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Organizations are now operating in a context where decarbonization and climate transition planning are increasingly table stakes. In the past year, the EU enacted the Corporate Sustainability Reporting Directive, California passed SB 253 and 261, and the US Securities and Exchange Commission passed the Climate Disclosure Rule. As climate-related regulations begin taking shape, organizations need to implement new ways of working that ensure they are not only complying with nascent regulations but also building a holistic decarbonization strategy that will keep them ahead of impending regulations.
For those who question the degree of impact that this new legislation will bring, recall that there was a similar movement for financial regulation and disclosure that changed how the government monitored financial reporting. What started as a shift in the prioritization of transparency, evolved into a wide and growing number of checkpoints to ensure that information was available to the public and reported consistently and accurately. A similar shift in corporate transparency and accountability is occurring with climate-related risks and opportunities.
The European Union’s Corporate Sustainability Reporting Directive requires that companies disclose information on material climate-related risks and opportunities, as well as their transition plans for moving away from fossil fuels. The goal is to ensure that their business models meet environmental targets that keep the world on a 1.5C temperature increase pathway to 2100. Examples include the Paris Agreement and the EU's 2050 climate neutrality target.
The state recently passed two climate-related disclosure bills:
While these bills have made notable impacts on the requirement for mandatory disclosure, there is also a continued effort by various agencies to increase the amount of mandatory disclosure at a national and international level.
In March 2024, the US Securities and Exchange Commission (SEC) proposed the Enhancement and Standardization of Climate-Related Disclosures: Final Rules which required organizations to report climate-related risks and their plans to mitigate them. Its various rules mandated that corporations.
The goal of this ruling was to provide investors with better insight into how climate-related factors may affect companies' financial performance and long-term sustainability.
The recent SEC ruling on enhancing and standardizing climate-related disclosure marks a pivotal moment for organizations. While the ruling has been paused, its significance lies in signaling a growing momentum toward mandatory disclosure requirements. Organizations will likely face increased pressure to accurately report their climate-related risks and impacts, both from investors demanding transparency and regulatory bodies seeking to mitigate systemic financial risks associated with climate change. This shift underscores the imperative for businesses to integrate climate considerations into their strategic planning, risk management, and reporting frameworks.
Rather than wait for everything to crystallize, companies should be proactive and start putting mechanisms in place to adhere to the new guidelines. The reporting process can be complex, and sourcing the appropriate data to support this process takes time.
Compliance reporting should not be done in a vacuum. Instead, it should be woven into holistic decarbonization plans. This involves allocating sufficient time and resources, which may require dedicated internal teams and securing buy-in for prioritizing disclosure.
Companies often encounter knowledge and talent gaps internally as they develop their disclosure practices. Additionally, obtaining clear and concise data can be time-consuming and may necessitate specialized tools and expertise. Considerations such as regional differences or managing multiple business units require alignment efforts. Despite these challenges, refining data-gathering practices, particularly for Scope 3 emissions, is crucial to effectively inform future disclosures.
While the work is complex, organizations should not become lost in a quest for perfect data at the expense of investing in meaningful decarbonization. Perfection can become the enemy of progress and delaying action around disclosure can put a company at risk. As mandatory disclosure regulations are put in place, customers, partners, and investors will have access to view organizations’ commitment to decarbonization. Even with incomplete data, disclosure can still be beneficial. Staying transparent with climate reporting demonstrates a commitment to addressing decarbonization concerns, which can help bolster an organization's reputation among stakeholders, and position the company as proactive and responsible in the face of climate challenges.
Mandatory reporting plays a pivotal role in advancing a comprehensive decarbonization strategy for companies, serving as a fundamental tool to steer them toward sustainability and a low-carbon future. By mandating transparency, accountability, and informed decision-making, these reporting requirements provide critical insights into the alignment of business models and strategies with a low-carbon economy. Acting as a form of gap analysis, they illuminate areas where companies need to bolster their efforts in mitigation and adaptation strategies to ensure readiness for the evolving economic landscape. The emerging disclosure requirements point to the need to create an adaptable strategy, roadmap, and business processes, but many organizations require a partner to transform their theoretical ideals into tangible best practices.
ENGIE Impact focuses on resilience to inevitable risks and impacts of climate change on the business. We build climate transition plans for organizations to ensure their business models and strategies are compatible with a low-carbon economy. Our experts are steeped in data and armed with implementation capabilities and can help you determine what emissions goals are most important to your organization.
It is a matter of time before organizations are operating in an era where decarbonization and climate transition planning are required. Starting the disclosure process now, before legislation mandates it, will have positive repercussions for the business. The first step is recognizing the implications of this changing landscape. Then, you need to find a partner that can help your organization prepare for the future.
Talk to our experts about navigating the era of climate reporting.
