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SEC climate disclosures and your company

How you can prepare today for investor-grade, tech-enabled reporting

What happened

In March 2022, the SEC proposed new rules for climate change disclosures. While they are not yet final and are open for public comments, the SEC has proposed to advance rules that require disclosure of:

  • Prospective risks and material impacts on the business, strategy and outlook caused by climate change, generally consistent with the Task Force on Climate-Related Financial Disclosures (TCFD) disclosures (e.g. asset risks at a zip code level)
  • Scope 1 and 2 greenhouse gas (GHG) emissions
  • Scope 3 emissions if material or if the registrant has set a GHG emissions reduction target that includes Scope 3 emissions
  • Additional qualitative and quantitative climate risk disclosures, including the financial impacts of climate related events and transition activities on line items of the financial statements
  • Governance of climate-related risks and risk-management processes

The proposal would also require:

  • Support plans to comply with companies’ advertised environmental claims (e.g., net-zero commitments)
  • Assurance on a phased-in period for accelerated filers and large accelerated filers

ESG disclosure key dates at a glance

What does this mean?

The proposed disclosures are broadly aligned with frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD). All public companies must now quickly transition to investor grade reporting. That means accelerating climate change reporting processes while transitioning to an effective controls environment. All businesses are at different points in their ESG journey, but here are five things every company should consider:

  1. Assemble a cross-functional team to create accountability for ESG performance: The finance function has the experience to oversee accounting, controls and reliability of ESG information while sustainability teams have the deep subject matter experience and context. Companies should address any knowledge gaps through upskilling or hiring to make sure they have the right team in place.
  2. Make sure you have the data that regulators will expect. It’s critical to clearly define ESG metrics, their scope and boundaries, what systems the information comes from, and who the owners are inside the company. To do so, companies should gather baseline data to compare current performance against future goals and milestones.
  3. Set an overarching strategic approach to ESG. This is not an exercise merely to tick a regulatory box, but to create sustainable advantage and value. Companies should connect ESG strategies, milestones and reporting to the overall business strategy.
  4. Upskill corporate directors: Boards—especially audit committee members—need to better understand how ESG fits into the overall business strategy to appropriately manage governance oversight responsibilities.
  5. Prepare for independent assurance: The SEC proposed independent, third-party assurance for Scope 1 and Scope 2 emissions to bolster confidence in climate change information (for accelerated or large accelerated filers).

The time is now and our teams are here to help. Let’s move to action, together.

ESG disclosure considerations by industry

Banking and capital markets

  • Financial services firms need to transition to investor-grade climate reporting and upgrade current processes and controls that fall short.
  • Particularly thorny is the question of how to measure financed emissions. If Scope 3 emissions are deemed “material” by the firm, or if the company has already set an emissions reduction target that includes Scope 3 emissions, financed emissions will need to be included in regulatory filings. Other Scope 3 challenges are that institutions are taking different approaches to measure financed emissions and existing standards don’t cover all asset classes.
  • Financial firms should expect to have little comparable reporting data from their counter-parties about climate risks and emissions. Some private market clients will not be subject to SEC disclosure requirements presenting an additional data collection challenge. This is an evolving area and standardization will take time.
  • Medium-size banks that may have sidestepped climate reporting now find themselves in the same regulatory bucket as GSIBs. They face a daunting challenge of quickly ramping up the collection, verification and reporting of climate data—plus any methodology used in their simulations—within a limited window of time.

Consumer markets

  • Consumer markets companies function within a value chain ecosystem that may include thousands of suppliers. That supply chain adds complexity to reporting on Scope 3 emissions, and companies subject to the new rules will need to use a combination of estimation approaches and actual data collection. This could be especially challenging because many private sector companies in the supply chain won’t be subject to the disclosure rules and may not be as prepared to respond to customer requests.
  • PwC research finds that a compelling sustainability story can be a competitive advantage. Consumers have told us they make purchasing decisions based on a company’s sustainability metrics.

Energy and utilities

  • The industry continually invests in its infrastructure to improve asset resilience and operational reliability. It’s unclear how companies should delineate between routine costs associated with reliably supplying energy to customers or recovering from typical weather events versus the climate-related disclosures required under the SEC proposal.
  • The SEC proposal requires companies to disclose emissions from upstream and downstream activities indirectly connected to their assets (Scope 3), if material, or if its greenhouse gas targets or goals include Scope 3 emissions. Scope 3 will likely be material for energy and utilities regardless of decarbonization commitments in industry-specific, high-emitting categories such as “fuel and energy-related activities” and “use of sold products.” Other Scope 3 categories could also be material for these companies.
  • The need for accurate and reliable data down to the zip code level may provide unique challenges for companies with assets like pipelines, transmission lines, drilling rigs or offshore wind turbines. The expanded disclosures beyond the industry’s already extensive reporting requirements, as well as an accelerated timeline for sustainability reporting, will likely require increased investments and enhancements of existing processes and systems.

