In March 2022, the Securities and Exchange Commission (SEC) of the United States proposed ground-breaking amendments for climate-related disclosures - including increased scrutiny on emissions data and business risk related to climate change.
While the ultimate rules are still being finalized, and even scaled back due to the strong push back from companies, when they are eventually enacted, these new requirements will have economic, financial, accounting, auditing, and tax implications—implications that, according to a recent survey by Deloitte, most businesses are not prepared for. Though the SEC is certain to consider feedback from corporates on the information deemed useful-to-investors and the grace period given to corporates to prepare for the required disclosures, it is only a matter of time before environmental and climate-related-business-impact reporting becomes more stringent. Progressive and intelligent business leaders who take decisive action now can be ready. Here’s how.
First, it’s important to understand the purpose of the SEC amendments. Aimed at enhancing and standardizing how the environmental impacts of businesses are reported, these new requirements will better protect investors by making reporting of climate-related information more consistent, comparable, reliable, and easier to find. They’ll achieve this by requiring disclosure of information on climate-related risks and risk management processes that are likely to have a material impact on the business. This includes information about both direct and indirect greenhouse gas emissions (Scope 1 and 2), emissions from upstream and downstream activities in a business’s value chain (Scope 3), and the impact of climate-related events (such as extreme weather) on business continuity. What the SEC aims to achieve with these new requirements is to put an end to companies ‘kicking the can’—the carbon emission goals—down the road.
That noted, companies stand to reap benefits beyond merely complying with the SEC’s new requirements. That’s because a lot of environmental good behavior is about being more efficient overall. It’s about reducing water consumption and overall volumes of waste. It’s about thinking of lifecycle costs, and about treating labor appropriately. What we are seeing is that by being more environmentally conscious and by focusing on transparent disclosures, companies can achieve greater financial performance as their organization are viewed more positively by investors, partners and employees. Many of the most profitable organizations have the most robust decarbonization, renewable energy, and overall sustainability targets that are well-documented and publicly available.
"There is a way of approaching these requirements that will reap long-term benefits beyond demonstrating good governance – and that is programmatically."
Where is the challenge? Reporting this information requires a solid grasp of the associated data, which many companies and auditors do not possess. Most businesses, in fact, lack the necessary expertise to comply with the requirements if they were effective today—more than half of participants in the Deloitte survey indicated that data availability and data quality are their greatest challenge with respect to environmental, social, and governance (ESG) disclosures. With the vast majority (82 percent) of survey participants indicating that they would need additional resources to generate these disclosures, this first hurdle in complying with the requirements may feel insurmountable. Being prepared is half the victory
As much as transparency is important to the SEC reporting amendments, the ability to clearly see and demonstrate the ROI of climate-related investments is just as important to a business’s board and C-Suite.
Organizations not only need to know what questions to ask, but also how to accurately forecast the financial implications of the necessary operational changes, and how to ensure that these changes do not have unintended, and ultimately costly, impacts.
There is a way of approaching these requirements that will reap long-term benefits beyond demonstrating good governance – and that is programmatically. This means that the complexity of planning operational improvements and acquiring, evaluating, and refining climate risk-related data is broken down into manageable stages and tasks, in a way that provides control, visibility, discipline, and the necessary feedback loop for continuous improvement. It is a method that plans for the long-term and entails many small projects delivered across short durations in a coordinated fashion. It requires careful collaboration across various stakeholders, an adherence to a budget, a focus on measurable outcomes, and a commitment to resourcing the program properly to assure intended results.
This programmatic approach has been used to successfully manage some of the most complex changes and systems on some of the biggest capital programs in the world, and already enables net zero strategies for companies across many sectors (e.g., data centers, financial services and healthcare).
The first five steps of a programmatic approach to tackle the commission’s conundrum
Here are five important steps to take early on in a programmatic approach that will help you to plan for, implement and gather data on the climate-related initiatives to be disclosed to the SEC.
- Review your operating model – you can’t plan for operational improvements without an operating model that allows you to identify regional and local leaders as well as the external stakeholders that can help capture data or identify data gaps. Accurately accounting for carbon across the three scopes is difficult and requires a concerted effort by multiple leaders to verify emissions.
- Assess if you have the right internal structure –To achieve the goals your business has publicly committed to and that you are now being held accountable for, you need to orchestrate communication between parties that traditionally don’t align on business activities. All areas of the business have an associated carbon footprint that requires improved behaviors. Companies need to establish a structure that allows for the evaluation of options and ultimately approval for the implementation of climate-risk management strategies.
- Assess the tools available for sustainability-related data capture, tracking and analysis. There are many different software solutions in the market to enable the accounting for carbon, alignment with upcoming disclosures, and improvement of the overall ESG standards of an organization. In order to effectively judge the usefulness of the software, cataloguing the different providers including their required inputs and outputs is encouraged. These offerings carry different price points and generate outputs in tailored formats that may be more or less effective depending on your organizations internal processes and external communications.
- Incorporate the outputs from the data as inputs into an action plan – Great ideas require implementation in order to be effective. COP27 demonstrated the urgent need for action with global leaders pushing for action on an organization’s path toward decarbonization. Data can demonstrate how the organization may be doing at that moment, or historically, but moving toward a lower carbon future requires a roadmap or process built upon intelligence captured. Once the baseline is established, underpinned by accurate data, activities may be orchestrated for near-term projects as a part of a long-term plan.
- Prepare to manage change - A successful approach goes beyond data capture and planning, to implementation that includes change management. Businesses need to be able to demonstrate positive progress towards achieving their publicly stated emissions targets, which often requires major shifts in employee behaviors. You need to understand not only what those behaviors are, but how to communicate them to employees and ensure they remain motivated to maintain them. We’ve seen corporates highlight ‘quick wins’ or projects that can have a positive carbon reduction at low or no cost in a short period of time; share inspiring communication on how employees commute to work or how they dispose of their food waste makes a positive impact. Others make projects relevant through interesting infographics and thought pieces as well as encourage employee engagement with local ‘green teams’. Crafting positive communication on how a certain location improved their recycle rate or reduced their onsite electricity consumption, for example, can inspire continued positive behaviors and encourage others to follow suit.
When the SEC announced delays to the implementation of the amendments, smart businesses knew that this didn’t mean it was time to take their foot off the gas. Even with the delays, the SEC’s timelines are ambitious. Businesses that act both decisively and programmatically will not only be the ones best positioned to comply, but they’ll also benefit from reduced capital costs, while simultaneously making themselves more attractive to consumers, investors, top talent, and government. The best companies are going to be doing this not because they must, but because it represents good business.
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