• Lizzie Dunigan
  • Published: 31 May 2022


Environmental, Social and Governance (ESG) continues being a hot topic in the wealth industry; however, there is still little reporting standardization or frameworks. To combat a topic filled with risks and opportunities, the SEC has taken the leap to require greater transparency into the “E” of ESG. For investors, the new disclosures will, hopefully, “provide consistent, comparable, and decision-useful information to investors to enable them to make informed judgements about the effect of climate-related risks on current and potential investments.” 1

On March 21, 2022, the SEC proposed a new set of rules that would “require registrants [public companies and foreign private issuers] to include certain climate-related disclosures in their registration statements and periodic reports.” 1 The upcoming requirement data can be broken down into five sections:

a. Greenhouse Gas Emissions: GHG emission metrics, including direct emissions (Scope 1), indirect emissions from purchased electricity or other forms of energy (Scope 2), and emissions from upstream and downstream activities in its value chain (Scope 3) if material or if registrant has set a target.

b. Climate-related risks and effect: The material impact of climate-related risks on business and consolidated financial statements, the effect on strategy, business model, and outlook, and the process to manage the risks.

c. Transition plans and climate-related metrics/targets: Metrics and targets included in a transition plan to adapt or mitigate climate-related risks.

d. Climate-related financial metrics: The impact of climate-related events and activities on consolidated financial statements and the disclosure of financial estimates and assumptions impacted by the climate-related events. 

e. Governance: The oversight and governance of climate-related risks by the registrant’s board and management.

This is a significant proposal in SEC history. Traditional SEC-required disclosures stem from outlined materiality-based framework. Instead, the recently proposed rules call for non-financial data reporting and, in some cases, third party owned data. Specifically, registrants will be required to ensure confidence over disclosures provided outside of their financial statements. Similarly, some required emissions metrics will be difficult to calculate and may be owned by a third party instead of the registrant itself.

Market Impact

These proposed rules do not directly regulate climate change effects; they only increase the transparency around climate risks. This increase in transparency should reduce the risk of greenwashing, “when a company spends more time and money on marketing themselves as being sustainable than on actually minimizing their environmental impact.”2 Greenwashing undermines market confidence and environmental improvement. Looking ahead, clear climate-risk transparency could put pressure on and enhance companies’ climate-related claims and goals, resulting in real efforts for action and change. 

What’s Next?

Should these rules go into effect, there will be a long road ahead for the required registrants to adhere to. Yes, some companies already voluntarily disclose climate-related risks and use voluntary disclosure frameworks today, but the level of detail and specificity required by the SEC exceeds most existing disclosures. 

Registrants will need to make costly changes organizationally and operationally to integrate the climate-related disclosures with the company’s internal controls, audit and oversight functions. This will include delegating a dedicated legal counsel, subject matter experts, third-party attestation provider and internal teams to navigate the final rules. 

The market is hearing mixed reviews from impacted parties. Critics say the SEC is overstepping its authority and forcing a costly burden for immaterial and overly broad disclosures which may delay the finalization of these Proposed Rules. Fans are applauded the SEC, citing that this is a necessary step in addressing climate change risk and impact, and the rules will help investors make better-informed decisions. Regardless, the affected parties need to consider third-party attestation sooner rather than later. 

While we await the final rules from the SEC, public companies and foreign private issuers should start taking action toward understanding their current state of ESG factors To start, registrants should dedicate cross-functional resources to establish ESG activity accountability and gather the baseline data the regulators will expect. At the same time, the companies should set strategic approaches for tackling ESG and educating corporate boards on the plans.

It’s important that companies look inward at their own practices and better position themselves in the market using ESG transparency. For instance, in order to evaluate the existing governance and risk management on climate risk, one should accelerate a gap analysis and materiality assessment to decompose and analyze all data elements in the ESG data solution. Companies should determine how their current measures will transfer to their SEC filings. Following, it is important to implement the strategy design, operationalize the necessary procedures and transformation processes, track and measure the implementation, monitoring, and control, and ultimately prepare the disclosures to meet SEC requirements. 

The window for comments on the SEC proposed disclosures is still open. Regardless of the SEC rules, there is always more that can be done to improve ESG factors in our environments at any step of preparation for the SEC ESG reporting regime.


2. Greenwashing: What is it, Why is it a Problem, and How to Avoid It (