From the News
Preparing for the Proposed SEC Climate Disclosures
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.
Many consumer brands have significantly transformed their businesses in recent years to align with environmental, social and governance (ESG) initiatives, responding not just to investors but also to customers, employees, supply chain partners and society as a whole. Despite this progress, however, complying with the climate disclosure requirements will be challenging.
While the proposed SEC rules refer to frameworks and standards — such as the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations or the Greenhouse Gas (GHG) Protocol — that may be familiar to some 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 building 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.
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.
This includes an example of the level of depth the SEC is looking for as the proposal requires zip- code-level disclosure of assets subject to climate-related risks.
The SEC proposal also requires all companies to report their Scope 1 (direct) and Scope 2 (indirect) GHG emissions. Scope 3 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, Scope 3 Purchased Goods and Services emissions make up a significant portion of value chain emissions.
Many consumer brands are already calculating their emissions for reporting to retail or other customers and/or investors; however, these companies will be well-served to dig into their GHG emissions reporting controls to determine whether it is 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 rules will 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.
How to prepare
Formulating a roadmap for compliance with the proposed SEC climate disclosure requirements will require coordinating a complex array of factors and operations. Most consumer brands will likely have taken steps toward addressing aspects of these requirements already, but activities may be taking place in silos and without the cross-functional capabilities required for investor-grade reporting. These steps include:
- Determine climate reporting strategy.
- Choose standards and metrics.
- Collect the
- Address risk, controls and information governance.
- Tech-enable and automate.
- Prepare to publish investor-grade reporting, including third-party assurance.
While consumer brands will be at different stages in their ESG journeys, all companies should begin by creating or confirming the right cross-functional team with the full set of capabilities needed in order first to assess the SEC requirements in light of the components they already have in place for supporting the proposed disclosures. This team should consider representatives from the ESG/sustainability/EHS, finance, operations, IT, risk and compliance, internal audit and legal departments.
As noted earlier, many companies may be collecting much of the required data already, but not always with the level of internal controls and oversight associated with inclusion in SEC filings. This will mean improving or enhancing underlying data structures and the processes, technology and people skills involved in collecting the data.
Lastly, it’s worth underscoring that companies should strive to connect their approach to disclosure requirements with their core strategies and overarching strategic approach to ESG. Consumers have told us they make purchasing decisions based on a company’s sustainability metrics so consumer brands should consider this more than just a regulatory exercise. This proposed regulation also presents an opportunity for consumer brands to create value for their businesses, stakeholders and society at large.
As a CPG Industry Champion, PwC is a top supporter of Consumer Brands and works with us on long-term initiatives.
Published on April 28, 2022
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