Mercado | Article | The SEC climate risk rule: What it means for the import supply chain

The SEC climate risk rule: What it means for the import supply chain


The SEC climate risk rule: What it means for the import supply chain

As consumers become increasingly conscious about their impact on people and the planet, we’re beginning to see this manifest in the demands investment firms and shareholders are making on their portfolio companies. With the recent volatility in markets, this is becoming even more pressing, with greater scrutiny over a company’s exposure — particularly when it comes to climate and cyber risk.
Without doubt, ESG (Environmental, Social, and Governance) is one of the hottest topics right now, and we’re seeing increased focus from boardrooms and governments alike in this area. The announcement and passing of the UFLPA (Uyghur Forced Labour Protection Act) legislation earlier this year reflects the shifting dynamics within the US government, and is reported to be the tip of the proverbial iceberg when it comes to policing the import supply chain.

The latest bill scheduled to impact the importing world is the SEC climate risk rule, which is due to come into effect early in 2023.

The U.S. Securities and Exchange Commission (SEC) had indicated earlier this year that they intended to “reverse” some of the current climate-focussed importing disclosures in order to make it easier for specific importers to bring goods into the US. This would have meant that companies wouldn’t have had to make certain information public — for example, implications related to the UFLPA.

Perhaps unexpectedly, this received heavy criticism and push back from big retailers. As a result, despite the SEC having had a self-imposed deadline of October to get their new ruling pushed through, they appear to be making a U-turn under the pressure.

Currently, the SEC doesn’t require companies to report on climate risk or describe how they must do so, instead providing “interpretive guidance” that suggests how companies disclose the impact from climate change in light of existing or new legislation, regulation, and global agreements. However, this could all be subject to a big change.

The commission is now reported to be proposing new rule changes that would make it mandatory for companies to outline their strategy towards climate risk on their 10-K, and include detailed plans to achieve targets they’ve set for curbing such risk.

The rules will not require all publicly traded companies to disclose the carbon emissions from their vendors, suppliers, and other third parties across their supply chains, but will limit the mandate to businesses that have already set goals for curbing such “scope 3” emissions, SEC Chair Gary Gensler said.

“If a company decides, ‘I have made no commitment to the future on that and it’s not material to my investors and my operations under the Supreme Court test of materiality,’ you don’t have a disclosure obligation on scope 3,” he reported.

“But if you have made a commitment to the public about the future path [regarding scope 3 emissions], then your investors want to understand how you’re managing that,” he said during a webcast hosted by The Wall Street Journal.

“If I were the CFO of a public company, I would fully expect that these rules will go into effect,” said Kai Liekefett, a partner and co-chair of the shareholder activism practice at Sidley Austin. “You need to prepare — you can’t count on Santa Claus to deliver you a present.”

What this means for importers

The climate risk disclosure ruling would require three categories of disclosure:
  1. Material climate impacts;
  2. Greenhouse-gas emissions;
  3. Any targets or transition plans.
For material risks and strategic implications, the rule as written would require companies to disclose risks from physical climate-related hazards, such as fires or floods by location and by share of assets exposed, as well as asking for disclosure of transition risks, which could be regulatory, technological, market, or reputational risks, over the short term, medium term, and long term.

Filers would need to disclose strategic impacts, financial impacts, and operational impacts, as well as their governance and risk management processes to manage these risks. Simply put, some importers are going to have to share more information on how they operate than others — and the variation will be set out in future guidelines from the SEC.

Even importers who don’t meet the threshold to share this information now, likely will at some point in the future, meaning that it's worth getting their affairs in order now.

For instance, the biggest unknown in the import supply chain right now is on the supply side. Few importers know what is happening with their products from the moment they place an order, to when they are loaded onto a boat, plane, or train. Under the new ruling, importers will need to understand how their suppliers are sourcing raw materials to manufacture their products, as well as the impact this has on their emissions and carbon footprint.

How can Mercado help?

Government mandates aren’t just something importers can turn a blind eye to (unless they don’t want to be in business anymore).

Luckily, Mercado has built-in compliance modules to support the creation, standardization and development of compliance standards. Mercado Plan gives importers the tools they need to verify, educate, and inform their suppliers about internally mandated guidelines — including new regulations, such as the UFLPA and those being brought in by the SEC. Eliminating supplier-related pain and equipping importers with the confidence they need to know their partners and vendors are aligned with their social, regulatory, and supply chain standards.

The platform comes with preloaded templates and content to give businesses a starting point to address key environmental, social, and governance topics. And with completely customizable features and creator tools, importers can develop their own custom content aligned to new regulations as needs arise.
For example, a climate impacts module could include lessons over what material climate impacts entail, finishing with a ‘test’ to measure the knowledge of participants, stipulating complete understanding in order to pass and continue operating as a supplier.

A greenhouse-gas emissions module could include reports and information on company expectations when it comes to meeting emission targets, in addition to requiring signature proof from suppliers that they understand these expectations and adhere to them — vital in holding them to account if issues arise in the future.

Mercado Plan also offers multi-media inputs — a targets and transition module could, for example, include a video explaining the targets the company expects to hit during the year, and require a viewer to watch the entire video in order to ‘pass’ the module.
With new changes reported on an almost weekly basis, there’s a lot of information that supply chains need to keep up to speed with. Whatever the solution implemented, new rulings like the SEC climate risk ruling aren’t going to be quick checkbox exercises — and the implications for selecting future vendor partnerships and products to manufacture are going to be huge.

Now is the time to get ahead — and tools like Mercado could be exactly what your business needs.

Don’t risk your import business

Get ahead of the new SEC ruling and plan for future regulation with Mercado Plan: the world’s first order management system that digitizes, networks, and automates your import supply chain.
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