The US Security and Exchange Commission (SEC) announced on March 21st that it will require companies to publicly report their carbon emissions in annual filings. SEC will now require US-based companies to also make climate risk disclosures or how climate change affects their business.
SEC is an authority with the main goal to regulate the securities markets and protect investors. It already requires that public companies disclose their financial situation, as well as the potential risks to their business.
As climate change is turning into one of the biggest perils that companies face globally, SEC’s new rules will aim to help protect investors and provide greater clarity about the corporate impact on climate change and carbon emissions.
Investors would thus be able to make their own decisions on whether they want to support a company with an intensive carbon footprint. They will be able to decide how much risk to take based on whether climate change is forecasted to weigh on the company’s future earnings.
Companies would also have an incentive to learn as much about those risks and take actions to minimize them along with their carbon emissions.
There are two main categories of climate change risk that companies may encounter: physical and transitional. Physical risks are related to impacts caused by increased severe weather events, rising sea levels and temperatures or changes in precipitation patterns and weather patterns.
Transitional risks involve effects caused by the transition to a lower-carbon economy like increasing price of emitting greenhouse gasses, regulation of existing products and services, changing consumer behavior towards less carbon-intensive choices, and stigmatization of a sector.
SEC’s new suite of rules will now enter a 60-day public comment period during which businesses, investors and other market participants can remark on and offer changes to the proposals. If the rules are approved and adopted, companies would have enough time to integrate the disclosures into annual financial reports.
Companies with over $700 million worth of shares on the public market would have the tightest integration period as they would be expected to file climate-related data to the SEC in fiscal year 2023. The rest would likely not have to file information on climate risks until 2024 at the earliest.
Smaller companies would not be required to report on their Scope 3 emissions. The larger companies would have to include Scope 1,2 and 3 emissions. Scope 3 includes those emissions generated by the company’s suppliers and customers. They are controversial as many companies have opposed their mandated reporting saying it would be too burdensome and complicated to be estimated.
Companies will now be forced by SEC to disclose how climate risks affect their business, outline their own carbon emissions and report on climate-related targets and goals. This is a big milestone for climate change policy as it integrates a more transparent and outspoken approach to the climate change problem and its effects on the whole financial and business world.