Understanding the SEC's Regulations for ESG

Julieta Casiello, SDR at Finboot
August 24, 2023

This blog discusses the SEC's new climate rules, which have been implemented to help with environmental protection. These regulations are designed to reduce the potential impact of climate change on our planet.

The US Securities and Exchange Commission (SEC) is nearing the completion of regulations concerning climate-related declarations, yet some uncertainty remains about the proposed SEC ESG rules and who they affect. 

What is the purpose of the SEC's new climate disclosure regulation?

The SEC's interest in ESG reporting has been spurred by the escalating importance of sustainable practices in the corporate world. A 2020 Harvard study demonstrated a positive correlation between ESG maturity and financial performance, highlighting the economic benefits of sustainable practices. As a result, investors are increasingly using ESG performance to assess potential investments, recognizing that superior ESG performance is indicative of greater profitability and risk management.

As per the SEC ESG rules which were issued in 2010, public companies must disclose information relating to climate that is material. According to the SEC's 2010 guidance, "a reasonable investor would likely consider it significant when determining whether to vote or invest in something," if the information is material.

It is evident that different companies have had varied understandings of the requirements for sustainability reports, resulting in flawed information being presented and a distorted view of a company's sustainability efforts. Particularly, GHG emissions reporting has had a long-standing issue of inaccuracy because organizations are using approximations instead of exact energy consumption figures.

A thorough investigation of Scope 1 and 2 corporate emissions revealed that of the thousands of companies that submitted emissions data voluntarily from 2010-2019, roughly one third had incorrect figures at some point. In numerous circumstances, companies reported a decrease in emissions in comparison to the preceding year when in reality they had increased.

The SEC's introduction of the climate disclosure rule, which has been strongly backed by the majority of investors, is intended to address the challenge of human beings' shared objective of cutting back on carbon dioxide emissions and to also aid investors in monitoring companies' sustainability initiatives over time or evaluating the performance of one company versus another. This is a crucial step for both humanity and investors who are more and more requiring transparency related to corporate climate risk mitigation.

What outcome could businesses potentially experience if the SEC climate disclosure rule is adopted?

The proposal would necessitate publicly-traded companies to submit statements related to environmental, social and governance activities in the same manner that their financial records are documented, calling for their carbon footprint accounting to be precise.

The new rule, which largely follows the frameworks set by the Task Force on Climate-Related Financial Disclosures and the GHG Protocol Corporate Accounting and Reporting Standard, necessitates public companies to reveal the absolute value and intensity of Scope 1 and 2 emissions. Moreover, large filers (ex. Fortune 500 firms) and companies that have specified a Scope 3 emissions goal must also disclose their Scope 3 emissions.

Under the terms of the SEC climate disclosure rule, public companies would be required to provide information on not only their emissions but also other aspects such as:

  • Examining the potential dangers that climate change can bring to a business
  • The system for governing and monitoring the risks from the highest level
  • Establishing a risk management plan to recognize, evaluate and reduce these risks
  • The objectives the business has set for sustainability and how they plan to reach them
  • Proof of their inner decarbonization attempts (like the figures used for carbon offsets)

What steps should my business take to be ready for the SEC's climate disclosure regulations?

It is a fact that certain features of the climate disclosure regulation are contingent upon a company's special conditions, taking into account both qualitative and quantitative components. It is imperative for many businesses to upgrade their internal procedures to ensure that they are delivering accurate data prior to when the new SEC ESG regulations become effective.

A large number of businesses have identified that reliable data is a key issue for them. Deloitte's 2022 Sustainability Action Report found that over half (57%) of senior executives are of the opinion that availability and quality of data are the key impediments that are preventing them from achieving their ESG disclosure objectives.

Businesses can now take proactive steps to accurately measure their energy consumption and carbon emissions prior to the introduction of new disclosure regulations by using data automation with direct utility access. This is the most effective way to ensure businesses are accurately and transparently reporting their carbon footprint.

Prominent ESG leaders have stated that the most heavily monitored piece of data, no matter the industry, is one's carbon footprint and is the most likely to be included in any regulatory environment. Executives preparing for the SEC rules are likely to be considering that the CFO signing off on this data wants to be sure that it is auditable.

Now is the time for firms to analyze their ESG data strategy in anticipation of the projected reporting timeline that is outlined in the SEC’s fact sheet.

A dependable ally for the fresh epoch of carbon accounting

Blockchain technology presents a viable solution for capturing, recording, and attesting carbon footprint data. By closely tracking emissions at each stage in the value chain, companies can provide a more accurate and inclusive picture of their true GHG emissions. This, in turn, enables them to build more realistic plans to mitigate their environmental impact.

Converting emissions into digital tokens on a blockchain allows supply chain partners to readily share primary emissions data. This capability is particularly beneficial for companies required to report Scope 3 emissions, as it facilitates access to emissions data from suppliers, thereby resulting in more comprehensive reporting.

Download it here.