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Practical Magic

What mandatory SEC disclosure would mean for ESG software

The proposed mandate will be a boon for ESG, climate intelligence and carbon management software — regardless of where it lands.

Software apps on several screens

Does your company’s IT budget include line items for ESG management, climate intelligence and supply chain traceability applications? Image via Shutterstock/Joyseulay

This article was adapted from Climate Tech Weekly, a free newsletter focused on climate technologies.

In a move that was a surprise to exactly no one, the U.S. Securities and Exchange Commission on Monday published its proposed rule for requiring public companies to disclose how their operations affect the climate — or the risks they might face in a climate-changed world.

The plan is subject to comment for the next 60 days, and yes, there will be lots of whining and threats of legal action from those who think requiring companies to report on these things represents government overreach. This will take a long time to play out, but it will be a catalyst for major changes, nonetheless.

What’s up? Even though most large companies have yet to get a handle on how to talk publicly about Scope 3 emissions — let alone calculate them accurately or specifically — the proposal would require them to disclose greenhouse gas emissions from their value chain if material to its business or if the company has a Scope 3 commitment in place. "Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in these disclosures," noted SEC Chair Gary Gensler in issuing the rule changes.

The potential Scope 3 reporting requirement is no small matter, and you can expect exceptions and phase-ins, as it takes effect. "For businesses that aren’t already, they must look into leveraging services to collect reliable, auditable Scope 3 data from their entire supply chain and use specific emissions factors to translate available information into a reportable emission data point," said Joe Schloesser, senior director of tech company ISN, in a statement. "Not only will the technological aspect in measuring emissions need to become more accurate, but buying organizations will also need to engage with their supply chain now more than ever to reach their ESG objectives."

Got software?

It remains to be seen what sticks after the public comment period, but I think the proposal represents a tipping point for how corporations use information technology — especially what I fondly refer to as carbon software — to manage their sustainability and ESG agendas. Get ready for the 2.0 wave of enterprise resource planning software. 

Reality: Spreadsheets won’t cut it anymore when it comes to collecting, analyzing, calculating, forecasting and reporting on climate-related data. So it should also surprise exactly no one that the rich array of ESG software application providers — including those focused on climate intelligence, carbon accounting and supply chain traceability — is incredibly excited about the SEC development. Before the development officially hit my news alerts, my inbox was flooded with comments from enterprise software startups, à la the one above and this one from Adrian Fleming, senior commercial director with governance software company Diligent:

The first step for leaders should be to gain oversight of their ESG performance, identify which areas to report on and set meaningful targets for improvement. It is critical companies treat this non-financial data as they would financial data, with similar rigor and cadence, and not treat this simply as a once-a-year reporting exercise. They will need to track and organize data regularly, and that requires an ESG platform with deep climate reporting capability and an appropriate strategy. 

Research firm Verdantix issued a statement Monday predicting companies will spend beaucoup bucks to gather this data, verify it and report it over the next three years — $6.7 billion across 2023, 2024 and 2025. That money will go both to financial data service providers such as MSCI and S&P Global that rate companies on climate risk and other ESG factors but a chunk will also go to a number of software firms, including those that Verdantix calls out by name as being "well positioned" to help with the SEC mandate: Cervest; Envizi; Persefoni; Planetly; Watershed; and Workiva.

I personally think that estimate is an underestimate. If you consider the need for climate risk analytics services, such as those provided by Jupiter Intelligence or Gro Intelligence, or broader sustainable business management platforms, such as the ones being hawked by everyone from Salesforce to Microsoft to ServiceNow, there’s plenty of potential for software providers. Oh, and don’t forget SAP, dancing around the periphery of the supply chain traceability movement for some time. On Monday, the company announced a project with Unilever, which will use SAP’s blockchain software to verify and report on its palm oil sources — with a particular focus on ensuring it is deforestation-free.

It’s time to ask: Does your company’s IT budget include line items for ESG management, climate intelligence and supply chain traceability applications? How is your organization funding investments in these digital capabilities? Let me know.

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