Climate risk disclosure requirements are here to stay

Mandatory climate disclosures aren't going away, despite the headlines.

You've likely read articles about the many lawsuits on both sides of the recently finalized U.S. Securities and Exchange Commission (SEC) rule on standardizing financial disclosures-or maybe you've read about California's landmark climate disclosure laws being challenged in court by the U.S. Chamber of Commerce and others.

Despite the headlines, mandatory climate disclosures are here to stay, and they will only continue to grow in practice as the SEC, California and other rules come into effect.

Mandatory climate disclosures

You may wonder why mandatory climate disclosures are here to stay. The reality is that the climate is changing, and along with that, there are increasing risks to current businesses and supply chains.

Corporations, investors and insurers cannot ignore these risks. Moreover, publicly traded corporations already have a responsibility to disclose financial risks to the company-including those that are climate related. In particular, the SEC rule, which seeks to provide more consistent and comparable risk information, responds to what investors are already asking for.

Other requirements are coming as well. The EU's Corporate Sustainability Reporting Directive (CSRD) is now in effect, and as it phases in over the next five years, it will start to apply to an estimated 3,000 U.S. companies based on criteria including listing on regulated markets and total economic activity.

Impacts on real estate and construction

To understand future business risk, companies must first look at GHG emissions inventories. In the SEC rule, the key issue for building developers, owners and tenants is the inclusion of scope 3 emissions, which includes both up- and downstream emissions.

Currently, some companies are voluntarily disclosing scope 3 emissions, or they are at least starting to do so with the data they have. According to an analysis of 2021 corporate reports by Robeco, 56% of the 200 largest real estate companies worldwide already report scope 3 emissions.

For the U.S. companies included in the Robeco analysis, reported scope 3 emissions represented the most significant emissions, averaging 75% of the overall emissions for companies that disclosed for all scopes. These emissions cannot be ignored for a company seeking to work toward net zero goals.

Climate risk reporting

Climate risk disclosures are a complement to emissions reporting. Climate risk disclosures are intended to reveal potential weaknesses, as well as dependencies, in the context of a business's strategy, operations and financial condition.

The increased visibility of decarbonization and other climate goals underscores the need for corporate sustainability teams to pay attention to the most significant components of their emissions and climate exposures. Buildings and other spaces are likely high up the list for many types of companies. Sustainable, low-carbon, healthy and resilient buildings and spaces protect the continuity of operations.

To remain credible to investors, and to be able to show progress once reporting starts, companies will need to develop plans to tackle emissions related to their buildings and spaces. They need to track, report and, to the greatest extent possible, mitigate physical risks and the costs of extreme weather events.

There is also an opportunity here: As companies report their activities to mitigate or adapt to climate risks, they can build a story around their decarbonization actions and improve their portfolio, deepening investor confidence. This risk reporting will also be scrutinized as portfolio owners refine best practices, and this will create more demand for building decarbonization and resilience in existing and new buildings.

What this means for companies

On the emissions front, companies that fall under the California rules could be required to report scope 1, 2 and 3 emissions-with no materiality test-as soon as 2026, but more likely in 2027 or 2028. The CSRD will kick in with scope 1, 2 and 3 emissions-also with no materiality test-for included companies on their second year of mandatory reporting, which could be between 2026 and 2030.

Together, these rules will likely drive the scope of GHG reporting for larger U.S. companies regardless of the delayed SEC rule, because even once in effect, the SEC rule is limited to scopes 1 and 2 and only when financially material. It should be noted that the environmental plaintiffs challenging the SEC rule are seeking restoration of scope 3 requirements, given their significance.

As for climate risk disclosures, the more specific information that would be required by the SEC rule will be on hold as the litigation runs its course, and the potential time frame for this could be between one and four years. In the meantime, publicly traded companies remain subject to baseline SEC requirements to report material financial risks, including those that are climate related.

Those companies that are already voluntarily disclosing climate issues on SEC filings will continue to do so, and many others will begin to prepare to report, if not report, climate risks. This preparation may include establishing internal tracking systems and developing risk assessments. The 2010 guidance and other SEC issuances, such as its 2021 ESG risk alert, are key resources.

California's climate disclosure laws may move faster through state court than the SEC rule will in U.S. District Court-and the California Air Resources Board is already initiating work to implement these laws. California's SB 261 focuses on climate risk disclosure with financial materiality, similar to the SEC rule, with reporting to start as soon as 2026 but likely to be delayed from one to several years.

For large U.S. companies operating in Europe, the CSRD will start to kick in over the next five years, with some disclosures mandatory and others determined based on "double materiality," whereby a company must report its impacts on people and the environment as well as how climate and sustainability factors impact the company's financial outlook. Here, the development for U.S. entities could be opportunities for streamlining reporting with EU equivalencies.

All in all, climate risk and GHG emissions disclosures are expanding-and when mandatory reporting will become required is only a question of scope and time frame.

Our new brief takes a closer look at the recent rules and developments.

Read USGBC's brief

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