The U.S. Securities and Exchange Commission (SEC) last week endorsed new environmental disclosure rules that will require companies to disclose their greenhouse gas (GHG) emissions along with an analysis of the risks climate change poses to their business. These regulations are in line with the Biden administration's focus on pushing publicly-listed companies to address climate change and standardizing environmental disclosure rules for the first time.

According to research firm Verdantix, the proposal will cost companies a collective $6.7 billion on climate strategy, assurance, compliance, and data processing from 2023 to 2025. But the positive impact of that will show in "the growth of technology solutions to improve climate change risk management and emissions reduction," Verdantix CEO David Metcalfe wrote in response to questions.

The tech industry stands out as having a head start in this area, Metcalfe explained. "Listed firms in the tech and internet sectors are often in the vanguard of climate risk management and carbon accounting," he said.

Tech executives and employees are often eager to be proactive on climate management, and they have in-house software engineering and data management talent to enable the development of sophisticated carbon accounting tools, Metcalfe explained.

Microsoft's internal carbon tax, IBM's recent acquisition of carbon management provider Envizi, and Google Cloud's customer carbon footprint tools are all demonstrations of the industry's environmental initiative, he said.

The SEC's proposed rules, which are due to come into effect after a 60-day comment period, would require businesses to report on:

• how a business plans to manage climate-related risks
• past or potential significant material impacts of climate-related risks on a business and its finances
• past or potential effects of climate-related risks on a business' strategy, business model, and overall outlook
• the impact of climate-related events, like extreme weather events or natural disasters, on a business' finances and assumptions used in financial statements.

In terms of emissions, the proposal would require companies to disclose:

• direct greenhouse gas (GHG) emissions (scope 1)
• indirect GHG emissions from purchased electricity or other forms of energy (scope 2)
• GHG emissions from upstream and downstream activities in its value chain (scope 3) if deemed material or if a company already has a target to reduce its scope 3 emissions.

Some larger companies would also need to have their scope 1 and 2 disclosures audited by an independent attestation service provider to ensure these disclosures are a reliable source of information for investors. According to the SEC, these disclosures are similar to those required with widely adopted climate disclosure frameworks.

"So it demonstrates a harmonized approach to disclosures on climate risk and opportunities including on carbon emissions," Metcalfe said.

He noted, however, broader ESG reporting frameworks still show significant weakness in scope 3 carbon accounting methodologies and significant variance in regulatory requirements to include scope 3 data in environmental reporting.

Various challenges face enterprises pursing compliance of the SEC's proposed regulations.

First of all, not many businesses want to broadly disclose risks posed by climate change that range from acute physical risks (like wildfires), to chronic physical risks (like altered rainfall patterns), to energy transition risks. And internal debates around which risks to disclose is likely to consume a lot of executive time and cause a lot of headaches.

What's more, many enterprises will soon discover they are "woefully unprepared" to compile the necessary data on fuel consumption, electricity bills, and embodied carbon in raw materials and capital goods. "This will require heavy investment in data acquisition, data modeling, and processing," Metcalfe said.

Deciding which scope 3 emissions sources to disclose is another hurdle facing enterprises, and it's a nuanced challenge. "Ignoring material scope 3 emissions will result in criticism from external stakeholders," but "disclosing too much could make the firm look more at risk than competitors," he explained.

Businesses concerned by the SEC's proposal should "immediately" conduct a gap analysis with a consulting firm and build a roadmap to meet compliance in the 2023 financial year. Although there is a plethora of consulting experience available, it's in high demand as similar environmental disclosure regulations pop up globally.

"So rather than sitting on their hands and waiting for the final vote later in 2022, companies with self-assessed weak capabilities should get an external view on how bad the situation is and better understand how much work is required for them to be compliant. The reality is that this requirement is not going away," Metcalfe said.

With consulting firms maxed out, "there won't be an option to throw warm bodies at the problem," he warned.

Verdantix recommends digitizing carbon management systems, which will be essential from a cost effectiveness standpoint and to help lessen that strain. "There are dozens of credible carbon management software providers on the market who already offer or will offer reporting modules which will facilitate compliance with the proposed rule from the SEC," he said.