Brief

How the SEC’s New Climate Disclosure Rules Could Help Sharpen Climate Strategy

CFOs should view the new rules as an opportunity to accelerate decarbonization.

By John Blasberg, Matthew Crupi, Torsten Lichtenau, and Pam Yee

First published on Μαρτίου 21, 2022
min read


At a Glance The US Securities and Exchange Commission has announced rules for climate disclosure, which may include reporting on emissions and other climate-related risks. Along with similar guidelines coming into effect around the world, the rules should begin to standardize climate disclosure, allowing investors and other stakeholders to more accurately assess the climate risks and opportunities of companies. CFOs and other finance chiefs should view the disclosure requirements as more than an exercise in compliance. By moving assertively and working with other senior executives, they can use the new rules to sharpen their climate strategy and accelerate decarbonization. Senior teams are under growing pressure from boards, investors, employees, and customers, all calling for stronger commitments to the climate, greater transparency, and more data to support decarbonization claims. Standards for reporting on climate and carbon goals already exist in the UK, Japan, and New Zealand, and are being drafted for Europe. In the US, the Securities and Exchange Commission (SEC) has announced its first set of climate disclosure rules, which are likely to take shape and finalize over the coming months. The SEC disclosure rules could provide new opportunities for companies to sharpen their climate strategies. Capital markets can align their investments with net-zero goals only if there’s a level playing field for comparing climate disclosures. Some disclosure efforts have already taken root. For example, in response to the G20 finance ministers’ request for standardization, the Task Force on Climate-related Financial Disclosures was created, and in the UK, premium listed companies, banks, and insurers must adhere to the task force’s rules. The SEC rules will bring this type of standardization to companies in the US. In most companies, it’s the finance function that will ensure compliance and transparency, in line with the rest of the executive team and the decarbonization roadmap. The head of finance will certify climate disclosures for regulators, investors, and customers. Most aren’t ready. Bain’s recent research on executive attitudes about the implications of environmental, social, and governance (ESG) programs for their organizations suggests that most finance leaders don’t feel prepared for this work, although they might welcome the structure of data and reporting standards. Just over half of finance chiefs said that they are not equipped to measure ESG outcomes or effectively report metrics on ESG performance. Nearly two-thirds said that they either have no plan or are just beginning to form a plan to manage the additional workload of ESG requirements. Just over half of CFOs said they don’t feel equipped to report on ESG performance. For most companies, the SEC’s disclosure guidelines represent not merely a new compliance requirement but an opportunity to accelerate decarbonization, build stronger bonds with investors, and sharpen climate strategy—which is increasingly important to valuation. The SEC’s climate disclosure rules The SEC’s guidelines cover four main areas: Governance: How are the board and executive team managing climate-related risks and opportunities? Strategy: What’s the impact of climate-related risks and opportunities, and how resilient is the company’s strategy under different scenarios—for example, an increase in global average temperature of 1.5 or 2 degrees Celsius by 2100? Risk management: What’s the process to identify and manage climate risks, and how does it integrate in the overall risk management process? Metrics and targets: What’s the company’s greenhouse gas (GHG) footprint across scopes 1, 2, and 3? What are its climate targets, and what are the metrics to assess and manage climate-related risks and opportunities? Some companies are more prepared than others to make climate disclosures. Although finance chiefs reported that they are not prepared to report on complete ESG performance, about three-quarters of the S&P 500 already report their carbon footprint through CDP, the leading carbon disclosure organization, and about 15% support the guidelines of the Task Force on Climate-related Financial Disclosures. Preparing for the SEC disclosure rules The SEC’s new rules pose two challenges for CFOs, but they also represent opportunities. First, companies can use the disclosure requirements as a catalyst to sharpen climate strategy and reap the benefits from capital markets. Rather than approaching this as a compliance exercise, they can view it as a chance to pressure test their decarbonization delivery. Most could use the push: Bain’s research also found that, globally, only about 7% of companies reported that they were on track to achieve their ESG objectives. The three most common barriers cited were organizational alignment, digital systems, and prioritization of commitments and actions. As they prepare for the new rules, CFOs and other senior executives will develop a more complete understanding of their carbon footprint, and they can set or confirm their ambitions in line with industry benchmarks. They will want to test their strategy against transition risks (such as assets being stranded due to the energy transition) and physical risks (assets losing value due to climate-related events like flooding or fires). These assessments can help them make hard choices sooner rather than later and identify the signposts that will inform future decisions. Taking stock of what’s been achieved so far in reducing emissions and in creating new low-carbon products and solutions for customers will also make it easier to talk with investors about carbon transition. Key questions to help sharpen strategy: How aligned is our business strategy to net zero? How clear are we on the climate-related risks and their impact on our business? What are the signposts to watch for that indicate which climate scenario is most likely? How are we delivering on decarbonization compared to our peers and customer expectations? How fast should our transition be, and how should we prioritize? How are we creating value from our low-carbon credentials with our customers? What are our shareholders’ concerns on climate, and are we addressing them? How does our performance management system encourage decarbonization? Second, in practice, it actually is something of an exercise in compliance, and the CFO’s team will be the ones to manage it. The CFO will certify it, and at global organizations, this is likely to require different reporting and certification across different regions and jurisdictions. Until recently, measuring a carbon footprint was a manual task, conducted once a year to provide a data point for the annual report. Now there are more sophisticated digital tools to systemize carbon accounting and management, like Persefoni, a strategic partner of Bain’s. SaaS platforms automate the process, provide an auditable carbon ledger, and allow companies to manage carbon just as they would manage costs. It’s no longer solely about reporting but also about improving. And, of course, CFOs will need to fit the additional workload into a finance organization that might already be stretched. Key questions to assess the company’s readiness to meet disclosure guidelines: How trustworthy is our carbon accounting? For us to be ready, how much change is required in our finance processes, operating model, talent, and data and technology? How/where can we automate and digitize the process to make it efficient from the start? What role will the CFO and finance function play in the company’s ESG efforts and in ensuring that they support the broader corporate strategy? How can we engage the business and other stakeholders to ensure finance can communicate the climate strategy and progress effectively? How will we accommodate the extra workload into the finance function? Do we have the right talent, capabilities, and funding, or should we look for external partners and providers? Measure and monetize the decarbonization journey Finance chiefs will play a vital role in setting the company’s climate agenda as they prepare to meet regulatory requirements. Every CFO will approach this differently, but every organization will need to do these three things. How well each is done will determine which companies can meet their climate ambitions while generating new value from the transition. Capture greenhouse gas data: Companies will need to translate their financial and physical activities into GHG emissions for scopes 1, 2, and 3. They will want to capture the data in an auditable carbon ledger. If you are already collecting data, take a critical look at its fidelity and ensure that you can certify it. If you don’t yet have a tool or system in place, start reviewing the current providers. Articulate your climate strategy and delivery plans: Develop or refresh your climate strategy and confirm its linkage to the business strategy. This should include assessing transitional and physical risks, as well as articulating the strategic choices necessary to preserve value under different climate change scenarios. Delivery plans should showcase ambitions to create new value from decarbonization, guided by owners who are accountable to targets and timelines. Assure and audit disclosure: Ensure that all of the above is aligned to the disclosure requirements and that you can efficiently and effectively meet requirements. Systematize and automate the process and consider how to build the right capabilities and operating model into the finance organization to get the work done. Accelerate the development and the implementation of the plan now so you will be ready to meet the requirements once they’re final.