Health services

  • Recent studies indicate that the US healthcare system is responsible for about a quarter of all global healthcare greenhouse gas emissions. Meanwhile, fossil-fuel generated air pollution and climate change generates more than $820 billion in medical costs annually in the US alone.
  • These developments, along with the proposed, new SEC rules for climate change disclosures, will increase pressure on both public and private healthcare organizations to address the effects of climate change. Executives will need to consider where they’re focusing. For example, has their organization adjusted its clinical service line, growth and population health strategies to incorporate the specific climate health effects on the communities it serves? Once an organization has reprioritized its healthcare services accordingly, how does that impact capital plans, clinician recruitment plans and the research portfolio?
  • Patients, communities, regulators and other stakeholders will increasingly demand that healthcare organizations are not just helping individuals recover from the health effects of climate change. They will also expect that healthcare providers are not adding to the problem. Decarbonization strategies will need to transform healthcare facilities, supporting operations and the healthcare supply chain.

Industrial products

  • Industrial products companies should begin (or accelerate) efforts to track GHG emissions not only for their operations but also for the raw materials and intermediary finished goods they source. This could be challenging because many private sector companies in the supply chain won’t be subject to the disclosure rules and may not be as prepared to respond to customer requests.
  • Reporting Scope 3 emissions may prove to be the most challenging task for manufacturers that source from vast networks of suppliers, and it’s likely to mean rethinking suppliers based on the size of their carbon footprints.
  • For some industrial sectors, such as engineering and construction, net-zero-as-service may open new revenue streams as customer demand for GHG emissions tracking and reporting heats up.

Insurance

  • Insurers, as with all sectors, may need to enhance climate reporting to investor-grade climate reporting, which likely means upgrades to current processes and controls.
  • Of specific relevance to insurers is how to measure financed greenhouse gas emissions. If a company deems Scope 3 emissions “material,” or if it has already set a reduction target that includes Scope 3 emissions, it will need to include financed emissions in regulatory filings. Further challenges include differing approaches to measuring financed emissions and the fact that existing standards don’t cover all asset classes.
  • Proposed rules don’t address “insurance-associated emissions,” but any insurer that has set a net-zero target which includes its underwriting portfolio will need to report insurance-associated Scope 3 emissions. The Partnership for Carbon Accounting Financials is developing a standard methodology and carriers should keep abreast of developments.
  • Climate scenario analysis is not required, but results and methods must be reported in detail if the company conducts a scenario analysis. In addition to the challenge of defining what is climate related, it’s unclear if P&C catastrophe modeling processes will qualify as scenario modeling.
  • Insurers also may need to consider the potential for triggering of liability coverages because of an insured’s past emissions.

Pharmaceutical and life sciences

  • Given the prevalence of climate action commitments in the pharmaceutical and life sciences sector, many companies will be subject to the proposed SEC rules requiring disclosure of plans and progress for meeting those commitments, including for Scope 3 emissions.
  • Reporting Scope 3 emissions may prove to be the most challenging task for pharma companies that source from a complex, international network of suppliers. That will likely mean rethinking suppliers based on the size of their carbon footprints.
  • Providers also need to consider the physical risks posed by climate change to their infrastructure as well as their operations (for example, pharmaceutical production is a water-intensive process, greatly contributing to a company’s carbon footprint). The quantitative impacts of climate-related risks will soon need to be disclosed in financials, making scenario-based risk analysis an invaluable tool.

Private equity

  • The first step for portcos and funds is to determine the applicability of guidance (filing requirements, exit plans and strategies in the public market, etc.), and focus on those where applicable. Of note, the proposal rules would provide no, or very limited, relief for IPOs.
  • Many portcos that are (or may be) subject to this disclosure guidance are likely in the process of collecting data that would satisfy Scope 1 and 2 requirements, but may not have the sophistication needed to satisfy the SEC. Few are working on assessing their Scope 3 emissions requirements, but may find their banks and larger investors (who would be subject to the SEC requirements) requesting this data from them.
  • For many funds, Scope 3 is a relatively new concept as few have tried to calculate downstream emissions. Leaders in this space are coordinating their efforts across their portfolio companies by baselining Scope 1 and 2. We would expect the change in the disclosure rules to accelerate this process.
  • We encourage both funds and portcos to determine which data the company can consistently receive and from there conduct a diagnostic to target priority issues.

Technology, media and telecommunications

  • Given the prevalence of climate action commitments in the technology, media and telecommunications sector, many companies will be subject to proposed SEC rules requiring disclosure of supporting plans and progress for meeting those commitments, including for Scope 3 emissions.
  • Telecommunications providers will need to consider physical risks posed by climate change to their infrastructure, especially those at risk for flooding, wildfires and hurricanes, and ensure these are managed with the same rigor as other enterprise risks. The quantitative impacts of climate-related risks will soon need to be disclosed in the financials, making scenario-based risk analysis an invaluable tool.
  • Many technology companies are leading the way in the transition to a low carbon future. From smart buildings to smart grids, the path to decarbonization is digital. However, the growing demand for cloud computing and cloud services also places a burden on tech companies to manage their data centers’ energy efficiency and power their operations with renewable energy.
  • Technology providers have a critical role to play in the climate transition, from carbon accounting solutions to enabling smarter supply chains, factories, cities and energy grids. The SEC’s proposal, and other global requirements, represent an opportunity for providers to double-down on developing these technologies to support ESG reporting requirements.

6 steps to transition to investor-grade, tech-enabled reporting

Contact us

Casey Herman

Casey Herman

US ESG Leader, PwC US

Kevin O’Connell

Kevin O’Connell

ESG Trust Solutions Leader, PwC US

Brigham McNaughton

Brigham McNaughton

Managing Director, Sustainability Services, PwC US

Heather Horn

Heather Horn

National Professional Services Partner, PwC US

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