Article contributed by Blake Sinclair - Head of ESG, MTI Network/ITI

The U.S. Securities and Exchange Commission (SEC) on March 21, 2022, proposed rule changes that would require U.S. listed shipping companies to include certain climate-related disclosures in their registration statements and periodic reports. We at MTI Network, a leading ESG risk and compliance advisor, drilled into the detail of the 506-page proposed amendment to bring you the key take-aways.

For the vast majority of listed organizations, the proposed rules will require the disclosure of climate-related risks, the independent verification of GHG greenhouse gas (GHG) emissions, and standardised reporting of these climate-related financial metrics in audited financial statements. The current thinking is that the rule will be adopted in 2022, which would require FY 2023 metrics to be disclosed in FY 2024.

The SEC are not directly regulating emissions, nor are they setting reduction targets — but they are making disclosure and transparency mandatory. This is mirroring a widely held belief that more information means better decisions. Extensive climate-related information would have to be disclosed, including:

1. Disclosure of climate-related risks considered to be reasonably likely and material to a company’s financial performance, or business-as-normal operations.
   

2. Disclosure and independent verification of scope 1 and 2 GHG emissions (scope 3 for some, depending on market cap.), and interim targets and reduction strategy; and
   

3. Presentation of this disclosure in a standardized format — though some firms may already include climate risk in governance disclosures, the detail in what is being requested will go over and above any voluntary additions currently made. The shipping industry will be significantly affected by this rule change and, with some notable exceptions, is unprepared when it comes to industry-wide understanding and disclosure of climate risks. The multi-actor nature of shipping that has previously allowed the problem to be bumped to someone else will now be a hindrance. Public shipping companies will have to take a strong stance to demand that all actors in their supply chain provide the metrics and strategy needed for companies to complete filing accurately — and it is the individual company that will be penalized if not. This is quite the task, given the number of cogs in a shipping company’s machine. For instance, the disclosure of scope 3 emissions could include scopes 1 and 2 of a company’s manning agents, catering suppliers — to start the list.

The good news is that this rule change is based on a well-trodden framework: the Taskforce for Climate-Related Financial Disclosure (TCFD). The Task Force’s recommendations on climate-related financial disclosures are structured around four thematic areas that represent core elements of how companies operate: governance, strategy, risk management and, metrics and targets. The TCFD guidance helps preparers by providing context and suggestions for implementing the recommended disclosures.

A summary graphic can be found in Figure 1 below.

For the past 3 years, a specialist team at MTI Network, under the brand ITI, has supported major operators already on this path and, although it looks intimidating, it offers a structured approach to developing climate-risk identification and management in line with these regulatory changes. Once the structure and strategy of the organization has been established, the independent verification of GHG is straightforward process for an accredited body.

From MTI’s experience, we know how time consuming and arduous the collecting of necessary data can be, especially if there is a mandatory deadline. Information is held in silos; supply chain partners may not collect the data required or may collect it in different formats; buy-in can be slow from those stuck in their ways. However, our advice is to start thinking about this now: The proposal may be approved in an altered form, but there is no doubt that it is coming. For those who have the lion’s share of the work done, they will be able to engage with this on their own terms, with the time to iron out any issues.

About MTI Network / ITI

MTI Network is the world’s leading risk management and crisis response. Under the brand ITI we have assisted and supported ship owners, managers and other industry participants in meeting their specific ESG needs. We have expertise in sustainability disclosures, GHG verification, ESG training, the development of tailored supply chain due diligence procedures and, we also have the most comprehensive collection of maritime industry ESG data, making our anonymous benchmarking services best in class. We serve as the only consultancy specialised in solely maritime ESG.

For more information, please contact blake.sinclair@mtinetwork.com