What to watch out for with the SEC ruling

On March 6, 2024, the US Securities and Exchange Commission (SEC) officially approved a much anticipated rule requiring select public companies to disclose their greenhouse gas emissions and climate risks. This decision comes after a lengthy review process marked by significant public engagement, with over 24,000 comments – the highest number ever received for an SEC proposal. However, It is important to note that the finalized rule represents a departure from the initially proposed regulations, reflecting adjustments made in response to feedback and opposition from various stakeholders. EcoAct Managing Consultant, Elie Bou Gharios and EcoAct Consultant, Anna Twomlow, break down key components of this new rule.

As of March 15, 2024, ongoing legal challenges and regulatory developments have temporarily paused the implementation of the SEC’s rules on climate-related risk reporting for public companies. Further updates and decisions are expected as these legal proceedings unfold. EcoAct will be monitoring these developments closely and providing updates accordingly.

Overview

The SEC’s decision, passing with a 3-2 vote, brings the United States closer to aligning with the European Union and California, which had previously implemented corporate climate disclosure rules this year. This ruling is strategically designed to provide consistent, comparable, and decision-useful information to investors to enable them to make informed judgments about the impact of climate-related risks on current and potential investments.

The mandate requires publicly traded companies to furnish more detailed information in their financial statements, shedding light on the risks posed by climate change to their operations and their contributions to environmental challenges. In response to this pivotal development, our EcoAct experts have compiled a comprehensive guide to navigate the intricacies of the ruling, providing valuable insights to stakeholders ahead of the final vote.

Summary of Requirements

The finalized rule, in its ultimate form, exhibits a noticeable softening of the initially proposed requirements. Despite this dilution, crucial structural components align the rule with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol.

The TCFD reporting framework, designed to elicit comprehensive information for investors to understand a registrant’s climate-related risks, serves as a key reference point for these final SEC rules, in line with mandatory climate reporting requirements in other countries. Core categories within the framework, focusing on governance, risk management, strategy, and metrics, align with existing disclosure requirements within Regulation S-K.

Moreover, the final rule strategically incorporates concepts from the Greenhouse Gas Protocol (GHG), a recognized standard for greenhouse gas emissions calculations. This fusion of global reporting requirements aims to streamline compliance for registrants and foster meaningful comparisons between commission registrants and foreign companies. This approach is particularly relevant for investors seeking to assess disclosures aligned with the TCFD framework and GHG Protocol, enhancing their ability to make informed investment and voting decisions.

Under the new ruling, companies are mandated to disclose their material emissions and specific information regarding climate risks in their annual reports and stock registration statements. This decision reflects the dual purpose of addressing climate change impacts and providing stakeholders with crucial data for informed decision-making.

Summary of the finalized SEC Climate Disclosure Rules

• Emissions Disclosure Requirements: The SEC mandates the disclosure of absolute Scope 1 & 2 greenhouse gas (GHG) emissions and their calculation methodology, provided these emissions are material:
  • The SEC refers to the “traditional” definition of financial materiality established by U.S. Supreme Court and referenced in other SEC rulings; namely “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.”
  • As outlined in the initial proposal, The SEC requires the alignment of emissions measurement with the standards and guidance of the GHG Protocol or a comparable standard
    • KEY CHANGE: The SEC has removed the requirement from the initial proposal that requires alignment of the GHG Inventory boundary with the boundary of assets and entities included in a company’s financial statements as long as appropriate disclosure of how the boundary differs from the scope of the consolidated financial statements is provided.
  • Emissions inventory should align with the reporting company’s fiscal year, and if data is reasonably available, emissions should match the years reported in financial statements.
    • KEY CHANGE: The SEC no longer requires disclosure of Scope 3 emissions as proposed initially.
    • KEY CHANGE: Emissions no longer need to be published in the annual report (Form 10-K). Instead, companies can report emissions in their second-quarter Form 10-Q.
    • KEY CHANGE: The requirement to disclose emissions on an economic or physical intensity basis has been removed.
    • KEY CHANGE: Companies are no longer required to disaggregate all emissions into their constituent GHGs. Instead, they must separately disclose any constituents deemed material.
  • Assurance of GHG emissions will be required as laid out in the initial proposal, however the timeline has been extended to require attestation on Scope 1 & 2 disclosures by 2029 at the earliest.

