The SEC is striving to announce its climate disclosure regulations by October 2023, according to a U.S. Securities and Exchange Commission agenda that surfaced on June 13, 2023. The rules are expected extend across business supply chains -- which means the regulations could dramatically impact companies of all sizes, along with their technology partners.
Indeed, technology partners may need to work overtime -- preparing their own businesses for climate reporting, while ramping up related sustainability reporting and consulting services for customers.
The proposed SEC rules would require all publicly listed companies to disclose information about:
- Climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition.
- Greenhouse gas emissions and certain climate-related financial metrics in a registrant’s audited financial statements.
Technology partners that previously navigated regulations such as HIPAA and Sarbanes-Oxley may have a case of deja vu. Indeed, the SEC climate disclosure regulations could cause expensive bureaucratic headaches -- while also inspiring companies to spend more on sustainability software and consulting services.
Will Scope 3 Disclosure Requirements Complicate Business?
The SEC initially proposed the climate-related disclosures in March 2022. The draft effort spans Scope 1 and Scope 2 inventory mandates, and even more complex Scope 3 disclosure requirements.
Still, the SEC effort faces political hurdles on multiple fronts. Indeed, the agency is expected to face litigation over the proposed regulations following significant pushback from business interests, Republicans and some Democrats over its plans, Bloomberg law reported. Moreover, the pending rules could face constitution challenges, according to Donald J. Kochan, professor of law and the executive director of the Law & Economics Center at George Mason University’s Antonin Scalia Law School.
Among the wildcards that all businesses and technology partners need to keep in mind: If the finalized SEC guidance requires Scope 3 emissions disclosures, then publicly held businesses will need to call on their suppliers and partners -- businesses of all sizes, upstream and downstream -- to proactively share carbon emissions data.
What types of emissions data will publicly held businesses need to collect? Scope 3 reporting is quite complex since it spans 15 emissions factors -- everything from upstream transportation and distribution carbon emissions, to end-of-life treatment of sold products.
SEC Climate Disclosure Regulations: Fueling ESG Software Demand?
Translation: IT consulting firms and technology could have their hands full setting up and monitoring Scope 1, Scope 2 and Scope 3 emissions data for customers -- and their own businesses. Amid that backdrop, annual spending on ESG reporting software is expected to reach $1.5 billion by 2027, up from $700 million in 2022, according to research from MarketsAndMarkets. That's a compound annual growth rate (CAGR) of 15.9%.
With an eye toward the potential SEC announcement in October 2023, businesses should take these four steps to prepare for the SEC climate rule, according to EY.
Blog originally published June 14, 2023. Updated regularly thereafter.