Proposed SEC climate disclosure rule will impact companies looking to go public

The investor community remains focused on climate transparency.

Two questions to ask:

• If you are an IPO aspirant, is addressing climate risk part of your planning process?
• Did you know that disclosures or the lack thereof could affect public perception of your company?

This article was originally published in ESG Today- Guest Post: Private Companies are Facing a New Era of Climate Transparency - ESG Today

The SEC’s proposed climate disclosure rule – released in March 2022 – is designed to give investors a more thorough understanding of the implications of climate change on the operations of publicly held companies.

But the trickle-down effect of those regulations – along with rapidly changing expectations among the investment community – will almost certainly impact privately held companies, too. And even companies that are not planning an initial public offering (IPO) in the near term will be affected. Forward-thinking entrepreneurs and private business leaders should pay close attention to this issue and begin making changes now to prepare for a future of more transparency.

New regulations, new expectations

Due to the significant amount and nature of the feedback received on the proposal, the SEC likely won’t release a final rule until late 2022 or early 2023. As currently written, the proposed rules would require companies undergoing an IPO in the US to disclose emissions data and related information in their S-1 filing. There is no exemption or scaled disclosures offered to companies going public including emerging growth companies, nor is there a transition period similar to that for compliance with Sarbanes-Oxley Section 404.

But it may not matter much.

Regardless of what is included in the final SEC rule, the investor community increasingly expects climate transparency from companies. Even if the SEC doesn’t require IPO companies to make climate disclosures when they go public, investors likely will. A company’s ability to market its IPO and establish the public perception of its offering could be affected by its disclosures, or lack thereof.

These changing expectations are being driven by a growing acceptance of environmental, social and governance (ESG) standards, which broaden corporate responsibility and goal setting beyond financial performance.

The ESG movement has become a business priority across all industries. The 2022 edition of the EY US CEO Survey, which included a mix of public and private leaders, found that 82 percent of US chief executives see ESG as a value driver to their business over the next few years, and virtually all have developed a sustainability strategy.

Further, 73 percent of US respondents say they have adopted ESG for strategic reasons – such as competitive advantage and lower cost of capital – and not because of pressure from regulators.

Three steps to effective transparency

To prepare for this new world, private companies – especially those considering an IPO – should immediately begin moving forward on three key elements.

First, begin enhancing your company’s governance structure around climate risk. This starts with evaluating if and how climate impacts your company’s business model today and how a transition to a lower carbon economy will impact your business model. Establish a “climate vision” and develop appropriate policies and procedures that support your strategic objectives. Where is your company today in terms of emissions, and where do you want to be in five or 10 years? Review the climate expertise of your board and senior leadership team and if necessary, bring in talent with the background and knowledge to help build a culture that is focused on transparency around emissions reductions. Finally, designate an executive or team to drive your climate efforts daily. Embedding this into your overall corporate strategy with the appropriate tone from the top will prevent this from being a siloed climate effort, addressed ad hoc and separate from the business.

Next, prepare for detailed emissions collection and reporting per the Greenhouse Gas (GHG) Protocol standards, the widely used global greenhouse gas calculation standard, which in many important ways aligns with the SEC’s proposed GHG emissions disclosure requirements. Pay particular attention to Scope 1 emissions (a company’s direct emissions, such as owned vehicles) and Scope 2 emissions (a company’s indirect emissions, such as purchased electricity/steam consumption). If your company isn’t already tracking emissions data, it’s time to begin. Depending on your industry and operations, emissions tracking and data collection can be a complex, time-consuming effort.

Many companies have some access to Scope 1 and Scope 2 emissions data, but it is often uncollected or decentralized. Now it is a necessity to put a data collection/analysis framework into place. The framework that companies develop should be inclusive of every part of their business and accurate enough to withstand outside scrutiny.

Even companies with no plans to go public will eventually be impacted, as publicly held companies begin reporting Scope 3 (indirect, both upstream and downstream) emissions, either due to regulations or by choice.

If a private company belongs to a public company’s supply chain, its executives will be asked to provide detailed emissions data – sooner rather than later – for the public company’s Scope 3 reporting. It will be the “price of admission” for working with publicly held companies.

Data collection can also require investments in technology and tools. Starting now enables a company to understand the scope of its effort, determine what technology is needed and spread investments out over time.

Finally, prepare to report on how climate change is impacting financial performance. Companies will need to disclose the impact of climate on financial statement line items and provide the equivalent of a “mini-MD&A” for climate each year.

Doing nothing is not an option

The biggest obstacle to this three-pronged approach is overcoming inertia.

Some private companies are intimidated by the size of the effort and unsure of how to begin. Others may not appreciate how the investment community – and the SEC – are evolving on the issue.

The key is to stay aware of developments, especially around the SEC rule, and do a materiality assessment of how business could be impacted. If disclosure rules were enacted today, how would you need to respond?

Most importantly, just start. Begin by establishing a workable cross-functional strategy for data collection and reporting and adjust as information is clearer. If companies aren’t capable of releasing climate data today, they can at least improve transparency by developing and discussing emissions plans and governance structure.

The bottom line for private company leaders is simple: Regardless of your IPO intentions, the time is right to begin thinking about climate reporting and how it fits into your long-term business strategy.