SEC Climate Disclosure Rule: What’s in It?

By many accounts, 2023 is expected to be a transformative year in the evolution of climate-related disclosure and mitigation requirements in the United States. In this webinar, we cut through the jargon to provide clarity about what climate-related requirements may be coming for US companies by unpacking the two proposed federal rules that are currently pending and one EU regulation that affects some US companies.

The new rule would require “consistent, comparable, and reliable” disclosure of climate-related risks and greenhouse gas emissions from public companies.

A proposed Securities and Exchange Commission (SEC) rule would require that public companies account for their carbon in the same manner that they account for their cash. The proposed rule, titled “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” would require “consistent, comparable, and reliable” disclosure of climate-related risks and greenhouse gas (GHG) emissions from public companies. This proposed rule is very similar to a rule proposed by the Biden-Harris administration that would require standardized emissions disclosures from federal suppliers. This proposed rule represents the latest iteration of the SEC’s environmental disclosure requirements dating back to the 1970s.

Why Now

According to SEC Commissioner Caroline A. Crenshaw, this proposed rule to require climate-related risk disclosures and GHG emissions accounting follows where the market has already moved—companies are making environmental claims to consumers, companies are disclosing climate-related risks in reporting, and companies are pursuing emissions reduction strategies—this rule aims to standardize and improve those efforts across public companies through clear requirements. She notes that between 2019 and 2020, 33% of all annual reports filed by public companies contained disclosure related to climate, and two-thirds of the S&P 500 have established a target for carbon emissions.

While the frequency of voluntary reporting from public companies represents significant progress, there remain investor challenges that the SEC aims to solve with the proposed rule. For example, when an investor is evaluating a company, it can be difficult—if not impossible—to track its climate-related performance over time or compare companies to each other, given the option for companies to choose from a number of protocols and methodologies when voluntarily quantifying and disclosing GHG emissions.

Comparing financial performance is a straightforward task due to the requirements to use standardized frameworks and processes in financial accounting, and carbon accounting is heading in a similar direction.

The SEC is charged with “protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.” Through this new proposed rule, the SEC aims to improve the accuracy, reliability, consistency, and integrity of climate-related disclosures that investors can use to make sound investment decisions. This means that thousands of companies may soon need to comply with new climate-related risk and GHG disclosure requirements.

The History of the SEC’s Climate-Related Disclosure Requirements

The SEC has a long history of addressing environmental and climate-related risk disclosures through financial reporting—it first began asking public companies to disclose environmental-related risks in the early 1970s.

• 1971—Release No. 33-5170
  Required the disclosure of the financial impact that compliance with environmental laws, based on the materiality of the information.
• 1973—Release No. 33-5386
  Required the disclosure of the financial impact that compliance with environmental laws may have on earnings, expenses, and the company’s competitive position in the marketplace.
• 1982—Release No. 33-6383
  Required the disclosure of information relating to litigation and other business costs arising out of compliance with “federal, state, and local laws that regulate the discharge of materials into the environment or otherwise relate to the protection of the environment.” (source)
• 2010—Release Nos. 33-9106; 34-61469
  The SEC reminded public companies of the requirement to disclose certain climate risk-related information. “[W]e and our staff continue to have to remind registrants, through comments issued in the filing review process, public statements by staff and Commissioners and otherwise, that the disclosure provided in response to this requirement should be clear and communicate to shareholders management’s view of the company’s financial condition and prospects.” (source)
• Proposed 2023—Release Nos. 33-11042; 34-94478
  The SEC is seeking to update its 2010 guidance by making disclosures “consistent, comparable, and reliable,” noting that climate-related risks to businesses and the economy have grown and investor demands for climate-related risk information as have grown, and it is “appropriate” for the SEC to consider investor demands in designing and enforcing a disclosure regime under federal securities laws. (source)

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What’s Proposed Under the New SEC Climate Disclosure Rule

Under the proposed rule, public companies would be required to disclose Scope 1 and 2 emissions, disaggregated and in the aggregate, both in absolute and intensity terms. Scope 3 emissions would need to be disclosed if material or if the company has set a Scope 3 emissions target.

