What the SEC’s climate rule means for IPOs

Smaller, pre-IPO companies looking to go public often lack the resources of large public companies, which have been bracing for the U.S. Securities and Exchange Commission's new rule on emissions and climate risk disclosure, and so are less likely to have the systems in place to comply with the rule. 

The SEC’s long-awaited climate disclosure rule requires publicly listed U.S. companies to disclose Scope 1 and 2 emissions considered material to their business starting in 2026. The largest of them will need to have those disclosures assured starting with fiscal year 2029. 

While the focus is on larger companies, the new SEC climate disclosure rule provides exemptions for "emerging growth" companies — defined as businesses with gross revenue of less than $1.23 billion. Emerging growth companies historically have accounted for 90 percent of IPOs; high-profile examples of companies that have espoused strong ESG principles in their investor roadshows include Allbirds, Duolingo and Sweetgreen. 

Given the intense scrutiny companies undergo during an initial public offering, compliance with the SEC climate disclosure rule should be a priority for startups and privately held companies making bold claims about their sustainability performance in their quest to attract capital from ESG investors.  

What IPO-bound companies need to know

The new SEC climate disclosure rule applies to all public companies, but emerging growth companies have a longer period to phase in disclosure of Scope 1 and 2 greenhouse gas emissions — up to five years after their IPO. 

The SEC granted this after determining the "compliance burden and cost for the GHG emissions disclosure to be proportionally greater for such registrants."  

That exemption is lifted if an emerging growth company exceeds $1.23 billion in revenue or $700 million in float or issues $1 billion in debt.

The grace period doesn’t apply to the rule’s qualitative disclosure requirements for climate risks that could be material. Emerging growth companies must include those in reporting starting with the fiscal year beginning in 2027 and filed in 2028; the rule provides an additional year to comply with certain financial expenditure disclosure requirements related to meeting climate-related targets and goals. 

Don’t limit disclosure to compliance

These days, most investors incorporate ESG analysis into their investment process in some way. One way a pre-IPO company can prepare is to identify ESG issues key to public companies in their sector. This is known as "ESG capital targeting," said Chris Hagler, head of ESG at boutique investment bank and strategic advisory firm Independence Point Advisors. 

"We analyze who invests in their public competitors and what ESG topics are most important to those investors,” Hagler said. "Then we look at how you are doing on these issues that we know these potential investors are intere

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