On March 21, 2022, the Securities and Exchange Commission released its proposed rule on climate disclosures. The SEC’s rule is a huge step for ESG corporate reporting and standardization, especially in the US which has seen much less coordination compared to the EU. 

The rule would require public companies to disclose information on climate risks and carbon emissions. Also, the rule will require investors and companies to conduct more extensive ESG risk analysis and adopt more effective tracking, reporting, and goal setting mechanisms for ESG topics.

The proposed rule is closely aligned with existing frameworks currently used by companies providing voluntary disclosures. These frameworks include the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Specifically the proposed rule will require companies to disclose information on the following topics:

Summary of Rule by Topic

Climate Risk:

• Process for managing climate related risks; including identification, assessment, management, and governance
• How climate-related risks are expected to affect the business, financial statements, strategy, business model and business outlook
• Climate-related transition plan details, including description, metrics, and targets for both physical and transition risks
• Climate-related and transition-related impacts on financial statement line items, including financial estimates and assumptions

Carbon Accounting:

• Internal carbon pricing information and a description of how prices were calculated
• Scope 1 and Scope 2 emissions reported separately from each other as disaggregate greenhouse gasses and collectively 
• If material or if a target has been publicly set, Scope 3 emissions must also be reported
• All GHG emissions reduction must be disclosed in total, not including off-sets and in terms of intensity (per unit of economic value or production)

Transformation Planning (if climate-related and carbon-related goals or targets have been set):

• Scope of activities included in the goals; including time horizon and intermediate targets
• Details on how the company intends to achieve the disclosed goals
• Annual updates on the company’s progress toward achieving the disclosed goals
• Whether off-sets or credits have been used to achieve the goals and information regarding the mechanisms that were used

The proposed rule includes a phase-in period where compliance dates and participation will be determined by filer status. Assuming the rules are adopted in December of 2022, the earliest companies will file will be in 2024. Both filers and the SEC will face challenges as the rule gets closer to passing. Some of those challenges include:

Major Challenges

Filers:

Reliability and availability of data: In order to report detailed GHG emissions and long-term transformation progress, companies need reliable data. Identifying reliable sources of ESG data and then managing that data are the two biggest challenges in incorporating ESG strategies at each level of an organization and achieving ESG targets.

Climate risk classification: As of right now, there is no standardization of climate risk definitions. Though there are available proposed definitions (ex. IPCC, TCFD), the SEC provides some guidance on how these risks will be defined but no clear definitions have been determined yet and will be a topic of discussion as the process continues. 

Cost of implementation: New compliance rules will lead to increased compliance costs including hiring more sustainability professionals to prepare and manage ESG data, tapping in to auditing firms to confirm the accuracy of reported data, and utilizing new software, tools and systems to accurately track and manage targets and goals that are a challenge to measure (Scope 3, climate risk and resiliency, transformation progress etc.).

SEC:

Determining materiality: Participation in certain sections of the rule relies on “materiality”. Though there are several materiality assessment frameworks available (ex. SASB, GRI, and MSCI) the SEC has not yet identified which materiality standards it will rely on or if it will develop a new set of standards altogether.

Sector reporting: The data challenge exists on both sides. The data collected per company must be normalized in a way that will allow the SEC to provide accurate climate risk and GHG emission profiles by sector, not just by filer. 

SEC authority on environmental topics (link): Some have argued that the SEC is not qualified to regulate climate disclosures. Pushback from these critics suggest the matter would be better managed by Congress. 

Though the SEC rule is new, other frameworks and tools currently exist that will allow companies to get ahead of the requirement. The sooner companies begin to prepare, the smoother the transition will be to mandated ESG reporting. 

The GRI Perspective: ESG standards, frameworks and everything in between, March 2022

Over the course of the next 60 days, the SEC will be collecting public comments. Following an active RFI period in 2021, the SEC will experience tremendous engagement from both opponents of regulation and proponents for more strict regulation. The SEC will have the opportunity to respond to all relevant commentary and adjust the rule as they see fit prior to finalizing. Depending on the review period, the process can take several months before a final rule is published and enforced.

Opportunities

Needless to say, the ESG reporting reckoning is fast approaching. And regardless of the impending decisions that will be made on the rule, high emitting sectors will have to answer; including natural gas. Though some companies have already started their decarbonization transition, these efforts will have to move faster, decisions will have to be more intentional, and collaboration will be an essential component of achieving deep decarbonization. 

Here at Energy Capital Ventures (ECV), we aren’t just investing in deep decarbonization, we’re connecting the entrepreneurs and business leaders who are eager and prepared to innovate and transform industry. This rule serves as a launchpad for entrepreneurs and executives alike to capitalize on climate-related initiatives and redefine what it means to be an Industry Leader. Some areas we’re most excited about are detailed below:

Green Molecules

A core belief  at ECV is that the future of the natural gas industry is critical to the future of hydrogen, renewable natural gas, and syngas. Though green molecule technologies are still earlier in their stages of development and deployment, this area is clearly gaining traction world-wide; see Denmark, British Columbia, and the EU framework on decarbonizing gas. Green molecules allow for transformation at every step of the value chain; which will be an essential component of disclosing Scope 3 emissions reductions. Stefano Galiasso provides great insight on the emerging market here. 

CCUS

ECV champions entrepreneurs and business leaders to embrace the potential of CCUS technology. Cemvita Factory, an ECV portfolio company, uses a synthetic biology platform to convert CO2 into biogas, biochemicals and biofuels at industrial scale. Earlier this week, United Airlines and Oxy Low Carbon Ventures announced an important partnership to develop Sustainable Aviation Fuel (SAF) with Cemvita Factory. The more minds we have exploring, discovering and creating in CCUS, the more successful we will be in achieving net zero emissions instead of merely reducing emissions.

Climate Risk and Resiliency Assessment 

Climate risk identification, management, and mitigation make up an overwhelming portion of the proposed rule. Though several start-ups are already using machine learning and climate data to build climate models, this becomes increasingly challenging as climate change impacts are cascading at an alarming rate. The IPCC’s most recent report summarizes the detriments of these effects. Greater accuracy and decision making capability in this area can be a game changer for companies and geographies that are most vulnerable to climate change.

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The SEC’s proposed rule on climate disclosures is a huge development in corporate governance and sustainability. Though the rule will encourage more transparency in public reporting and discourage greenwashing, its finalization, acceptance and enforcement will come with challenges and pushback from both proponents and opponents. 

The rule is a forcing-factor on conversations that have gone on for decades among numerous interest groups. At Energy Capital Ventures we see the development of this rule as an enormous opportunity for entrepreneurs and business leaders to innovate and create massive enterprise value and climate benefit. 

ECV will closely track the commentary process and industry sentiment. We look forward to sharing further insight and updates as the rule proposal process continues.  As venture capitalists, we look forward to investing and partnering with those entrepreneurs that see the proposed rule as the incredible opportunity that we do.

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