Companies need to provide reliable information on climate-related risks and impact on their operations, but the lack of consistency and standardization in data collection, the absence of the right infrastructure to record data, and insufficient expertise in financial and climate analytics poses significant challenges.
The Securities and Exchange Commission (SEC) has proposed new rules that would require companies to disclose certain information about the impact of climate change on their business, including greenhouse-gas emissions and climate-related risks that are likely to have a material impact on their operations or financial condition. The proposed rules are intended to provide investors with consistent, comparable information to help them make informed investment decisions, and to provide companies with clear guidelines for disclosing such information.
The changes would require companies to:
- Disclose information about their governance and risk-management processes related to climate change
- Relate the impact of climate-related risks on their business, financial statements, and strategy
- Include a safe harbor for liability from disclosing Scope 3 emissions and an exemption for smaller reporting companies.
Under the proposed rule changes, larger companies would be required to have their greenhouse gas emissions disclosures attested to by an independent service provider to increase the reliability of the disclosures for investors.
Implementation challenges to be SEC compliant
The SEC’s policy has been welcomed by many as an important step towards addressing the growing concern about climate change and its impact on businesses. However, several challenges are impeding organizations from taking action.
- The proposed rule will require publicly traded companies in the United States to disclose information on their governance, risk management, targets, and goals related to climate change in their financial filings. This will be the first time such requirements have been implemented in the country. While there are some data and methodologies for assessing climate-related hazards, there is a lack of consistency in the data and methods used to assess the severity of climate-related risks (physical and transitional), which makes it difficult to determine the potential damages or losses from such risks.
- Substantial effort will be needed to acquire the right data across clients’ assets/sites/systems due to inconsistency and lack of standardization. Organizations are not yet collecting all the information their systems are creating or don’t have the proper infrastructure in place to record the right data. Organizations lack master data management practices resulting in low data quality. Overall, setting up GHG emissions and reduction goals means collecting data and benchmarking emissions to show changes year-over-year, which is proving to be challenging.
- Companies may use one or several third-party reporting frameworks, including the Global Reporting Initiative (GRI) standards, Greenhouse Gas (GHG) Protocol standards, Task Force on Climate-related Financial Disclosures (TCFD) framework, and Sustainability Accounting Standards Board (SASB) standards, for voluntary reporting on climate data. Transparency is obscured by the use of multiple measures and the fact that some frameworks might paint a company in a more positive light than another.
- Performing risk calculations requires solid financial and climate acumen and analytics, which expertise is often missing. This results in difficulty assessing risks and opportunities from a range of climate-change scenarios. Additionally, organizations do not have the right processes in place for climate risk approval and oversight.
Assessing the impact of the SEC’s climate disclosure policy
Capgemini worked with the Wharton School’s Venture Lab to investigate the impact of the SEC’s climate-disclosure policy on organizations.
First, the Capgemini team and the students from The Wharton School conducted a deep-dive into the SEC’s climate disclosure policy. This involved reviewing the policy in detail, as well as researching best practices for climate-related disclosure and assessing the potential impact of the policy on companies across different industries.
Next, the team mapped the gaps and risks identified in the SEC policy to the solutions offered in the market. This analysis involved a comprehensive review of existing climate-related disclosure frameworks and standards, as well as an assessment of the strengths and weaknesses of each approach.
The team also conducted research on recent trends in ESG and “green” dealmaking. This involved analyzing data on recent deals, identifying key players in the market, and assessing the impact of climate-related risks and opportunities on dealmaking.
Finally, the team reviewed the variation in reporting requirements between different organizations, including EFRAG, SEC, and ISSB. This also involved an assessment of the potential challenges and opportunities associated with each approach.
Managing SEC climate-related challenges
To address the challenges posed by the SEC’s climate disclosure policy, businesses need to take a comprehensive approach to collecting and managing their climate-related data. This involves addressing several key areas, including data availability, quality, access, and governance.
- Businesses can start by collecting all the information their systems are creating and building the right infrastructure to record and ensure high-quality data. This involves creating a centralized database that can be accessed by all relevant stakeholders and ensuring that the data is accurate, complete, and up-to-date.
- To ensure that the data is being used effectively, businesses also need to focus on data access and governance. This involves centralizing data, especially when it is available but siloed, to limit overall access. A well-designed enterprise data model and governance principles can help ensure that data is being used effectively and efficiently.
- Another key area of focus is climate-related data monitoring. Businesses need to define clear ESG metrics and gather baseline data for comparison against future goals. This will allow them to track their progress over time and identify areas where they need to improve.
- To make informed decisions about climate-related risks and opportunities, businesses also need to focus on quantifying the impacts of climate change on their business models for different climate scenarios and decarbonization pathways. This will help them develop effective strategies for managing climate risks and identifying new opportunities for growth.
- Finally, businesses need to focus on developing ESG strategies that are closely connected to their overall business strategy. This involves assessing the impact of emission reduction projects and deciding which low-cost and high-impact solutions to pursue.
By taking a comprehensive approach to managing their climate-related data, businesses can not only comply with the SEC’s climate disclosure policy but also make more informed decisions about how to manage climate-related risks and identify new opportunities for growth.
At Capgemini, we understand the challenges organizations face in managing their climate-related data and complying with the SEC’s climate disclosure policy. That’s why we offer a range of solutions designed to help businesses address the key areas of data availability, quality, access, and governance, as well as climate-related data monitoring, risk and opportunities insights, ESG strategies, and emission-reduction steps.
Guest Author: Farah Abi Morshed is manager of energy, utilities and chemicals at Capgemini. Read more Capgemini blogs focused on sustainability here. More: Read all guest blogs here.