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SEC's proposed climate rule a game-changer for sustainability

Experts are praising the SEC's newly proposed climate risk disclosure rule, which would require businesses to bake climate risk into their overall risk management plans.

The U.S. Securities and Exchange Commission's newly proposed climate risk disclosure rule sets a clear course for business sustainability efforts and provides quantifiable climate impact data to investors.

That's according to Forrester Research analyst Renee Murphy, who said the proposed SEC rule strengthens requirements for demonstrating climate risk and gives a clear framework to businesses when it comes to gathering and reporting climate risk data.

The SEC rule would require publicly traded companies to report on climate-related risks such as weather variability severe enough to impact business operations and financial conditions. Climate risk is an assessment related to the potential impact of climate change on a business's revenue, assets and costs. This includes reporting on weather risks such as extreme heat and cold, droughts, extreme rainfall, hurricanes, wildfires and other events that may be exacerbated by a warming planet.

The rule gives investors "consistent, comparable" information with which to make investment decisions, SEC Chairman Gary Gensler said in a news release.

While companies have traditionally reported environmental, social and governance data to demonstrate a company's sustainability to investors, those efforts are voluntary. The SEC climate disclosure rule requires businesses to not only give a big-picture view of a company's environmental impacts, but to show climate risk specifically and exact greenhouse gas emissions data.

What they're saying is, your viability and resiliency will be affected as a corporation based on climate change.
Renee Murphy Analyst, Forrester Research

"There's no more greenhouse gas guessing; we now actually have to do greenhouse gas accounting," Murphy said. "It has to be as reliable, factual and usable as your financial data is to an investor."

Murphy said the proposed SEC rule is "going to change everything."

"What they're saying is, your viability and resiliency will be affected as a corporation based on climate change," she said.

What the proposed SEC rule means for businesses

Should the proposed SEC rule go into effect, businesses would have to disclose the possible impacts climate change may have on business operations and strategy, as well as their plan for managing the risk, Murphy said.

Businesses would also be required to disclose information about their direct greenhouse gas emissions from sources owned and controlled by the business, known as Scope 1 emissions, as well as indirect gas emissions from purchased forms of energy, such as electricity and gas, known as Scope 2 emissions.

SEC climate rule

Businesses would be required to disclose emissions from assets outside of their control as well such as employee commuting or purchased goods, known as Scope 3 emissions. The proposed SEC rule does include a safe harbor from the Scope 3 emissions disclosure protecting businesses from liability, which is a good thing for businesses, said Stacy Swann, CEO and founding partner of Climate Finance Advisors.

"A lot of people were very nervous about Scope 3 emissions, for good reason," she said. "Scope 3 is something that's out of your control as an organization, but still an important concept in terms of data and information disclosures. You want organizations to get their hands around climate risk; you don't want them to run away from it because they're nervous about unintended consequences." 

The SEC rule aligns with the Task Force on Climate-Related Financial Disclosures (TFCD), a widely accepted and used framework for climate risk disclosures which provides chief sustainability officers with a specified framework for identifying and reporting climate risk, Murphy said.

Indeed, Swann said the TFCD framework is one investors and companies have been using to identify and manage climate-related financial risk.

Though Murphy expects the compliance effort for businesses already focusing on sustainability to be low, she said it will be more work for a business that hasn't already prepared to provide the sort of data the proposed SEC rule is asking for.

Murphy said the reporting work will fall to chief sustainability officers, as well as sustainability management platforms businesses use to look within a business's environment to determine greenhouse gas usage. If a business doesn't have a chief sustainability officer or sustainability management platform, the reporting task will fall to a business's legal counsel or the chief financial officer.

The comment period for the proposed SEC rule will remain open for 30 days after being published on the Federal Register.

Makenzie Holland is a news writer covering big tech and federal regulation. Prior to joining TechTarget, she was a general reporter for the Wilmington StarNews and a crime and education reporter at the Wabash Plain Dealer.

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