At a Glance

The US Securities and Exchange Commission has announced rules for climate disclosure, which may include reporting on emissions and other climate-related risks.
Along with similar guidelines coming into effect around the world, the rules should begin to standardize climate disclosure, allowing investors and other stakeholders to more accurately assess the climate risks and opportunities of companies.
CFOs and other finance chiefs should view the disclosure requirements as more than an exercise in compliance. By moving assertively and working with other senior executives, they can use the new rules to sharpen their climate strategy and accelerate decarbonization.

Senior teams are under growing pressure from boards, investors, employees, and customers, all calling for stronger commitments to the climate, greater transparency, and more data to support decarbonization claims. Standards for reporting on climate and carbon goals already exist in the UK, Japan, and New Zealand, and are being drafted for Europe. In the US, the Securities and Exchange Commission (SEC) has announced its first set of climate disclosure rules, which are likely to take shape and finalize over the coming months.

The SEC disclosure rules could provide new opportunities for companies to sharpen their climate strategies. Capital markets can align their investments with net-zero goals only if there’s a level playing field for comparing climate disclosures. Some disclosure efforts have already taken root. For example, in response to the G20 finance ministers’ request for standardization, the Task Force on Climate-related Financial Disclosures was created, and in the UK, premium listed companies, banks, and insurers must adhere to the task force’s rules.

The SEC rules will bring this type of standardization to companies in the US. In most companies, it’s the finance function that will ensure compliance and transparency, in line with the rest of the executive team and the decarbonization roadmap. The head of finance will certify climate disclosures for regulators, investors, and customers.

Most aren’t ready. Bain’s recent research on executive attitudes about the implications of environmental, social, and governance (ESG) programs for their organizations suggests that most finance leaders don’t feel prepared for this work, although they might welcome the structure of data and reporting standards. Just over half of finance chiefs said that they are not equipped to measure ESG outcomes or effectively report metrics on ESG performance. Nearly two-thirds said that they either have no plan or are just beginning to form a plan to manage the additional workload of ESG requirements.

Just over half of CFOs said they don’t feel equipped to report on ESG performance.

For most companies, the SEC’s disclosure guidelines represent not merely a new compliance requirement but an opportunity to accelerate decarbonization, build stronger bonds with investors, and sharpen climate strategy—which is increasingly important to valuation.

