Why businesses should persist with SEC Climate Disclosure despite legal challenges

The SEC's climate disclosure rules are currently facing legal challenges from both sides of the debate. On one side, business groups and Republican Attorneys General argue that the SEC has overstepped its bounds, citing issues of authority, arbitrary action, and concerns about compelled speech. On the other hand, environmental protection groups like the Natural Resources Defense Council and the Sierra Club are pushing back against the rule's dilution, particularly the exclusion of scope 3 emissions from the more comprehensive original proposal. Amidst these legal battles, with a temporary stay granted by the 5th Circuit and since dissolved and the cases consolidated in the 8th Circuit Court of Appeals, it remains crucial for companies to continue their preparatory work for compliance with these evolving climate disclosure standards, even in the face of the current legal uncertainties.

In a webinar hosted last week, Allison Herren Lee, former Acting Chair of the SEC and Co-chair of Persefoni’s Sustainability Advisory Board, shed light on the SEC's final rule, legal challenges to the SEC, and the pivotal aspects businesses should focus on as they prepare:

1. Proactive preparation approach for compliance is advised, despite legal challenges to the rule. It is no surprise to anyone that there's litigation. This may cause companies to take the position of ‘I’m going to wait and see what happens.’ But that’s a bit of a risky course to take. At a minimum, companies should expect that there are certain pieces of the rule that will likely survive, even if some of them are struck down. It is difficult to gauge what the outcome of the lawsuits will be and that introduces a lot of uncertainty. The SEC is in an unprecedented situation, caught between dueling lawsuits. Because we don’t know precisely where all of this litigation will land, companies should prepare on a going-forward basis for at least some, if not all, of the rule to survive. 
2. Companies should embrace the familiar TCFD recommendations. Despite modifications from the proposed rule, the final rule retains the core structure of the TCFD framework, focusing on governance, strategy, risk management, and climate-related metrics and targets. Companies already aligning with TCFD will find this continuity beneficial.
3. When determining materiality, look to the examples provided in the rule. Each company will need to assess the materiality of GHG emissions based on its own circumstances — and the SEC has said that the determination likely will not rely solely on emissions volume. The SEC provides two examples of factors that might make emissions disclosures material. For example, a company could face material transition risks if it is required to report its GHG emissions metrics under foreign or state law. It could also determine whether its emissions are material if investors would find this information important to an understanding of whether the company has made progress toward its decarbonization targets or transition plan.
4. Companies should focus on rigor and coordination. Make sure that the finance and sustainability or ESG functions are working together carefully and thoughtfully. Companies should coordinate what they are putting out in corporate sustainability reports with the information disclosed in their Forms  10-K. Internal controls over financial reporting will apply to the financial statement disclosures, and disclosure controls and procedures will apply to the information in Regulation S-K, or the “front end” of the document, so companies will need to set up appropriate controls to meet their new reporting obligations.

For further insights from Allison Herren Lee and the team, including an on-demand recording of our SEC Expert Insights webinar and an in-depth Q&A that dives deeper into the nuances of navigating the SEC's climate disclosure rule, visit our Events page. 

Global Adoption of ISSB Standards Continues

It’s also been a busy month for countries working to adopt ISSB Standards. We highlight four big steps below, but other steps continue around the world. Canada has introduced its Canadian Sustainability Disclosure Standards (CSDS), Singapore is mandating climate-related disclosures in support of its Green Plan 2030, Nigeria has fostered a strategic partnership to integrate ISSB-aligned sustainability into corporate reporting, and Malaysia is advancing towards adopting ISSB standards through its National Sustainability Reporting Framework (NSRF). All of this is part of a broader effort to enhance the quality of information available to investors and other stakeholders in a way that is comparable and consistent with the ISSB’s global baseline standards. 

