Part 1: What the 2024 SEC Proposal for Climate Disclosure Reporting Means
Climate disclosure reporting means more work for businesses. Climate disclosure reporting means more opportunities. These statements seem to be at odds, but both are true. Yes, new regulations will mean more work. However, proactive, forward-thinking businesses can navigate the changes with some serious advantages.
Before diving into the bright side of climate disclosure reporting, let’s consider how the new reporting rules will impact businesses.
The corporate reporting landscape has experienced seismic shifts in recent years, and none may be as transformative as the U.S. Securities and Exchange Commission’s (SEC) proposal to mandate climate disclosure reporting by 2024. This move — reflecting the growing urgency of environmental concerns — will reshape how companies operate, market themselves, and interact with stakeholders.
What information would companies be required to disclose? The SEC’s website lists the following:
- The registrant’s governance of climate-related risks and relevant risk management processes
- How any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term;
- How any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook
- The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements
In addition to these points, companies would have to disclose information on their greenhouse gas emissions. But government regulations aren’t the only source of pressure on companies to embrace a greener future — perhaps more compelling is the demand from public opinion.
Rising Social Pressures for Sustainable Business Practices
The mandating of climate disclosure reporting isn’t solely a regulatory one — it’s a reflection of a broader societal trend.
Consumers, investors, and the public at large are increasingly discerning about the ethical and environmental implications of their choices. Companies are no longer judged merely by their products or profits but by their commitment to sustainability and impact on the planet. Consider a few ways society is pushing companies to be greener.
- Consumer demand. Modern consumers are making more purchasing decisions based on the ethical and sustainability practices of companies. The preference for environmentally responsible businesses is motivating companies to prioritize their Environmental, Social, and Governance (ESG) performance to retain and grow their customer base.
- Reputational risks. In the age of social media, news about a company’s misdeeds can spread rapidly, damaging its reputation. Firms that don’t address ESG concerns risk negative publicity, which can result in loss of customer trust and decreased sales.
- Investment concerns. Many investment funds now prioritize businesses with strong ESG metrics. This stance is not just for ethical reasons but because strong ESG performance can be indicative of lower risk and long-term financial sustainability.
- NGOs and activist pressure. Non-governmental organizations (NGOs) and activists often highlight and campaign against companies with poor ESG performance. Their movements can result in negative publicity, consumer boycotts, and other challenges for targeted companies.
- Peer pressure. As more companies incorporate ESG best practices, those that don’t can stand out negatively in comparison. Competitive pressure from industry leaders will push lagging companies to elevate their ESG standards or get left behind.
It’s clear that many of the pressures toward environmental transparency are from social forces. These consumer, social, and investor expectations mean that companies that fail to keep up with sustainability expectations will take a hit to their bottom line. However, those who choose to lead the pack have an opportunity to leverage their strategic advantage.
Where many see headaches and additional costs, others see opportunity. Rather than just checking boxes for ethical practices, these innovators imagine unlocking a treasure trove of business possibilities. Think of charting a path for sustainable growth, innovative solutions, stronger stakeholder relationships, and long-term resilience. Let’s explore some opportunities awaiting businesses that champion ESG values.
- Brand boost. Companies with strong ESG scores can market themselves as industry leaders committed to sustainability. As a result, they enhance brand loyalty among environmentally conscious consumers and attract investors who prioritize sustainability.
- Innovation and efficiency. As businesses strive for better ESG scores, they may innovate and adopt more efficient technologies and processes. Not only can this curtail their carbon footprint, but it can also lead to cost savings in the long run.
- Access to green capital. The green finance market is burgeoning. Companies with solid ESG practices may find it easier to access green bonds or loans, which are often earmarked for environmentally friendly projects.
- Supply chain stability. ESG-focused companies often require their suppliers to meet specific sustainability and ethical standards. This elevates industry standards, resulting in a more stable and resilient supply chain.
- Access to partnerships. High ESG scores can make a company more appealing for partnerships, especially with organizations or entities that prioritize sustainability and social responsibility.
If you’re still dubious about the feasibility of climate disclosure reporting, consider California’s example.
California, a trailblazer in green initiatives, provides a compelling example of the transformative power of such reporting. Using the Greenhouse Gas (GHG) protocol as a base, the state leverages its cap-and-trade program to incentivize businesses to lower emissions by providing financial advantages through a kind of emissions market.
Has it been successful? In 2020, 100% of the companies in the cap-and-trade program met their 2020 compliance obligations. California businesses that adhere to this protocol provide transparent data on their emissions, fostering a culture of responsibility and accountability.
Companies like Apple Inc. in California have already seen the benefits. By adopting efficient technologies and adhering to the GHG Protocol, Apple not only slashed its emissions but also identified inefficiencies in its operations. Their approach resulted in the deployment of energy-efficient facility designs, advanced cooling designs, data center optimization, and investments in solar and wind power. These steps and others towards a greener, more transparent future, no doubt, are bolstering an already strong brand presence.
Interestingly, one avenue where companies can make immediate strides in their ESG scores is through efficient computing. Outdated systems consume more power and lack the energy-saving technologies of newer models. Switching to energy-efficient servers, optimizing data centers, and leveraging cloud-based solutions can substantially reduce a company’s carbon footprint.
Another consideration is the strategies companies use to run their data center. For example, strategies like composable infrastructure allow data centers to increase resource utilization, lowering hardware and energy requirements. As a bonus, these steps often result in long-term cost savings.
The SEC’s proposal to mandate climate disclosure reporting is not just a regulatory requirement; it’s an acknowledgment of our evolving global ethos. While challenges lie ahead, so do opportunities. But going at it alone can be daunting and unfeasible.
Our team at Equus is helping companies navigate ESG with solutions for infrastructure analysis, reporting, and more. Starting with a comprehensive review of your IT infrastructure, we provide recommendations that improve computing efficiency while reducing energy consumption. Then, we help you deploy recommended changes and provide quarterly ESG reports to keep you compliant. If you want to prepare for ESG reporting and give your business a competitive edge, contact us to learn more.