What do the proposed SEC climate disclosure rules mean for consumer-facing companies?
In March 2022, the SEC proposed new rules for climate-related disclosures. If enacted, they would encompass a wide array of requirements—from the prospective risks that climate change might have on a company to the reporting of greenhouse gas (GHG) emissions, along with a host of other qualitative and quantitative climate-related factors.
Few companies could have anticipated such a detailed and expansive release from the SEC, a response to steadily increasing investor demand for information about the effects of climate change on businesses—and their plans for managing these risks and opportunities.
While the proposed SEC rules refer to frameworks and standards—such as the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations or the GHG Protocol—that may be familiar to some consumer-facing companies, some key differences and additional requirements now merit consideration.
Although the SEC still needs to consider public input on its proposal and adopt a final rule before any new disclosures would be required, companies are well-advised to understand the proposal and begin drawing a roadmap toward compliance now, as the new rules could be in effect for large accelerated filers as soon as fiscal year 2023 (filed in 2024).
What’s in the proposal?
The new SEC rules, if enacted, would entail two separate pieces of disclosure requirements. The first involves adding a specific climate-related disclosure section to Regulation S-K alongside financial and non-financial information on the annual report, while the second pertains to Regulation S-X and requirements for certain climate-related disclosures in the annual financial statement footnotes.
- Regulation S-K
- Regulation S-X
Regulation S-K
Required here will be the climate-related impact on strategy, business model and outlook for two types of risk: physical risk and transition risk.
- According to the SEC proposal, physical risks encompass everything from acute risks, which are event-driven risks such as flooding, to chronic risks which include longer-term weather patterns and related effects such as higher sustained temperatures.
- Transition risks are those risks that companies will face during the transition to a lower carbon economy. These could include costs due to changes in laws or policy, changes in customer or consumer preference or behavior and more.
The SEC proposal also would require all companies to report their Scope 1 (direct) and Scope 2 (indirect) GHG emissions. Disclosures of Scope 3 (value chain) emissions will be required (except for smaller reporting companies) where such emissions are material, or if the registrant has set a GHG emissions reduction target that includes Scope 3 emissions. For most consumer brands, emissions from the Scope 3 Purchased Goods and Services category make up a significant portion of value chain emissions.
Many consumer-facing companies are already calculating their emissions for reporting to customers and/or investors; however, these companies will be well-served to dig into their GHG emissions reporting controls to determine whether they are investor-grade.
The proposed disclosure requirements will also relate to the board of directors’ oversight of climate-related risk and management’s processes for identifying, assessing and managing climate-related risks.
Regulation S-X
Regulation S-X rules would require companies to determine the impact of severe weather events and other natural conditions as well as transition activities on individual financial statement line items (“financial impact metrics”) as well as “expenditure metrics”. This proposed footnote disclosure is notable as it would be subject to the financial statement audit and management’s internal control over financial reporting.
Start preparing now
How can consumer-facing companies begin preparing now for these new rules? Here are a few key steps:
- Convene a cross-functional team from across the organization for detailed reporting
While consumer-facing companies will be at different stages in their environmental, social and governance (ESG) journeys, all should begin by creating or confirming the right cross-functional team to commence detailed reporting. This team will need the capability to assess the SEC requirements in light of the components already in place in the company. This team should consider representatives from the ESG, health and safety, finance, operations, IT, risk and compliance, internal audit and legal departments.
- Implement upgrades to data collection
Few consumer-facing companies have implemented the level of controls they will want to have in place for compliance with the SEC proposed rules. Compliance will likely involve improving or enhancing underlying data structures and implementing robust data collection systems.
- Prepare for the reporting implications to your entire value chain
The size of most consumer-facing companies’ value chain ecosystems—which can include thousands of suppliers—adds complexity to reporting Scope 3 emissions. Private companies in the value chain ecosystem will not be subject to the new rules and may be less prepared to respond to customer requests for emissions data.
To fulfill the SEC requirements, consumer-facing companies—in situations where Scope 3 emissions are determined to be material—will have to use a combination of estimation approaches and actual data collection. In addition, the global nature of consumer-facing company supply chains will require careful consideration in assessing both physical and transition risks. - Align investor reporting with ESG aspirations
PwC research finds that a compelling sustainability journey is a competitive advantage: Consumers tell us they make purchasing decisions based on a company’s sustainability metrics. As consumer-facing companies consider the proposed SEC climate disclosure requirements, they should highlight activities that both improve performance on climate-related risk management and also support future corporate purpose and ESG aspirations. While the level and type of communication will differ for the two audiences, it’s nevertheless essential that the processes are in place to confirm that voluntary disclosures and marketing communications are consistent with investor disclosure.
Expect challenges and opportunities ahead
Many consumer-facing companies have significantly transformed their businesses in recent years to align with ESG initiatives, responding not just to investors but also to customers, employees, supply chain partners and society as a whole. Despite this progress, however, the SEC’s new climate disclosure requirements will still present compliance challenges.
As consumer-facing companies assess their approach to complying with the rigorous standards set by the SEC proposal, it’s worth repeating they should strive to connect that approach with their core strategies and business milestones. More than just a regulatory exercise, this is an opportunity to help create value for their businesses, stakeholders and society at large.
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