What the New SEC Sustainability Rule Means to Investor Relations

Sustainability disclosure for publicly traded firms is increasingly a must-do, not a nice-to-do. In 2023, the European Union enacted legislation that requires businesses to report publicly the impact of their operations on the environment, as well as social and governance matters. And now the United States has followed the footsteps of the EU with legislation of its own: on March 6, the Securities & Exchange Commission (SEC) passed a rule that will require large publicly traded firms to report some of their climate-related risks. The new rule is not as far-reaching as it could have been, but it’s another sign that Investor Relations professionals need to report sustainability information in a clear and compelling way. 

Here’s what you need to know: 

The New SEC Rule 

The SEC Rule, originally proposed in 2022, requires a domestic or foreign registrant to include certain climate-related information in its registration statements and periodic reports, such as on Form 10-K. Specifically, businesses must report their: 

• Direct greenhouse gas (GHG) emissions (Scope 1) 
• Indirect emissions from purchased electricity or other forms of energy (Scope 2). 

Originally the SEC proposed that businesses report GHG emissions from upstream and downstream activities in its value chain (Scope 3). However, the final rule requires only Scope 1 and 2 reporting. 

The affected companies will have to start complying with the new rules in 2025. 

What Must Be Reported? 

The requirements are complex and far-reaching, as the 886-page rule attests. Here are some highlights: 
 

• Climate-related risks that have had, or are reasonably likely to have, a material impact on the registrant’s business strategy, results of operations, or financial condition. 
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook. 
• If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities. 
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks. 
• Disclosure location: either in a company’s Q2 Form 10-Q or an amendment to the company’s Form 10-K filed in Q2.  

The SEC offers this summary for more insight. It’s interesting to note the part about the role of management and the board of directors. This shows how the SEC is holding business leaders and their boards accountable – an important point that IR teams will need to consider as they report on their sustainability impact. 

Why the New SEC Rule Matters 

The SEC, together with the EU, are ushering in a new era of ESG disclosure (with the SEC rule focusing on the “E” in ESG). 

For years, businesses have complied voluntarily with global standards, frameworks, and protocols. Doing so has been important to respond to both influencers and investors. But the agenda of investors has always been to understand the business risks that ESG places on a company, not necessarily a company’s impact on ESG. For example, investors want to know how much financial risk a company undertakes by polluting the earth and incurring costly fines. Companies have complied by controlling the narrative as best as they can, choosing to share what they disclose about their impact on the planet. 

The new rules take control away from companies, though, by requiring them to report how they affect sustainability. 

What’s Next 

The final rule will be published in the Federal Register and will become effective 60 days afterward. Compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status. 

What You Should Do 

For many IR teams, the rules simply require them to be more transparent about what they’ve already been doing by sharing their sustainability story. The principles of effective sustainability communications stay the same. For example: 

Plan Now for Compliance 

Ten states have filed legal challenges to the rule. Don’t take a wait-and-see approach. Take the lead in planning a strategy for what data needs to be collected, how it will be collected, how it will be reported, and when. And indeed the ruling contains many important conditions that affect some companies more than others. For instance, companies need to decide which consider the emissions they consider to be “material,” or of significant importance to their bottom lines. This qualification affects the extent to which a business discloses details about its impact on sustainability. IR needs to dive in and assess these and many other crucial details. 

Read the Room 

Yes, the ruling is getting disputed among legislators. What do your key stakeholders feel about increased reporting, though? Listen closely to the voices of all your stakeholders, including investors, employees, and customers. Businesses are operating a time when Americans are generally concerned about the impact of climate change and expect businesses to take action. The rule could provide an excellent opportunity to align your actions with the values of your stakeholders. 

Go Beyond the 10-K 

It’s clear that sustainability reporting is a year-round commitment beyond compliance with the SEC. Be prepared to discuss compliance at annual shareholder meetings, executive briefings, and anywhere else sustainability is a topic of discussion (which is everywhere these days if you are a publicly traded company). 

Take the Lead Educating the Executive Team 

The entire executive team must understand what happens next and what must be done to comply. This is especially true because the ruling contains provisions that involve executives’ actions in sustainability reporting. IR/communications teams are best suited to brief decision makers – after all, you are living on the front lines of change. Be an advocate to help your leadership adapt. 

Share a Narrative 

Go beyond sharing data. Share a narrative about the company’s long-term strategy through the lens of the CEO and their team (more important than ever given the SEC requirement). Discuss financial decisions in the context of that narrative. Ensure that the narrative is consistent with the story your business shares with every stakeholder.   

Use Powerful Storytelling 

Don’t get lost in the morass of sustainability reporting. Discuss your compliance using plain language supported by strong visual content that tells a story in a compelling way. Avoid technical jargon and complex terminology as best you can. Instead, use simple, easy-to-understand language that is accessible to all stakeholders. Moreover, visual aids such as charts and videos can be used to present financial information in a more accessible and understandable way.  

Be Consistent 

The EU and SEC rules make it even more important for IR teams to coordinate your message and your supporting data with everything your company tells consumers and employees. The era of transparency will make consistent data reporting mandatory. 

At IDX, we help IR teams craft compelling narratives through our own corporate comms/IR expertise. We also publish some of our ideas with thought leadership. Preparing for changing ESG requirements is one of the major challenges that IDX discusses in a recently published white paper, How to Crush Every Investor Relations Challenge in Your Path. Read our white paper and learn about our investor relations expertise on our website.