SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures
When the stock market crashed in October 1929, so did public confidence in the U.S. markets. Congress held hearings to identify the problems and search for solutions. The eventual solution came in the form of Federal oversight over the stock market and the drafting of the Securities Act of 1933. It was based on the findings from these hearings and enacted by Congress at a time when the country was in the deepest throes of the Great Depression.
The outcome was a new institution – The Securities and Exchange Commission (SEC), which was then instituted the following year (1934). It is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. At its core, the SEC promotes full public disclosure and protects investors against fraudulent and manipulative practices in the stock market.
As we all know, the stock market is always changing and evolving and it’s not always straightforward for investors (both private and professional) to keep on top of. Many changes that are invoked by the SEC seem to be incremental, where they clarify rules or expand definitions, but rarely do the changes result in wholesale changes to the marketplace in general.
However, rules centered around climate-related disclosures can radically change the atmosphere for investors in a good way. The new rules will also hold corporations (both large and small) accountable for carbon emissions while encouraging and rewarding climate-smart activities.
Investors are increasingly requesting consistent, reliable sustainability data on corporations that in the end, are more easily comparable. Thus, allowing them to use this information to accurately assess their investments in companies that are proactive in reporting climate-related risks, as well as their activities to reduce greenhouse gasses (GHGs) and carbon emissions. Consistent data on a business’s climate activities allow investors to make decisions that are aligned with their own moral compasses. This is the thrust of the new proposal.
What are Some Changes that are Being Proposed?
The Securities and Exchange Commission proposed rule amendments that would require a domestic or foreign registrant to include certain climate-related disclosure information in its registration statements and periodic reports, such as on Form 10-K, including:
- Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook.
- The registrant’s governance of climate-related risks and relevant risk management processes.
- The registrant’s greenhouse gas (“GHG”) emissions, which, for accelerated and large accelerated filers and with respect to certain emissions, would be subject to assurance.
- Certain climate-related financial statement metrics and related disclosures in a note to its audited financial statements.
- Information about climate-related targets and goals, and transition plans, if any.
The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.
The Commission began efforts to provide investors with material information about environmental risks facing public companies back in the 1970s and most recently provided related guidance back in 2010. Today, investors are concerned about the potential impacts of climate-related risks to individual businesses, and in turn want to align their investment dollars accordingly.
The proposed rules are intended to enhance and standardize climate-related disclosures to address these investor needs. Many issuers currently seek to provide this information to meet investor demand, but current disclosure practices are very fragmented and inconsistent. The proposed rules would help issuers more efficiently and effectively disclose these risks, which ultimately, benefits both investors and issuers.
The SEC is proposing new climate-related disclosure requirements for organizations, including statements about how the organization is adapting to our changing climate. The rule changes are to include:
- Information about climate-related risks that are reasonably likely to have a material impact on their business.
- Results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements.
- The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.
What Does Carbon Reporting Mean for Investors?
Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and these investors need reliable information about climate risks as well as climate-smart activities.
The new proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release.
The proposed rule changes would require a registrant to disclose information and inform investors about:
- The registrant’s governance of climate-related risks and relevant risk management processes.
- How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short, medium, or long term.
- How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook?
- The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.
What Does Carbon Reporting Mean for Corporations?
For registrants that already conduct scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management.
The proposed rules also would require a registrant to disclose information about
- Its Scope 1 emissions – these are direct greenhouse gas (GHG) emissions from owned or controlled sources.
- Its Scope 2 emissions – these are indirect emissions from purchased electricity or other forms of energy.
- Its Scope 3 emissions – these are GHG are all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. Scope 3 emissions are broken down into 15 different categories that have varying levels of impact.
Scope 1 & 2 emissions have been more consistently reported, simply because they are easier to define and measure. Scope 3 emissions are much more difficult, as they are indirect emissions based on the upstream and downstream value chains. They require more cooperation within the supply chain participants to accurately be measured (not double counted as an example).
These emissions include those from product use and disposal, as well as those from the production and distribution of products. Here’s where the additives used in plastics can make an effect. By choosing natural additives, the offsetting carbon is reduced. Materials like hemp are carbon negative, in fact, for every ton of hemp grown, it offsets 1.6 tons of carbon! That can equate to reducing the carbon footprint of your plastics by 50% or more!
Scope 3 Emissions are not the same as Scope 1 and 2 emissions. Scope 1 and 2 emissions happen within our organization or supply chain, while scope 3 emissions come from external sources. For example, it’s possible for an organization to purchase paper for printing purposes that comes with a high level of scope 3 emissions because it was made in a way that led to significant resource depletion.
Managing scope 3 emissions is about finding ways to reduce their impact on the environment through simple steps like buying responsibly sourced materials or switching out energy providers who offer renewable energy-only plans. All of these reduce the amount of carbon in the cycle.
How Will the Rules Apply to Scope 3 Emissions Reporting?
If the registrant has set a GHG emissions target or goal that includes Scope 3 emissions, the proposal will provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks.
The proposed rules aim to provide a safe harbor for companies who disclose their Scope 3 emissions and give small reporting companies an exemption to the scope 3 requirements. They are like those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.
The new rules would include a phase-in period for all registrants, with the compliance date dependent on the registrant’s filer status, and an additional phase-in period for Scope 3 emissions disclosure.
What Will the Future of Carbon Emissions Tracking Hold?
At Heartland, we envision a future where environmentally responsible materials come with accurate life cycle analyses that easily allow companies, both large and small, to report on their upstream and downstream climate-smart activities – including the reduction of GHGs released into our atmosphere.
The industrial hemp we grow, and process not only sequesters GHGs during the growth cycle but since we add the processed hemp fibers and fillers to polymers, that carbon is captured within the plastics themselves. We use plastics’ characteristics of very long decomposition rates in a positive way, to capture that carbon for decades or even centuries!
By accurately measuring carbon sequestration, we will allow our customers to comply with the proposed reporting structure and confidently report on Scope 3 emissions, something that is very difficult, if not impossible to do today.
The bottom line is that this proposal if enacted, will be an asset for those who invest in or issue securities, and are concerned about our planet, our species, and our future.
Join us as we make a world out of hemp.