The proposed SEC climate disclosure requirements would standardize climate disclosures provided by public companies. Specifically, the disclosures companies would need to provide include an accounting of their greenhouse gas (GHG) emissions, the environmental risks they face, and the measures they’re taking in response.

These would focus on climate-related risks likely to have a material impact on the organization or the organization’s financial statements. The disclosures would require organizations to describe the actual and potential impacts of climate-related risks on the strategy, business model, and outlook.

ESG reporting addresses how organizations disclose their operations in three areas: environmental, social, and corporate governance, all of which bring transparency to a company’s ESG activities.

ESG stands for environment, social, and governance.

Environmental

The environmental area measures how companies use and manage energy, which include energy efficiency, climate change impacts, carbon emissions, waste management, and air and water quality.

The Greenhouse Gas (GHG) Protocol, a widely accepted standard for accounting for greenhouse gas emissions, has categorized emissions into three scopes:

• Scope 1. Direct emissions from the organization’s owned or controlled sources.
• Scope 2. Indirect emissions from generating purchased electricity, steam, heating, and cooling that the organization consumes.
• Scope 3. All other indirect emissions from a company’s value chain as well as 15 categories of common business activities.

Social

The social area measures how an organization promotes its people and culture. Factors that are often addressed include:

• Inclusivity
• Gender
• Diversity
• Employee engagement
• Human rights
• Labor standards

Governance

The governance area addresses the organization’s internal control structure which ensures transparency with regulations.

The climate disclosures would need to include information such as the following:

• Management’s role in assessing and managing climate risks
• Oversight and governance of climate-related risks
• Scope 1 and Scope 2 greenhouse gas emissions—and Scope 3 indirect value chain emissions—if a GHG emission reduction target has been defined
• Impacts of past and present climate-related risks on the business and financial statements
• Climate targets, goals, and transitions plans
• Price and rationale for internal carbon prices

Organizations should automate their data integration as it relates to climate metrics and develop a governance and control structure over the source, transmission, and presentation of data, ideally using their existing financial control structure over climate-related data. Data process flows and any data transformations should also be documented.

Organizations would need to decide where their ESG reporting function lives, as this team will not only be responsible for reporting metrics but also overseeing the control and reliability of ESG data.

Organizations will also need to clearly define:

• ESG metrics
• What ESG metrics include
• In which systems or applications this data resides
• Who owns the metrics

Once defined, organizations should gather their existing data to create a baseline to evaluate future performance. Organizations should use this reporting exercise to ensure compliance with regulatory requirements and integrate the information gained into their overall business strategy.