Standardised Climate-Related Disclosure for Investors
Sustainability reporting is increasingly crucial. Pressure is mounting for companies to achieve net zero, and investors are requiring sustainability reports before investing more and more.
In response to investors’ requirements for more consistent, comparable and reliable reporting, the US is bringing in new rules to enhance and standardise climate-related disclosures by public companies and in public offerings. It hopes to bridge the gap between investors and sustainability reporting, allowing insight into the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.
The rules have been brought in by the Securities and Exchange Commission, an independent federal agency working to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
“Our federal securities laws lay out a basic bargain. Investors get to decide which risks they want to take so long as companies raising money from the public make what President Franklin Roosevelt called ‘complete and truthful disclosure,’” says Gary Gensler, Chair of the Securities and Exchange Commission, about the new rules.
“Over the last 90 years, the SEC has updated, from time to time, the disclosure requirements underlying that basic bargain and, when necessary, provided guidance with respect to those disclosure requirements.”
What does the new requirement mean for companies?
The new ruling requires registrants to disclose specific information, allowing potential stakeholders to see standardised information that promotes clarity and informed decision making.
The list of required disclosures includes:
- Climate related risks
- The impacts those risks have and may have
- Any activity the company has undertaken to mitigate or adapt to those risks, and the financial impact of those activities
- Any activity to mitigate or adapt to material climate-related risk
- Management of climate risks, including any oversight by the board of directors of climate-related risks
- Processes for identifying, assessing and managing climate risks
- Climate targets, and any financial impact these may have on the company
- Some companies may also have to include information about Scope 1 and/or Scope 2 emissions
- Costs and losses as a result of natural disasters
- Costs and losses related to carbon offsetting and renewable energy credits or certificates
Whilst this is a great step to even the regulatory playing field that has started to become a very crowded, uneven space, there is a glaring lack of inclusion of Scope 3 emissions.
“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” continues Gensler.
“The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”
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