Both True — SEC Climate Disclosure: Your Big Opportunity

Nothing makes me want to put my head in my hands like imagining the U.S. Security Exchange Commission’s (SEC) anticipated “consistent, comparable, and reliable” rules on climate-related financial disclosures. Yet the more our team at Adamantine digs into this, the more opportunity we see for game-changing oil and gas companies.

Both of these things are true:

  • The pending revisions to disclosure requirements coming out of the SEC look like another cumbersome, regulatory hoop we must jump through.
  • Climate-related disclosures — with the backing of a federal agency to set a standard for consistency — is an opportunity for oil and gas leaders to understand the rules of the ESG game, create a winning decarbonization strategy, and disclose clearly, consistently, comparably, and reliably.

The current scattershot of expectations and requirements around climate disclosures is impossible to navigate. But investors and stakeholders want clarity. They can’t navigate the current mess either. And we in oil and gas are not winning any energy beauty pageants at the moment, so the need for consistent, clear, and reliable metrics gives us an opportunity to join the stage.

We all tend to knee-jerk react against this kind of incoming bureaucracy. But it’s worth asking: How can I use this opportunity to create business certainty, understand my risks and opportunities better, and build a go-forward ESG and disclosure strategy?

Your competitors might react superficially to new disclosure rules. Game-changing companies will instead use the incoming expectations to raise their ESG game, including their transparency and disclosure.

The situation

Over the summer, I set up the rapidly evolving climate finance landscape in What to Watch: Feds in [SM1] Climate Finance Action.  After the SEC’s March announcement that it was requesting public input on climate change disclosures, it received over 5,800 comments from individuals, government officials, NGOs, law firms, corporations, and investors. In July, Chairman Gary Gensler said that the SEC will release their new proposed rules by year end. Then just last month, the SEC released a sample letter on the disclosure of climate-related information that the agency may send to a company in the future.

At Adamantine, we were surprised when our review of the public comments demonstrated how overwhelmingly supportive businesses, investors, and individuals are of the SEC’s issuing of a climate disclosure proposal. There is, of course, a wide range of opinions in stakeholders’ comments, but the general tone conveyed the following consensus: Climate-related risks should be reliably and transparently disclosed to investors and the public.

Based on our review of these tea leaves, here is what the Adamantine team expects to see in SEC draft climate disclosure rules:

  • Mandatory disclosures: Although some stakeholders question the SEC’s authority to mandate these disclosures, many large companies and asset managers have stated clear support. This includes “The Big Three” investors, Vanguard, BlackRock, and State Steet. Companies such as Walmart have chimed in enthusiastically as well. We expect mandatory disclosure requirements are coming your way. Not so sure? Check out Commissioner Allison Herren Lee’s recent comments asserting the SEC’s broad authority to “require disclosures in the public interest and for the protection of investors.”
  • Climate-risk disclosures aligned with existing frameworks: Several prominent respondents encouraged the SEC to allow companies to satisfy disclosure requirements using existing reputable voluntary disclosure frameworks. We expect climate-risk disclosures supported by the SEC will need to be aligned with the recommendations provided by the Task-force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB), as favorably mentioned in the letters submitted by the BlackRock, Ceres, and PGIM (The Global Investment Management Businesses of Prudential Financial). Chairman Gensler highlighted the frequency at which TCFD was mentioned in the comments in a recent speech.
  • Scope 1 and 2 emissions: We expect the disclosure of Scope 1 and 2 emissions will be made mandatory by the SEC. As for Scope 3 (the emissions of products), comments were — as you might expect — a mixed bag. While we don’t expect SEC to take on Scope 3 now, we observe that interest in Scope 3 emission disclosures is building.
  • Embedded carbon: The SEC has existing guidance that informs energy companies on how to disclose their oil and gas reserves. We predict those guidelines will undergo revisions to include the disclosure of embedded emissions, as highlighted by this letter submitted to the agency.

Seize the day

Game-changing companies are preparing — not just for the SEC rule implementation — but for how these new requirements can inform their ESG and decarbonization strategy. Here’s what you can do now:

  • Understand the frameworks. Now is the time for your company to assess your climate-related risks and opportunities anddecide how you will translate them into a reputable disclosure framework. If you haven’t already, you should prioritize familiarizing yourself with the TCFD recommendations and SASB metrics.
  • Look to your peers. If you don’t know where to start, try identifying a peer company that has already begun disclosing their climate-related risks with an established framework.  An example or two can help you illustrate what “doing it right” looks like.
  • Start a team. Gathering your climate-related risks and opportunities isn’t a copy and paste exercise. Bring in leaders from all business units and departments to make sure you have a comprehensive understanding of your list.
  • Chat with your investors. You should talk with your own investors to better understand what they expect from you. If they submitted comments to the SEC, it may be worth reading those public comments. (You can find those comments here.) Talking to your investors can also help you learn about the best practices of other companies that have already started to disclose their climate-related risks.
  • Develop a strategy.  Disclosing your climate-related risks and opportunities won’t be enough. Your company is still under pressure from the public, policymakers, and investors to lay out a plan for mitigating and reducing those risks at every level within your company. This objective should lay at the heart of your company’s ESG and decarbonization strategy. If you haven’t already, check out Anne Carto’s must-read guidance in Small Steps: Part 1 – Developing an ESG Strategy.

Get up to speed: If you want to hear more about the SEC’s pending climate disclosure rules, check out my recent episode on the Energy Thinks podcast, “It’s changing really really fast: Insider ESG advice with Tim Mohin.” Stay tuned for an upcoming episode with Granville Martin of the Value Reporting Foundation (keepers of SASB) where we will dive into this topic as well.

Then, level up: Ready to bring your company’s efforts to the next level? Adamantine can help with a series of strategy sessions.

Wishing you a day better than “consistent, comparable, and reliable.”

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