SEC Climate Disclosure (Expected to be finalized in October 2023):
The proposed regulations would require SEC-registered domestic or foreign companies to include climate-related information in registration statements and periodic reports such as 10-K annual reports
Proposed disclosures:
Narrative disclosures about the company’s climate-related financial risks (Governance, Strategy, Risk Management, Metrics and Targets)
Third party assurance of Scope 1 and 2 emissions
Note to consolidated financial statements
Reporting for climate-related data in 2024 10K filings, due in 2025
Facts & Quotes:
The lack of preparation stems from three key areas: technology, resourcing, and budgeting.
A full 85% of executives are concerned their company “does not have the right technology in place,” despite almost all (97%) anticipating technology playing an important role in meeting potential new requirements.
More than one-third (36%) of leaders are not very confident their company is staffed appropriately.
More than three-in-five (61%) business executives believe the rule will cost their company more than $750,000 in the first year of compliance.
Four in ten (39%) executives share that their companies are not fully prepared to meet new requirements.
Almost all (96%) executives say they will proceed with independent assurance, whether it’s required in the final rule or not.
Tablecloth Measurement:
Scope 1
Scope 2
Scope 3
Governance Survey
Environmental Survey
Scope 1 and Scope 2 Data Collection Tool Assessment
Needed Definitions:
The U.S. Securities and Exchange Commission (SEC): a federal regulatory agency responsible for overseeing and regulating the securities industry and protecting the interests of investors in the United States.
Securities: financial instruments such as stocks, bonds, and other investment assets that can be bought or sold in the financial markets.
Initial Public Offering (IPO): the process by which a private company becomes publicly traded by issuing shares of its stock to the public for the first time. This allows the company to raise capital from a broader range of investors and be listed on a stock exchange for trading.
Form 10-K annual report: a comprehensive and mandatory financial disclosure document that publicly traded companies in the United States are required to file with the U.S. Securities and Exchange Commission (SEC). It provides detailed information about a company's financial performance, operations, risk factors, management analysis, and other relevant data for the previous fiscal year. It serves as a critical resource for investors and analysts to assess a company's financial health and performance.
Greenhouse Gas (GHG) emissions: the release of gases into the Earth's atmosphere that have the potential to trap heat and contribute to the greenhouse effect, leading to global warming and climate change.
Scope 1: Direct GHG emissions from sources that are owned or controlled by an organization, such as emissions from on-site fuel combustion and industrial processes.
Scope 2: Indirect GHG emissions associated with the generation of purchased electricity, heating, or cooling consumed by an organization.
Scope 3: Indirect GHG emissions from sources not owned or controlled by an organization, including emissions from the supply chain, employee commuting, and business travel.
Issues or Factors involved:
Private companies may need to pay attention to the SEC's new climate reporting and disclosure requirements on public companies for several reasons:
Supplier and Customer Expectations: Private companies often form integral parts of supply chains and business relationships. Public companies may require transparency and sustainability compliance from their suppliers. Demonstrating climate responsibility can help maintain and attract business relationships.
Potential Future IPO or Public Offering: Many private companies, especially those backed by private equity, have aspirations of going public through an initial public offering (IPO) at some point in the future. The SEC's climate reporting requirements for public companies may serve as a precursor for similar regulations that could apply to private companies once they go public. Being prepared for these disclosures in advance can be beneficial for a smooth transition to the public markets.
Regulatory Precedent: SEC regulations often set a precedent for industry standards and regulatory practices. Private companies may anticipate that similar climate reporting requirements could emerge at the state or federal level in the future, affecting their operations.
Competitive Positioning: Private companies often compete with public companies in the same industries or markets. By voluntarily adopting climate reporting practices similar to those required by the SEC for public companies, private companies can position themselves as leaders in environmental and social responsibility, potentially gaining a competitive advantage.
Investor and Stakeholder Expectations: As climate change and sustainability concerns become increasingly important for investors, customers, and other stakeholders, private companies are also under pressure to disclose their environmental impact and sustainability efforts. Demonstrating a commitment to climate reporting can enhance their reputation and attractiveness to investors.
Risk Mitigation: Private equity firms and their portfolio companies are increasingly recognizing climate-related risks, such as regulatory changes, supply chain disruptions, and reputational damage. Engaging in climate reporting can help private companies identify and mitigate these risks proactively.
Access to Capital: Even without going public, private companies may need to raise capital or secure financing from banks and investors who increasingly consider climate risk in their decision-making. Climate reporting can provide the transparency and assurance these stakeholders seek.
