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Unpacking the 490-Page Proposed SEC Climate Disclosure Rule

New SEC Climate Disclosure Rule

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

SEC Climate-Related Disclosure Update (1/24/23)

On January 4, 2023, the United States (US) Securities and Exchange Commission (SEC) updated its 2023 rule-making agenda, setting April 2023 as the release date of its final climate-related disclosure rule. The final release of the rule was delayed last year due to a technical glitch that prevented some feedback from being submitted which caused the SEC to extend the initial commenting period. This post will be updated as new information is released. Register for our upcoming webinar on February 22, 2023 to learn more about the proposed upcoming US climate regulations and what you can do now to be prepared.

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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.

CarbonBetter helps organizations take proactive steps to ensure compliance with potential new regulations, including the proposed SEC rule and the proposed federal supplier rule. Reach out today to get started.

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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)

“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.”

PER SEC COMMISSIONER CRENSHAW, PUBLIC COMPANIES MAKING DISCLOSURES
SUSTAINABILITY REPORTING OVERVIEW

Sustainability reporting serves as a valuable tool to achieve corporate commitments and better manage climate-related business risks. This white paper walks you through what’s typically included and what should be considered.

What’s Proposed Under the New 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 that has since been pushed back to an unknown date. 

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.


About the Author

Nicole Sullivan is the Director of Climate Services at CarbonBetter. When she’s not working on sustainability reports and helping clients to decarbonize, she’s busy reading about the environment or is outdoors exploring it. Connect with her on LinkedIn and drop her a line to let her know what you thought about these stories and share what you’re reading.


What companies would be affected by the Securities and Exchange Commission (SEC) Climate-Disclosure Rule?

All public companies. Under the proposed rule, all 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. 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.

Is the proposed Securities and Exchange Commission (SEC) proposed rule similar to the federal supplier rule?

The Federal Supplier Climate Risks and Resilience Proposed Rule and the SEC proposed rule to Enhance and Standardize Climate-Related Disclosures for Investors are similar in the requirement to disclose climate-related information, but the requirements and affected businesses are different. The SEC rule is designed to require SEC registrants (public companies) to disclose climate-related risks that are reasonably likely to have a material impact on the business, including greenhouse gas (GHG) emissions. The proposed federal supplier rule would also require GHG disclosure of federal suppliers, with the scope varying based on the volume of annual contracts. It’s possible that a company could be affected by both rules, should they pass in their current form.

When will the Securities and Exchange Commission (SEC) Climate-Disclosure Rule go into effect?

The new Securities and Exchange Commission (SEC) Climate-Disclosure Rule was expected to go into effect in early 2023 but is now delayed due to multiple complications—the first of which is a technical delay that caused the comment period to be extended thru October 2022. A recent supreme court opinion also brings into question whether the SEC would even be able to enforce this new rule.

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