Canada

Canada has introduced its proposed Canadian Sustainability Disclosure Standards (CSDS), which are open to public comment until June 10, 2024. These standards represent a key step in Canada’s efforts to incorporate the IFRS Sustainability Disclosure Standards (ISSB Standards) into the Canadian market. The CSDS draft standards are closely aligned with the ISSB Standards, including general requirements for the disclosure of sustainability-related financial information (CSDS 1), and specific climate-related disclosures (CSDS 2). The CSDS modifications focus on timing, including accommodations that reflect the issuance date and provide additional time for Canadian companies to transition to applying the GHG Protocol and reporting on Scope 3. Specifically, the proposed modifications include:

• Extending the effective date on year to on of after FY2025
• If a company used a different GHG calculation method than GHG Protocol in the last financial year, the company can use that method during its first year reporting using the CSDS, but must use GHG Protocol in subsequent years
• Scope 3 reporting is not required in the first two years of using the CSDS, in comparison to the one-year period of scope 3 relief provided by the ISSB

Like the ISSB standards, the CDSB standards will be ready for Canadian companies to use voluntarily as soon as effective. Once final, Canadian securities regulators will consider regulations for mandatory reporting - i.e., who will have to report when. 

Canada also moved forward on integrating the ISSB Standards into its existing requirements for financial institutions.  Canada’s Office of the Superintendent of Financial Institutions (OSFI) updated Guideline B-15 and announced new Climate Risk Returns for federally regulated financial institutions, mandating comprehensive climate risk management and reporting. These updates require adherence to the IFRS S2 standards, which include detailed disclosures on greenhouse gas (GHG) emissions across Scope 1, 2, and 3, including financed emissions.. Aimed at banks and insurers, this initiative seeks to streamline disclosures in a comparable, globally-aligned manner and enhance transparency and accountability in addressing climate-related financial risks.

Singapore

Singapore is also poised to enhance its sustainability reporting framework by introducing mandatory climate-related disclosures (CRD) following the recommendations from Singapore's Sustainability Reporting Advisory Committee (SRAC). The initiative, spearheaded by the Accounting and Corporate Regulatory Authority (ACRA) and Singapore Exchange Regulation (SGX RegCo),supports Singapore's Green Plan 2030. From FY2025, all listed issuers will be required to submit annual CRDs, aligning with the standards set by the ISSB. This mandate will extend to large non-listed companies (with annual revenue of at least $1 billion and total assets of at least $500 million) from FY2027. 

Singapore’s mandate will include comprehensive reporting on GHG emissions, including scope 1 and 2 emissions from FY2025 for listed issuers and from FY2027 for large non-listed companies. There's also a provision for a one year relief, phasing in scope 3 depending on the size of the company. Independent assurance on scope 1 and 2 emissions will be required starting FY2027 for listed issuers and FY2029 for large non-listed companies. Companies can find public consultation documents on the REACH consultation portal, ACRA and Singapore Exchange websites.

Nigeria 

Nigeria's Financial Reporting Council (FRC) and the Nigeria Integrated Reporting Committee (NIRC) signed a Memorandum of Understanding on March 8, 2024, to foster sustainable corporate reporting practices, aligning with ISSB guidelines. This collaboration is a significant step towards the implementation of IFRS S1 and S2 standards, showcasing Nigeria's commitment to integrating sustainability into corporate reporting. 

Malaysia 

Malaysia is advancing towards adopting the ISSB’s IFRS S1 and IFRS S2 standards through its National Sustainability Reporting Framework (NSRF). Spearheaded by the Advisory Committee on Sustainability Reporting under the Securities Commission Malaysia, this initiative aims to align with global standards starting with Main Market listed issuers by the end of December 2025, the NSRF will gradually include ACE Market listed issuers and significant non-listed companies, emphasizing the necessity of transition reliefs and external assurance for greenhouse gas emissions to ensure credible and consistent reporting.

Events You Can't Miss

• Last week, Persefoni hosted a webinar that is now available on-demand: ‘CSRD Perspectives: From Compliance to Value Creation.’ Our expert panel, drawing from hands-on experiences with leading organizations such as CDP, the European Financial Reporting Advisory Group, and Workiva, shared strategies for navigating CSRD reporting requirements within and outside the EU.
• Join us in person (Chicago, IL) on April 25 for "ESG Evolution: Preparing for the Next Generation of Requirements." Discover how to prepare your finance organization for the ESG era with insights from industry leaders and experts. Don't miss out on networking opportunities, cocktails, hors d'oeuvres, and valuable discussions on sustainability priorities and solutions. Register here.

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