The SEC’s climate disclosure rules

The SEC’s guidelines cover four main areas:

Governance: How are the board and executive team managing climate-related risks and opportunities?
Strategy: What’s the impact of climate-related risks and opportunities, and how resilient is the company’s strategy under different scenarios—for example, an increase in global average temperature of 1.5 or 2 degrees Celsius by 2100?
Risk management: What’s the process to identify and manage climate risks, and how does it integrate in the overall risk management process?
Metrics and targets: What’s the company’s greenhouse gas (GHG) footprint across scopes 1, 2, and 3? What are its climate targets, and what are the metrics to assess and manage climate-related risks and opportunities?

Some companies are more prepared than others to make climate disclosures. Although finance chiefs reported that they are not prepared to report on complete ESG performance, about three-quarters of the S&P 500 already report their carbon footprint through CDP, the leading carbon disclosure organization, and about 15% support the guidelines of the Task Force on Climate-related Financial Disclosures.

Preparing for the SEC disclosure rules

The SEC’s new rules pose two challenges for CFOs, but they also represent opportunities.

First, companies can use the disclosure requirements as a catalyst to sharpen climate strategy and reap the benefits from capital markets. Rather than approaching this as a compliance exercise, they can view it as a chance to pressure test their decarbonization delivery. Most could use the push: Bain’s research also found that, globally, only about 7% of companies reported that they were on track to achieve their ESG objectives. The three most common barriers cited were organizational alignment, digital systems, and prioritization of commitments and actions.

As they prepare for the new rules, CFOs and other senior executives will develop a more complete understanding of their carbon footprint, and they can set or confirm their ambitions in line with industry benchmarks. They will want to test their strategy against transition risks (such as assets being stranded due to the energy transition) and physical risks (assets losing value due to climate-related events like flooding or fires). These assessments can help them make hard choices sooner rather than later and identify the signposts that will inform future decisions.

Taking stock of what’s been achieved so far in reducing emissions and in creating new low-carbon products and solutions for customers will also make it easier to talk with investors about carbon transition.

Key questions to help sharpen strategy:

How aligned is our business strategy to net zero?
How clear are we on the climate-related risks and their impact on our business?
What are the signposts to watch for that indicate which climate scenario is most likely?
How are we delivering on decarbonization compared to our peers and customer expectations?
How fast should our transition be, and how should we prioritize?
How are we creating value from our low-carbon credentials with our customers?
What are our shareholders’ concerns on climate, and are we addressing them?
How does our performance management system encourage decarbonization?

Second, in practice, it actually is something of an exercise in compliance, and the CFO’s team will be the ones to manage it. The CFO will certify it, and at global organizations, this is likely to require different reporting and certification across different regions and jurisdictions. Until recently, measuring a carbon footprint was a manual task, conducted once a year to provide a data point for the annual report. Now there are more sophisticated digital tools to systemize carbon accounting and management, like Persefoni, a strategic partner of Bain’s. SaaS platforms automate the process, provide an auditable carbon ledger, and allow companies to manage carbon just as they would manage costs. It’s no longer solely about reporting but also about improving. And, of course, CFOs will need to fit the additional workload into a finance organization that might already be stretched.

Key questions to assess the company’s readiness to meet disclosure guidelines:

How trustworthy is our carbon accounting?
For us to be ready, how much change is required in our finance processes, operating model, talent, and data and technology?
How/where can we automate and digitize the process to make it efficient from the start?
What role will the CFO and finance function play in the company’s ESG efforts and in ensuring that they support the broader corporate strategy?
How can we engage the business and other stakeholders to ensure finance can communicate the climate strategy and progress effectively?
How will we accommodate the extra workload into the finance function? Do we have the right talent, capabilities, and funding, or should we look for external partners and providers?

Measure and monetize the decarbonization journey

Finance chiefs will play a vital role in setting the company’s climate agenda as they prepare to meet regulatory requirements. Every CFO will approach this differently, but every organization will need to do these three things. How well each is done will determine which companies can meet their climate ambitions while generating new value from the transition.

Capture greenhouse gas data: Companies will need to translate their financial and physical activities into GHG emissions for scopes 1, 2, and 3. They will want to capture the data in an auditable carbon ledger. If you are already collecting data, take a critical look at its fidelity and ensure that you can certify it. If you don’t yet have a tool or system in place, start reviewing the current providers.
Articulate your climate strategy and delivery plans: Develop or refresh your climate strategy and confirm its linkage to the business strategy. This should include assessing transitional and physical risks, as well as articulating the strategic choices necessary to preserve value under different climate change scenarios. Delivery plans should showcase ambitions to create new value from decarbonization, guided by owners who are accountable to targets and timelines.
Assure and audit disclosure: Ensure that all of the above is aligned to the disclosure requirements and that you can efficiently and effectively meet requirements. Systematize and automate the process and consider how to build the right capabilities and operating model into the finance organization to get the work done. Accelerate the development and the implementation of the plan now so you will be ready to meet the requirements once they’re final.