In the midst of the current United Nations COP27 climate change conference, governments around the world are undergoing a big push to make ESG Reporting and climate-risk data mandatory instead of voluntary.
Within this backdrop, in March 2022, the Securities and Exchange Commission (“SEC”) proposed revolutionary new rules for US public companies to report more in-depth, mandatory climate-related financial reporting or disclosures.
For public companies, these developments signal the most significant overhaul of ESG reporting requirements in two decades. Bloomberg Law
The new proposed climate data is meant to meet ever-increasing investor demand for more ESG and climate-related financial information.
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 investors need reliable information about climate risks to make informed investment decisions. SEC Chair Gary Gensler
In essence, the SEC is proposing that US public companies should integrate new climate financial data and greenhouse gas (GHG) protocol in EDGAR filings like the 10-K or annual report going forward.
Just like it’s new iXBRL update, the SEC is leading the way in climate SEC EDGAR filings. As a result, this helps investors with ESG investing.
SEC Increases Focus on ESG Reporting & Climate-Related Financial Data for EDGAR Filings
In the US, the SEC has taken several recent steps to signal its focus towards climate-related financial disclosures and reporting as outlined below.
In addition, Gary Gensler emphasized that climate-related disclosures need to be consistent and comparable.
How the SEC guides climate financial data & ESG reporting
The SEC is taking an active role in seeking enhanced climate-related reporting. Also, it is seeking clarification of climate reporting that companies provide.
In Feb. 2021, SEC Commissioner Allison Herren Lee directed focus on climate-related disclosure of public company filings.
In Sept. 2021, the SEC issued a sample letter that demonstrates how the SEC comments on climate-related reporting or the absence of such disclosures. The SEC ramps up its scrutiny of climate reporting.
In 2022, the SEC is proposing landmark changes to climate-related disclosures. Requesting disclosure of management oversight is a new facet.
SEC Influences Climate & ESG Reporting Trends in EDGAR Filings
In June 2022, the White & Case Public Company Advisory Group published its fourth annual study of ESG reporting in SEC filings.
The group reviewed the annual meeting proxy statements and annual reports of 50 companies in the Fortune 100 in 2020, 2021 and 2022.
Climate-related reporting steals the spotlight in 2022
The study reveals that climate-related disclosures increased significantly in both Form 10-K and proxy statement filings of the surveyed companies in 2022.
Furthermore, it appears that the SEC’s comment letters, focus on climate and proposed climate filing changes are directly influencing the increasing trend in climate reporting.
Source: White & Case Public Company Advisory Group
As well, many companies are including climate disclosures for the first time in 2022.
The White & Case study also summarizes the following findings:
14% addressed climate-related disclosures in their Form 10-K for the first time
12% addressed climate-related disclosures in their proxy statements for the first time
5 companies added new sections discussing ESG, Sustainability & Climate Change in their MD&A’s
The Seven ESG Topics on the Rise in 2022
In 2022, environmental disclosures are increasing substantially. Undoubtedly, companies are filing ESG press releases and information in reports and this aids with ESG investing.
In fact, the environmental category is seeing the largest increase in reporting or disclosures out of all of the ESG categories.
Source: White & Case Public Company Advisory Group
Environmental ESG Category Sees Highest Disclosures
In 2022, the 50 surveyed companies increased their environmental disclosures in 89 out of 100 filings.
It should be noted that, this is a 254% higher increase in environmental filing disclosures in 2022 compared to 2021. Moreover in 2021, only 35 filings saw increasing environmental disclosures.
Source: White & Case Public Company Advisory Group
Current Climate Reporting Requirements for U.S. Public Companies
At this time, US public companies look to the SEC’s 2010 guidance for ESG and climate-related financial disclosures.
SEC 2010 Guidance for Climate Reporting
The SEC’s 2010 guidance leaves climate-related disclosures up to the discretion of each public company. But, it says that companies should base reporting on materiality or the degree to which climate affects companies.
In addition, companies are able to decide which ESG rules or standards to follow.
Corporate Sustainability Reports (CSR) for Climate & ESG Reporting
Currently, the SEC does not require CSR reports. Thus, CSR’s are voluntary in nature and there are no CSR filings on EDGAR.
Nonetheless, in 2022, about 90% of the world’s biggest companies voluntarily publish CSR reports.
Importantly, Harvard Business Review reports that most companies have complete discretion over what they report in CSR’s. As well, it says that the information can be confusing and only a minority of CSR’s are validated by third parties.
Subsequently, this leads some to question how reliable CSR reports are for climate-concerned investors looking for more thorough, standard and comparable information for ESG investing.
Measurement is often nonstandard, incomplete, imprecise, and misleading. Kenneth P. Pucker, Harvard Business Review
Leading Worldwide ESG Reporting Frameworks
Bloomberg Law reports that there are four leading ESG reporting frameworks. However, many policymakers are endorsing the TCFD.
Task Force on Climate-related Financial Disclosures (TCFD)
Global Reporting Initiative (GRI)
Sustainability Accounting Standards Board (SASB)
United Nations Global Compact (UNGC)
Significant Worldwide Upward Trend for New Climate ESG Reporting
In a Forbes article, author Robert G. Eccles refers to the evolution of sustainability disclosure. As well, Eccles lists three significant new proposals recently put forth for climate-related disclosures.
The U.S. Securities and Exchange Commission’s 2022 proposed rule for, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.”
The International Sustainability Standards Board’s (ISSB) “IFRS S-2 Climate-related Disclosures (Draft).”
The European Sustainability Reporting Standards (ESRS) “ESRS E-1: Climate Change (Draft)“
Eccles is hopeful that a worldwide standard will be reached even with these three different proposals in the mix.
The framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) is foundational for all three proposals…All three build on the widely-used Greenhouse Gas (GHG) Protocol as well. Robert G. Eccles, Forbes
The Task Force On Climate-Related Financial Disclosures (TCFD) is Increasing in Popularity
The TCFD is widely recognized as the global leader in providing worldwide recommendations for climate-related financial disclosures. It is chaired by Michael R. Bloomberg and consists of 31 members across the G20.
Currently, significant progress is being made to develop a global baseline for climate-related reporting disclosures.
The number of TCFD supporters has reached 4,000 companies in 101 countries with a combined market capitalization of over $27 trillion.
Many countries leading the way in the adoption of enhanced climate reporting
The worldwide focus on climate change has spurred favoured public opinions on enhanced climate reporting in many countries as the public looks for socially responsible investing.
In June 2021, the G-7 members backed mandatory TCFD reporting. These members include the US, the UK, Canada, France, Japan, Germany and Italy.
Additionally, the UK is the first G20 country to enforce mandatory climate-related reporting of risks and opportunities for Britain’s largest businesses.
Brazil, Mexico, New Zealand, Japan, Singapore, Hong Kong, South Africa and Switzerland are also leading the way in adopting TCFD-aligned reporting.
As policymakers and the public around the world continue to focus on the climate, increasing controls on climate financial reporting are inevitable. Along with this, the SEC will continue its push for increasing mandatory climate-related financial reporting on EDGAR and this will aid investors with ESG investing.
Image by Drazen Zigic on Freepik