The SEC notes that there were two necessary precursors to developing the proposed rule: the emergence of a widely accepted climate-related reporting framework and a standardized accounting framework for GHG emissions. The concepts and definitions in these frameworks are now standards used in many businesses worldwide, paving the way for regulation like this proposed rule.

DETAILS about the proposed Climate-Related Disclosure Requirements

The proposed disclosure framework is based on the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations, which include 11 topics related to the assessment, management, and disclosure of climate-related financial risks. The TCFD was published in 2017 and was developed by an industry-led task force charged with “promoting better-informed investment, credit, and insurance underwriting decisions.”

As of 2021, more than 2,600 organizations, with a market cap of $25 trillion, and 1,069 financial institutions, managing assets of $194 trillion, have expressed support for the TCFD. The TCFD’s recommendations have been incorporated into other voluntary frameworks, including CDP (formerly the Carbon Disclosure Project), Global Reporting Initiative (GRI), Climate Disclosure Standards Board (CDSB), and Sustainability Accounting Standards Board (SASB). 

The proposed rule would require that public companies disclose information about climate-related risks that are “reasonably likely to have material impacts on its business or consolidated financial statements.” Including GHG reporting and metrics could give investors the quantitative information they need to assess those disclosed risks. Companies can also disclose climate-related opportunities in the same manner as risks.

In addition to risk disclosure, the proposed rule would require specific “climate-related financial statement metrics and related disclosures” to be included in the company’s audited financial statements. This information would include “disaggregated climate-related impacts on existing financial statement line items.” 

Companies would also be required to disclose:

• Climate-related targets or goals set by the company;
• The oversight and governance process of climate-related risks by management and the company’s board;
• How identified climate-related risks have or may affect the company’s business model, strategy, or outlook; and
• How the company determines, assesses, and manages climate-related risks and how those processes are integrated within the company’s operations.

Companies would be provided with a phase-in period for these disclosures, depending on the size of the company (as determined by the value of outstanding shares).

Details about the proposed Emissions Disclosure Requirements

The proposed rule also draws from the GHG Protocol. The GHG Protocol introduced the concepts of “scopes” of emissions and provides uniform methods to measure and report GHGs, including carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen trifluoride. The Protocol was created through a partnership between the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) and has been updated periodically since its development in the late 1990s.

The SEC notes that including the GHG Protocol’s established emissions framework would lower the compliance burden for companies because many organizations are already measuring and reporting on Scope 1, 2, and 3 emissions using this method.

Under the proposed rule, companies will be required to disclose Scope 1 and 2 emissions, disaggregated and in the aggregate, both in absolute and intensity terms. Scope 3 emissions would need to be disclosed if material or if the company has set a Scope 3 emissions target.

A transition period for emissions disclosure would be provided for companies to meet the new requirements.

Rule Timing and What to Expect Next

Originally, the proposed rule could have potentially affected the FY2023 reporting year, but regulators have now set an April 2023 date for a final rule. 

There are a few complicating factors at this stage:

• A technical “glitch” prevented some feedback from being submitted, so the comment period was extended in October 2022.
• A Supreme Court ruling issued after the proposed rule may affect the SEC’s ability to regulate climate-related risk disclosures.
• Results from recent elections may create new headwinds for Environmental, Social, and Governance (ESG)-related regulatory proposals.

No matter the fate of this proposed climate disclosure rule, there’s no denying that stronger climate-related regulation is coming to the United States. Indeed, there are already significant advantages to voluntary sustainability efforts, and as we stare down new regulations that would require GHG inventories and disclosure of climate-related risks for public companies and federal suppliers, there has never been a better time to be proactive about addressing sustainability in every organization. 

The right partner will be critical in meeting these deadlines and limiting risks associated with noncompliance. CarbonBetter helps organizations measure Scope 1, 2, and 3 emissions, supports teams in submitting CDP Climate Change Questionnaires, and helps set and obtain SBTi validation of science-based targets. Reach out today with questions or to get started.