capital markets and the entire economy. The new rules apply to the majority of issuers, including companies with carbon-intensive business models.

Scope 3 emissions are particularly important as the largest source of emissions from most companies. According to Paul H. Munter, SEC Chief Accountant, the new rules will require that Scope 1 and 2 will be included in the company audited financial statements, with Scope 3 reporting being phased in over time depending on the size of the company. Smaller companies, it should be noted, are exempt.

The point of this all is simple. Climate change is a global problem. As climate-related impacts reach historic and increasingly catastrophic levels, commensurate ambition and action are required. Voluntary guidance, to date at least, does not seem to result in either quick or comprehensive action by markets.

So clear and consistent climate-related disclosure mandates from the SEC, including full reporting of Scope 1-3 emissions, are the next step up the ladder.

UK Net Zero Standardisation

In additional policy alignment for corporates on carbon, across the pond, a new Net Zero Strategic Advisory Group (SAG) formed by the UK National Standards Body, BSI, will help ensure standards accelerate the transition to Net-Zero.

Standardisation, along with disclosure, is vital to ensure all corporates are playing to the same rules. The SAG intends to drive positive change across the international standards community by overseeing a shift in all standards so that they best reflect Net-Zero requirements and are compliant with Net-Zero policies.

Its activity will include articulating industry requirements and policy ambitions while providing guidance to BSI to ensure its standards and wider work support the transition to Net-Zero. A historic problem has been that differing UK and indeed global firms work to differing standards and metrics on Net-Zero. This news, potentially, could be a game-changer.

Sebastiaan Van Dort, Associate Director, Energy and Sustainability Standards, BSI said: “Over the last twelve months the journey to Net Zero has gathered pace. COP26 served as a major watershed moment for nations, governments and businesses.

“If we want to achieve the goals of the Paris Agreement and keep global temperatures from rising above 1.5C, then now is the moment to turn our climate change commitments into climate change actions. The international standards community has a critical role to empower standards users to accelerate their transition. The Net Zero Strategic Advisory Group will oversee our delivery of this.”

Laura Sandys, Chair of the BSI Net Zero SAG, said: “Industry standards are often the crucial but forgotten component of change required for reaching Net-Zero. The work that BSI are doing nationally and as importantly internationally will be one of the most important drivers of embedding change across the economy. I am very privileged to be chairing such a group of experts to support BSI deliver on its important role in driving Net Zero economy-wide.”

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