SEC Rule on Climate-related Disclosures
In January 2023, the Securities and Exchange Commission (SEC) cited April as the release date for a long-anticipated final action – a rule on companies' climate-related disclosures.
For reference:
Scope 1 emissions are considered direct greenhouse gas (GHG) emissions from sources that are controlled by a company such as emissions from energy to run equipment, heating and cooling, and company vehicles.
Scope 2 emissions are indirect GHG emissions created by the production of energy (electricity, steam, heat, or cooling) the organization buys.
Scope 3 emissions are indirect GHG emissions that are not owned or controlled by the reporting organization. This category is much more encompassing as it addresses emissions generated by customers who use the products and by suppliers making products the company uses. Addressing Scope 3 involves tracking emissions across the entire value chain from suppliers to end users.
Scope 1 and 2 emissions tend to be easier to track, measure, and, to an extent, control. Options, such as solar and other renewable energy sources and switching company vehicles to electric models, are a few examples. With regard to Scope 3 emissions, EPA suggests that an “organization may be able to influence its suppliers or choose which vendors to contract with based on their practices.” For other companies, the focus can be less on suppliers and more about their customers’ use of products.
The reality is the upcoming SEC final rule release will regulate publicly traded companies; however, these publicly traded companies will be obligated to heighten their demands on the private sector suppliers to the companies subject to the SEC rule. Private companies will very likely be affected by new vendor or customer requirements. Small and mid-market organizations may not have the capability to effectively manage in-house. For those organizations already addressing Scope 1 and 2, it will be critical to ensure the process is accurate. A periodic third-party audit will be prudent. While not anticipated to have a reporting date before 2025 (for FY 2024), if not yet addressed, a plan to identify, manage and measure Scope 3 should be considered.
It is and will be critical for organizations to publicly communicate accurate, complete, and reliable environmental data, which includes environmental risks, opportunities, and practices as well as GHG emissions that are useful in decision-making for stakeholders.
A recent article in Environment+Energy Leader reminds us that there is good news. “…the good news is that these new standards and requirements are aligning around a common core, giving the markets more comparable information, and giving companies clearer direction. Organizations must understand that C-suites and Boards of Directors will be held accountable for disclosures and data management. It will be critical to ensure that data is reliable.”
Important Notes:
The proposed SEC rule would provide a safe harbor for liability from Scope 3 emission disclosure and exemption from Scope 3 emissions disclosure requirement for smaller reporting companies.
The proposed disclosures are anticipated to be similar to currently accepted disclosure frameworks such as ISSB (IFRS) and CDP.
Sources:
https://www.epa.gov/climateleadership/ghg-inventory-development-process-and-guidance
Recent Posts
The Role of ESG and EHS in Mergers and Acquisitions
To say the past two years have been difficult for manufacturers – big and small – would be a huge understatement! In addition to the unprecedented challenges presented by COVID-19 during 2020 and 2021, businesses must now deal with supply chain issues, labor shortages and surging inflation.
How can an organization balance all of these challenges? Throughout the business world, management teams are working and reworking their strategy to deliver shareholder value. Talk in boardrooms includes the need for additional capabilities, access to new markets, improved marketing of products and services as well as scalability. For smaller companies, business owners may be burnt out and start evaluating their next move. With all the uncertainty, owners are exploring mergers or selling. Step in Mergers and Acquisitions (M&A) specialists which could be comprised of banks or private equity groups (PEGs).
The primary goal of a Merger and Acquisition (M&A) specialist is to help companies grow. The M&A market had impressive increases in the number of transactions in 2021 as compared to 2020. Activity outpaced expectations with record-setting volume and value. Most banks and PEGs expect another strong year of deal-making since they are sitting on record amounts investment capital and cash.
One of the most compelling reasons for companies to consider M&A is the need for or to share technology and digital assets as well as other resources; however, companies merge for a variety of reasons such as entering new markets or to improve business efficiency as well as gain or maintain market position. Even more as of late, many mergers and acquisitions are stemming from the importance of technology in production processes.
Whether your organization is considering acquiring or merging in the near term, or you are preparing your company for a future transaction, the selling as well as the buying side of M&A must be a strategic process that should include the assistance of subject-matter experts to provide guidance throughout the due diligence phase.
For both buyers and sellers, there is a roadmap that should be followed – a playbook of sorts. The roadmap helps establish clear roles and tasks for the team members involved. While there are multiple steps, the due diligence phase tends to be the most time-intensive and stressful. Due diligence consists of a thorough review of EVERY aspect of the entity, such as products, services, customer base, human resource records, financials and regulatory. For all intents and purposes, it is a process that provides information related to value, liabilities and risk.
One important aspect of due diligence are the topics of environmental, health and safety (EHS) and environmental, social and governance (ESG) which have traditionally been overlooked (or delayed to the 11th hour) by M&A “dealmakers”; however, most are now realizing its inevitable rise in prominence. After all, there is clear evidence that socially conscience investors use ESG criteria to screen investments. M&A groups are challenging their teams to ensure sellers and buyers are considering targets to advance an organization’s plan toward sustainability. Both ESG and EHS due diligence reveals information - track records of behaviors and insight into actions and the status of compliance or lack thereof. The resulting information is an aid to investors to identify material risk.
Looking at environmental and safety concerns, dealmakers are increasingly challenged to assess post-close risks associated with non-compliance, pending government inquiries, potential litigation, contamination/remediation and reputational concerns, which can extend to long term operational burdens. The process begins with evaluating risks and opportunities and, in many cases, ends with review of ESG disclosures. (ESG disclosures; how to measure and manage with no common standard is an important and challenging topic on its own!)
Whether you are contemplating M&A or strategizing on how to build value in your organization, it is prudent to ensure ESG and EHS is part of your strategy. Build a culture of competency, conduct due diligence by having a third-party, subject matter expert audit EHS compliance. After all, to make your way through ESG and set sustainability goals, an organization must start from a solid base of regulatory compliance. ESG is a framework to evaluate the overall health and resiliency of an organization – environmental, health and safety are defined by laws/regulations and are mandatory. Some components of the “E” and “S” involve judgement – making choices about conduct that reflect values. Both are essential for the longevity of business today.