SEC New Climate Rule: What You Need To Know
/UPDATE: On April 4, 2024, the SEC paused the rules pending the outcome of litigation.
On March 21, 2022, the Chairman of the U.S. Securities and Exchange Commission (SEC), Gary Gensler, proposed a landmark new rule that would require companies to begin disclosing their GHG emissions and a variety of climate-related information. This announcement follows a growing stakeholder demand for more transparency and uniformity in climate-related reporting, particularly from the side of investors. Policymakers have also voiced concern over the current climate-related disclosure landscape, suggesting that it is too unreliable for investors to have a clear picture of the genuine climate-related risks associated with various industries. These sentiments are echoed by Gensler himself, who stated that “companies and investors alike would benefit from the clear rules of the road proposed in this release.”
The proposed SEC law would follow similar climate mandates that have been issued in the European Union in recent years and would mark a serious change in policy for the United States government. It would also follow other recently passed U.S. state laws like California’s Climate Corporate Accountability Act, which puts pressure on California businesses with similar climate reporting requirements.
Proposed SEC GHG Disclosure Framework
The proposed SEC GHG disclosure framework is based on recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), as well as guidance from the Greenhouse Gas (GHG) Protocol. These two platforms are commonly used by companies to support the preparation of their GHG inventories. Included within the SEC proposal are requirements for companies to disclose their Scope 1, Scope 2, and in some cases Scope 3 GHG emissions, a requirement which has garnered significant attention due to its potential implications for businesses and their supply chains.
Below are brief descriptions of each emissions scope as defined by the U.S. EPA:
Scope 1: Direct GHG emissions that occur from sources that are controlled or owned by the company.
Scope 2: Indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling.
Scope 3: GHG emissions that are the result of activities from assets not owned or controlled by the reporting company, but that the company indirectly impacts in its value chain.
SEC Scope 3 Emissions Reporting Requirements
While the proposed rule would require all companies to disclose their Scope 1 and Scope 2 emissions, not every company would be required to disclose their Scope 3 emissions. According to the proposed rule, companies would only need to disclose their Scope 3 GHG emissions “if material, or if the registrant has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.” Further, it states that all GHG emissions are to be expressed in absolute and intensity terms within the disclosure framework. This means that companies would need to determine their own intensity metrics, which involve the relationship between a company’s GHG emissions and some other performance metric, such as revenue, profit, or units produced. For all companies, a “phase-in” period would be granted to provide adequate time for companies to meet compliance deadlines, with an extended period given to those complying with the Scope 3 requirements. In addition to the GHG emissions reporting requirements, the proposed rule also includes several other requirements that primarily relate to how companies identify, assess, and manage their climate-related risks.
S&P Global data suggests that currently only 35% of North American companies have set GHG emissions targets, and these plans do not include Scope 3 emissions. Since all the disclosure requirements in the proposed rule are currently considered voluntary in the U.S., moving them to the compliance space would undoubtedly demand a considerable investment from companies that do not already report such information. Concern has been raised regarding the vague nature of certain requirements in the rule, including what constitutes “material” Scope 3 emissions and what methodology is to be employed to capture these types of emissions. Despite these and other concerns, some experts contend that the SEC has legitimate authority in this area because of the demand from investors and consumers to have better climate-related data. This is made clear in the proposed SEC rule, where it is stated that investors “need information about climate-related risks- and it is squarely within the Commission’s authority to require such disclosure in the public interest and for the protection of investors.” Currently, the rule is open to public commenting until at least May 20, 2022.
4 Steps for a Strong Climate Disclosure
Whether or not the rule is passed into law, there are many ways that companies can prepare to meet the growing demand for climate-related disclosures. Below are a few examples of how your company can achieve a stronger climate disclosure:
Understand your emissions inventory.
As a first step, companies that have not already begun tracking and reporting their annual GHG emissions should consider making efforts to do so. Doing this can help companies get a grasp on what their overall footprint is, and reporting to voluntary disclosure frameworks such as CDP can foster greater accuracy and legitimacy of results.
Develop an emissions reduction strategy.
In addition to calculating GHG emissions, companies can also set science-based targets for their GHG emissions. This is done primarily to help companies understand how much they need to reduce their footprint over a ten- to twenty-year time horizon to be aligned with certain emissions scenarios that are outlined by the Science Based Targets initiative (SBTi).
Consider how climate-related risk is managed in relation to other types of risk.
Beyond regulatory compliance, climate-related risk management has evolved to encompass governance and policies, risk assessment and strategy, risk management, and reporting, monitoring, and feedback. Your company likely has a process for identifying and managing risk (for example, Enterprise Risk Management, or ERM). Does climate-related risk fall under the same process? If it falls within ERM or another risk-management process, the goals are to articulate climate-related risks for potential impact on the strategy and business strategy, to bring these issues into the mainstream processes and evaluations, and to ensure buy-in to support the investment in data collection, management, and evaluation.
Future proof your business with a Climate Scenario Analysis to address risks and capitalize on opportunities.
A Climate Scenario Analysis involves forecasting possible future climate-related scenarios and an assessment of how they might impact a company’s business outcomes. Identifying where a company’s biggest climate risks lie using this method allows them to respond accordingly and mitigate any avoidable damage. Ultimately, applying any or all of these measures has significant potential to improve investor, client, and customer relations, as the demand for climate-related disclosures continues to grow.
KERAMIDA is a global EHS and sustainability services firm that assists businesses to disclose their GHG and climate-related risks. Please contact us or call (800) 508-8034 to speak with one of our Sustainability professionals today.
Contact:
Becky Twohey, Ph.D.
Vice President, ESG Strategy, Planning and Reporting
KERAMIDA Inc.
Contact Becky at btwohey@keramida.com
