Few Companies Are Ready for the New SEC Climate Disclosure Rules, But Experts Say It’s Not Too Late

In boardrooms and C-suites across the U.S., executives who are paying attention are likely wringing their hands — wondering just how prepared they are to meet the Securities and Exchange Commission's (SEC) upcoming climate disclosure rules. The new rules are expected to force thousands of companies to disclose the full scope of their greenhouse gas emissions. This will be the first time that they have to account for emissions across the entire business cycle — and for many, that includes supply chains.

The SEC is expected to finalize the climate disclosure rules this spring, with the aim of enhancing and standardizing climate-related disclosures for investors. It plans to do so by requesting that companies provide climate transition plans. Companies with revenues over $75 million will have to report not only on their Scope 1 and 2 emissions — which come from their own operations and the electricity they buy — but also Scope 3, which includes emissions from both their supply chains and customers. The SEC fact sheet indicates that companies could be required to do this as early as 2024, using their 2023 numbers.

A new level of rigor required for the SEC's climate disclosure rules

But are companies prepared for the level of transparency required by the SEC? Not so much, says Alex Saric, chief marketing officer at Ivalua, a procurement technology firm that specializes in supply chain sustainability.

“Overall, I think very few companies are truly prepared for this,” Saric told TriplePundit. 

While a number of companies have been collecting and making public disclosures about their carbon and GHG emissions for some time, they haven’t been consistent about doing so. “It is generally incomplete, and the methodology is perhaps sloppy and not up to the standards the SEC is requiring," he explained. "Much more rigor and thoroughness will be required given the SEC mandates and the potential fines and other implications of the new rules.”

Companies have a lot to contend with these days — from supply chain resilience to the effects of inflation. Climate disclosure may be one thing leadership has yet to focus on, at least partially because the final rule is not yet in place. 

Betting on “weaker” rules could backfire

In fact, some companies may think they are buying themselves time by not taking action yet. Especially after SEC Chairman Gary Gensler told CNBC the agency was considering “adjustments” to the rules that some observers think could lead to the new requirements being “watered down."

“It’s anyone’s guess whether or not they will do that,” Saric said. “But it is highly risky for companies to bank on that. Even if they allow more of a grace period to comply, or change some aspect of the Scope 3 emissions requirement, it will most likely still go into effect. And if you start to move now, you are ahead of the game.”

Inaction is a “wasted opportunity”

The biggest risk of inaction is “a wasted opportunity,” Saric continued. “If companies wait until the last minute to get the transparency the SEC is requiring, they may find that it is not as rosy a picture as they had hoped, that the information they will need to disclose is not consistent with statements or pledges they have made in the past. And that’s not ideal at a time when they can be increasingly criticized for greenwashing. And in the worst-case scenario, some companies underestimate how much work is involved and fail to meet the minimum due diligence required by the final deadline and are subject to fines and penalties as a result.”

It's much better to be prepared to meet the growing expectations for corporate climate disclosure and action. “The biggest opportunity here is to really be positioned as a leader in an area that is increasingly important to investors, to customers and to employees," Saric said. "By being proactive and taking action up front, [companies] can identify areas they can improve. Even if they can’t address them now, they can start implementing concrete plans by being able to disclose that information. It shows they are a leader in a space that’s very important.”

The challenge of Scope 3 emissions

Saric acknowledges that it is a challenging task — especially for Scope 3 emissions, which account for up to 75 percent of a company's total footprint, according to the Principles for Responsible Investment, a group of socially conscious investors backed by the United Nations.

“Scope 3 is not just suppliers but the entire depth of the supply chain, from extraction to the transport of materials, all the sub-tiers,” Saric explained. “While many companies may know who their immediate suppliers are, very few have a view into their sub-tiers. Gathering this information is a very complex exercise.”

Message to suppliers: We’re all in this together

Supplier engagement will be key, Saric added. Collaboration — not dictums from above — will be the way to win cooperation from valued suppliers, he advised.

“Companies will have to engage, in some cases, thousands of suppliers — most of which won’t be affected by this requirement," he told us. "So they have to do it in a way that is both consistent and scalable and also feels mutually beneficial to their suppliers, rather than just issuing a demand for emissions data. If they build the right foundation, and the processes and mechanisms required, companies will be in a much better place once the SEC rules take effect.”

Image credit: Li-An Lim / Unplash