• Climate-related Targets Disclosure Requirements: Disclosure of climate-related targets that have materially affected or are reasonably likely to materially affect the business (KEY CHANGE from initial proposal that mandated disclosure of all public targets regardless of materiality), including:
  • Target emissions boundary and time horizon
  • The reporting company’s strategy to meet its targets
  • Data indicating progress toward the target
  • Details on how such progress has been achieved
  • KEY CHANGE: Companies must provide information about the use or projected use of carbon offsets and Renewable Energy Certificates (RECs) to support target progress if they are a material component of the company’s plan. If carbon offsets or RECs are used to achieve climate-related goals, registrants must disclose the quantity, source, nature, and location of such offsets or RECs, along with authentication details and associated costs. These requirements are notably less extensive than AB 1305.
• Climate-related Risk Disclosure Requirements: Companies must disclose their processes for detecting, evaluating, and managing climate-related risks, including how these risks are integrated into broader enterprise risk management programs. This disclosure should include:
  • An explanation of how material climate-related risks have materially affected or are reasonably likely to materially affect the registrants’ business strategy, results of operations, or financial condition.
  • An explanation of how identified material climate-related risks actually or potentially materially affect the registrants’ strategy, business model, and outlook.
  • Disclosure of the use of internal carbon pricing its use in assessing climate-related risk.
  • If utilized, as description of scenario analysis used for assessing business in the context of identifying material climate-related risk, including scenarios, assumptions, and projected financial impacts.
  • Explanation of any adopted climate transition plan and progress over time in registration.
    • SEC definition of a Transition Plan: “Transition plan means a registrant’s strategy and implementation plan to reduce climate-related risks, which may include a plan to reduce its GHG emissions in line with its own commitments or commitments of jurisdictions within which it has significant operations.”
• Climate-related Financial Impact Disclosure Requirements:
  • Companies must provide quantitative and qualitative information on material expenditures and impacts on financial estimates and assumptions, directly attributable to mitigation or adaptation to climate-related risks, disclosed transition plans, or targets/goals and actions taken towards them.
    • KEY CHANGE: This is a significant departure from the initial proposal, which required that projected climate-related impacts on financial statements be assessed on a line-item-by-line-item basis
  • Aggregate expenditures and capitalized costs as a result of severe weather events and other natural conditions in the year of disclosure
    • KEY CHANGE: This is a significant departure from the initial proposal, which required that in-year climate-related impacts on financial statements be assessed on a line-item-by-line-item basis
  • Disclosure on whether severe weather events, other natural conditions, or disclosed climate targets and transition plans have materially affected estimates and assumptions reflected in the financial statements
• Governance Disclosure Requirements:
  • Description of how the registrants’ board of directors (or subcommittee) and management oversee the assessment and management of climate-related risks, including monitoring progress towards any disclosed climate-related target, goal, or transition plan.
  • Explanation of any adopted climate transition plan and progress over time in registration.

EcoAct’s take on some tough, early questions:

• How will the new rule affect how we calculate carbon footprints
  • The new SEC rules, though softened, still align with the GHG Protocol for emissions calculations. The SEC has addressed concerns by granting more time for emissions disclosure (now in the 2nd-quarter 10-Q), eliminating the need to align financial and greenhouse gas inventory boundaries, and ceasing the mandate to report Scope 3 emissions.

    Companies are advised not to delay emissions or emissions targets measurement and disclosure, as the SEC rules align with best practices. Developing a robust GHG inventory based on accurate data may take several years for companies that have yet to calculate their emissions. Companies should conduct a comprehensive gap analysis to prioritize next steps.

• What steps should companies take to prepare for compliance with the new SEC rules?
  • To prepare for compliance with the new SEC rules, companies should not delay measuring and disclosing emissions or targets. Early adoption can streamline compliance efforts, ensuring a smoother transition and reducing non-compliance risks. Developing a robust GHG inventory may take years, so companies should start promptly. Additionally, conducting a comprehensive gap analysis against current disclosures and climate-related risks, financial aspects, and governance processes can help prioritize necessary steps.

Conclusion

This new ruling, though facing criticism for its weakened provisions, is still a significant step in centralizing climate risks in decision making for companies. Driven by shareholder and investor demands, the rule emphasizes climate reporting as a smart business decision.

If you’re serious about managing your company’s carbon impact, EcoAct offers comprehensive services to support your sustainability goals. Our tailored solutions include carbon footprinting, target setting, climate scenario analysis and regulatory gap analysis services. This holistic approach enables you to understand where you stand in terms of impact and compliance, empowering you to make informed decisions and drive meaningful change.