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Navigating SEC’s Proposed Climate Disclosure Regulations
As the financial landscape evolves, the U.S. Securities and Exchange Commission (SEC) has proposed significant changes to climate disclosure regulations for publicly listed companies. This guide aims to help organizations navigate and prepare for these upcoming regulatory shifts, emphasizing the importance of transitioning from voluntary to mandatory Environmental, Social, and Governance (ESG) disclosures.
I. Understanding the SEC’s Proposed Rule:
- Explore the SEC’s Enhancement and Standardization of Climate-Related Disclosures for Investors rule proposed on March 21st, 2022.
- Recognize the key elements, including detailed reporting on climate-related risks, greenhouse gas emissions, Net Zero plans, and governance approaches.
B. Compliance Timeline:
- Understand the proposed compliance timeline based on the size of companies (large, accelerated filers, accelerated and non-accelerated filers, and smaller reporting companies).
- Anticipate compliance dates for calendar year-end registrants, providing clarity on when disclosure is required.
II. The Path from Voluntary to Mandatory:
A. Investor Pressure:
- Acknowledge the growing demand for higher quality ESG data from investors.
- Understand the disparity in ESG reporting and the need for greater controls to ensure consistency and decision-useful data.
B. Regulatory Trends:
- Compare regulatory approaches, with a focus on the EU, UK, and the SEC’s proposed rules.
- Recognize the trend of moving from voluntary to mandatory disclosures and the implications for companies.
III. Practical Steps for Preparation:
A. Data Quality Assurance:
- Emphasize the need for high-quality, defensible ESG data aligned with financial reporting requirements.
- Recognize the importance of third-party assurance and the role it plays in validating ESG data.
B. Building Disclosure Controls and Procedures (DCP):
- Approach the challenge as one of disclosure controls and procedures rather than solely sustainability-related.
- Address fundamental questions regarding ESG data ownership, chain of custody, and quality assurance.
C. System of Record Development:
- Establish a detailed system of record for ESG data to streamline annual disclosure calendars.
- Develop improved documentation, processes, and procedures for confident data collection, QA, tracing, and external assurance.
IV. Seeking Assistance:
A. Service Providers:
- Consider engaging with ESG service providers for support.
- Explore services like those offered by Anthesis, which can assist in ESG data procedures and disclosure governance.
As the SEC moves towards adopting the climate disclosure rule, companies must proactively prepare to meet the evolving regulatory landscape. This guide provides a comprehensive roadmap for understanding, adapting to, and implementing changes necessary to navigate the transition from voluntary to mandatory ESG disclosures. By focusing on data quality, disclosure controls, and third-party assurance, organizations can position themselves to manage investor expectations, reduce regulatory risks, and ensure compliance with the forthcoming SEC requirements.