The Disclosure Divide: How Proposed SEC Requirements Change the Reporting Landscape

For climate advocates, corporate disclosure of climate impacts, goals and commitments has long been a key focus of engagement. Absent any formal requirements, consumers and advocates had to rely on the information companies were willing to share, or shareholders could force them to share, to understand how companies addressed the climate crisis. Oftentimes, this information was developed with a marketing lens, with less focus on the hardline business impacts from climate change. The proposed SEC rule on climate disclosure could change this dynamic, forcing alignment between what companies say about climate, and what they actually do.  

For decades, companies have issued ESG reports and other communications to share their Purpose and impact to their stakeholders. They offer a great window into how a company views itself, wants to be viewed by others, and its sense of identity and values. Oftentimes, these reports are used as key engagement points for NGO partners, consumers and the broader public. The reporting movement has seen great success, and in 2019, 92 percent of S&P 500 companies published sustainability reports.

But stakeholder expectations change over time, and with a mounting climate crisis and growing expectations around corporate action to address it, disclosure is no longer sufficient. Stakeholders demand action. While the number of companies reporting goals and targets has grown, it still lags overall disclosure. According to Morgan Stanley Research, 66 percent of companies in the S&P 500 have public emissions reductions targets. A small fraction of these are third-party verified or set to a standard like the Science Based Targets Initiative. Here the gap begins to take shape between self-assessed sustainability framing and actionable plans to address climate change.

Institutional investors have long sought more information about the material impacts of climate change, as well as disclosure around plans to address those risks. This recent Time overview does a great job of showing how climate disclosure in financial filings has evolved in the past decade and become more prevalent, yet still less specific about goals and targets. According to Time’s research, out of the 300 most consistent members of the S&P 500 since 2012, 175 mention Climate Goals in their financial filings (58 percent), still highlighting the gap between reporting on impacts and action, risk and response.

What will finally close the gap between disclosure of material climate impacts, goals and transition plans, and the self-published narratives that companies have gotten so good at sharing? 

Just as financial disclosure has evolved over time to meet the needs of the groundswell of ESG investors, consumer pressure and knowledge should push ESG reports in the same direction.  As the general public better understands the role of companies in solving climate issues, their expectations on the information they demand will follow suit.

The proposed SEC rule on climate disclosure would also address this gap. In the proposed rule, climate-related targets or goals set by a registrant would need to be disclosed. If you have a nicely laid out plan in an ESG report for net-zero, you would have to also put that plan into your financial filings that are auditable by the SEC. The proposed rule would require information on the scope of activities and emissions included in the target, the unit of measurement, whether the target is absolute- or intensity-based, the time horizon and the baseline against which progress is tracked, and a consistent base year if there are multiple targets. 

How companies balance this will be crucial. Greenwashing, weak corporate commitments and unreliable information will be easier to spot. While welcome, the proposed SEC rule has the potential to create a short-term dividing line for companies that have yet to take clear action around disclosing their climate progress. Companies will have to consider the extra scrutiny that comes with publishing climate goals and commitments in financial documents, as well as the costs of gathering and reporting information – pegged at an average of $675,000 per year according to a recent analysis. Will this create a more polarized landscape with disclosure leaders jumping out ahead, while those just getting started face higher barriers and fall further behind? 

We have started to see two forces – consumer awareness and pressure and evolving regulatory frameworks – converge to create a more transparent and reliable ecosystem of corporate climate information. And while the proposed SEC rule might create a higher barrier to entry for some companies, ultimately this is a good thing for stakeholders, investors and the planet. We don't have time to waste with nebulous or vague corporate commitments that aren’t backed up by real action. The SEC guidelines help get us there by separating concrete climate action from corporate fluff. 

Image credit: Andreas Breitling via Pixabay