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Securities and Exchange Commission proposes mandatory climate risk disclosures.

Climate disclosure is proposed to be mandatary as new proposed rule by the SEC

Securities and Exchange Commission proposes mandatory climate risk disclosures.

Under new rules proposed Monday by the Securities and Exchange Commission, companies in the United States would be required to disclose their greenhouse gas emissions and how climate risk affects their business, as part of a broader effort by the US government to address climate change.

Public companies would be required to report on their climate risks, including the costs of transitioning away from fossil fuels, as well as risks related to the physical impact of storms, drought, and higher temperatures caused by global warming, under the proposals approved by the SEC on a 3-1 vote. They'd have to spell out their climate risk management plans, including how they aim to fulfill climate targets and progress, as well as the financial effect of severe weather occurrences.

In recent years, the number of investors seeking additional information on the risks associated with global warming has risen considerably. Many businesses currently voluntarily share climate-risk information. Investors would be able to compare companies within industries and sectors if all essential information was uniform.

"Companies and investors alike would benefit from the clear rules of the road" in the proposal, SEC chairman Gary Gensler said.

What types of emissions are required to be disclosed?

Companies would be forced to disclose greenhouse gas emissions generated directly or indirectly, such as through the consumption of their products, cars used to carry items, employee business travel, and energy needed to grow raw materials, among other things.

The Securities and Exchange Commission (SEC) offered optional recommendations in 2010, but this is the first time mandatory disclosure regulations have been proposed. The guidelines were open to public discussion for around 60 days before final adoption, and they might be changed.

Climate activists and investment groups have pushed for mandatory information disclosure that would apply to all businesses. According to the proponents, omitting firms' indirect emissions would leave almost 75% of greenhouse gas emissions unaccounted for.

How does this affect companies?

Companies will be required to identify what climate-related risks they face and how they manage those risks under the new guidelines. If a corporation has a "transition plan" to adapt to a warming world, "uses scenario analysis to test the resilience of its business strategy to climate-related risks," or "uses an internal carbon price" to budget for emissions, it must explain how it employs such tools. Carbon offsets will have to be disclosed and quantified by companies. Companies' financial statements will include disclosures indicating how climate concerns affect their financials. These requirements are based on the Task Force on Climate-Related Financial Disclosures' recommendations; the TCFD is chaired by "Michael Bloomberg, founder and main owner of Bloomberg News' parent business."

Companies will be required to report their greenhouse gas emissions as well. The SEC cites the Greenhouse Gas Protocol standards, which divide greenhouse gas emissions into three categories: Scope 1 ("direct GHG emissions that occur from sources owned or controlled by the company"), Scope 2 ("emissions primarily resulting from the generation of electricity purchased and consumed by the company"), and Scope 3 ("all indirect GHG emissions not otherwise included in a registrant's Scope 2 emissions, which occur in the upstream and do not affect the company's Scope 2 emissions, which occur Companies would be required to reveal their Scope 1 and 2 emissions, as well as Scope 3 emissions "if material, or if the registrant has set a GHG emissions reduction objective or goal that includes its Scope 3 emissions." Large corporations will be required to have their Scope 1 and 2 numbers audited, or rather "attested" by a certified carbon-emissions-attesting firm. (Scope 3 emissions are more difficult to quantify and do not require attestation, and there is a "safe harbor" for enterprises that do their best but miscalculate their Scope 3 statistics.)

15Rock has a free climate risk and transition platform that provides full analytics across ALL pillars of TCFD. Reach out for more info!

Gautam Bakshi

Head of Product & Engineering

Former: MD - Private Markets, Wealth & Asset Management, Manulife. Education: Ryerson University, Seneca College

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