What's the Big Deal With the SEC Climate Rules?

in April 1st, 2024

By Simon Pritchard, Managing Director of Analytics

Over the past few weeks in the sustainability space, there’s been a buzz. Take your pick of free webinars. Newsletters are flying fast and furiously into inboxes (or maybe just mine?). The myriad of outreach efforts has posed much the same question: Is your company ready for disclosure? This whir of activity has been happening for a good, and highly anticipated, reason. After nearly two long years, and over 24,000 public comments, on March 6, 2024 the US Securities and Exchange Commission (SEC) finalized rules requiring publicly-traded companies to disclose climate-related risks to their business and how they are taking steps to address those risks, in order to provide relevant information to investors who may consider such risks when making investment decisions.

The final rule pared down the required disclosures quite a bit from the original proposed rule; however, the nearly 900-page regulation still greatly expands the content of companies’ financial filings. With the important caveat that Competitive Energy Services (CES) does not provide legal advice, and that this overview is for informational purposes only, let’s dig in a bit.

Overview of The Rule

All companies are required to disclose how climate-related risks such as sea-level rise, flooding, or wildfires have or may negatively impact the company’s business model, strategy, or financial condition in a material way, in line with frameworks developed by the Task Force on Climate-Related Financial Disclosures (TCFD), and how the company has or plans to take steps to manage and mitigate those risks.

The part of the proposed rule that had received the most attention, the requirement to disclose Greenhouse Gas (GHG) emissions in accordance with the global emissions accounting standard GHG Protocol, was watered-down substantially in the final rule. Starting in 2026, only companies meeting the SEC’s definitions of Large Accelerated Filer and Accelerated Filer will be required to report their Scope 1 and Scope 2 emissions, representing companies’ own-source emissions directly caused by company activities, such as from burning natural gas for heating or using electricity in buildings, where the companies determine those emissions to be material.

Reduced from all companies in the proposed rule, the rule also removes the proposed requirement for reporting of Scope 3 emissions, which refer to emissions occurring across a company’s value-chain related to the company’s business activities, but not directly emitted through the company’s actions. Scope 3 emissions are difficult to accurately measure, often requiring significant estimates in calculations without stringent data collection protocols, and the inclusion of Scope 3 requirements was a major source of push-back in comments received on the proposed rule. By comparison, most companies have access to the energy consumption or process gas data required to accurately calculate Scope 1 and 2 emissions.

Another reduced requirement for emissions reporting is the level of assurance that companies must obtain from a third party. Applicable companies are required to obtain limited assurance, which typically allows a 5% error threshold to certify as accurate, three years after first reporting, and only Large Accelerated Filers are further required to obtain reasonable assurance, which only allows a 1% error threshold, seven years after first reporting.

Some additional requirements that haven’t received as much publicity but may be of relevance to many companies are the disclosure requirements for climate targets (both GHG emissions reduction targets, and other climate-related targets), including internal targets that have been adopted but have not been made public. Companies will need to disclose specifics such as baseline, time horizon, and progress made to date, as well as specific information on actions taken to meet the goal, notably regarding the use of Renewable Energy Certificates (RECs) or carbon offsets. Companies will be required to disclose specific information about the sourcing, types, and pricing of RECs and offsets.

Now, let’s get up to speed on where the rule stands since being finalized. On March 15, 2024, the Fifth Circuit Court of Appeals issued a temporary stay of the rule in response to a legal challenge from two companies in the fracking industry, and that lawsuit along with eight others have now been consolidated into a single case before the Eighth Circuit. It is entirely possible that the judicial review process overturns or significantly delays the rule. However, companies looking at the SEC rule may also need to be aware of other disclosure requirements coming into effect in other jurisdictions.

Similar Reporting Requirements

In the fall of 2023, the State of California passed two landmark bills, Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261), deemed the “Climate Accountability Package.” These bills enforce disclosures requirements for climate-related risks and GHG emissions, in some cases going farther than the SEC rule in stringency. Starting in 2026 and 2027, the SB 253 GHG emissions disclosures require Scope 1, 2, and 3 emissions to be reported, including limited assurance verification of Scope 3 emissions and reasonable assurance of Scope 1 and 2 by 2030.

The SEC rule and the California bills have some applicability overlap. Unlike the SEC rule, which applies only to public companies, the California bills apply to both public and private companies. GHG emissions disclosure requirements under SB 253 applies to companies with greater than $1 billion in revenue doing business in the State of California, while SB 261 climate-related risk disclosure requirements apply to companies with greater than $500 million in annual revenue.  Given the size of California’s economy, most U.S. companies meeting those size thresholds are expected to qualify as doing business in California.

Looking across the Atlantic Ocean, the Corporate Sustainability Reporting Directive (CSRD) is European Union (EU) legislation covering disclosures of environmental, social, and governance (ESG) activities more broadly, including both GHG emissions and climate-related risk disclosure requirements adopted in 2023. The CSRD requires Scope 1, 2, and 3 emissions reporting, with third party assurance, and comes into effect for fiscal years beginning in 2024. While focused on European companies, the CSRD does apply to many US companies with total annual EU revenues of over €150 million, that meet additional thresholds for specific branches or subsidiaries.

In summary, the SEC rule faces legal challenges that may limit, delay, or overturn it, but the writing is on the wall that reporting is going to become a part of everyday business. As a result, companies need to not only have a strategy for complying with SEC rules but also have a plan to comply with additional disclosure requirements that may overlap with them. If your company is trying to get a handle on developing a strategic plan for calculating and reporting GHG emissions in preparation for the SEC rules or other reporting requirements and you are looking for assistance, please reach out to your Energy Services Advisor to see how CES can help. 

Photo by: Khanchit Khirisutchalual


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