THE SEC CLIMATE DISCLOSURE RULE
The SEC Climate Disclosure Rule, initially set in motion by the Securities and Exchange Commission (SEC) in early 2022, is expected to see further delays. Estimated to be unveiled in 2023, with potential implementation set for 2024, recent reports suggest that the comprehensive guidelines may not be unveiled until at least 2024, with implementation projected for 2026. The SEC’s mandate seeks to compel public companies to transparently disclose climate-related risks, including Scope 1, 2, and 3 emissions.
One of the challenges SEC faces in the practical implementation of the Rule is with regards to Scope 3 emission reporting. Concerns have been raised by various business coalitions regarding the complexities and financial implications of reliably monitoring these emissions. Moreover, indirect greenhouse gas accounting also involves privately held firms outside the SEC’s jurisdiction, raising questions about the rule’s legal viability and how likely these companies will comply with the Rule.
RECENT COMPROMISES AND CONSIDERATIONS
Recent discussions, led by Chairman Gary Gensler of the SEC, hinted at possible compromises, such as making Scope 3 disclosures voluntary unless a company has made specific public commitments on these emissions. This approach would grant businesses significant leeway in deciding the materiality of their Scope 3 emissions information. In ongoing developments, companies may potentially be allowed to provide estimated Scope 3 emissions, a method that is still under development, with industry experts expected to contribute to establishing standard estimation procedures.
Another aspect under review is Regulation S-X, which pertains to amendments of past disclosures. This would involve reassessing prior financial statements to reflect the impact of significant climate events and the costs associated with transitioning to sustainable operations.
CURRENT PROGRESS AND CHALLENGES
The SEC’s cautious progress is evidenced by its thorough review of over 16,000 public comments on the draft rule. The proposed timeline seems to align with other jurisdictions like California and the EU, which have set 2026 as the year for their climate disclosure mandates to take effect. Although the SEC has not confirmed the schedule for finalizing the climate reporting standards, the delays and global alignment efforts suggest a likely postponement until 2024. While Gensler is looking to slow down the pace of the Rule’s enactment to weed through Scope 3 issues and give businesses more time to prepare, potential shutdowns from the US government could even further delay the SEC’s rule-making efforts.
The SEC has also received legal threats from Republicans, businesses and environmental groups; both sides of the debate have warned that if Scope 3 emissions are maintained (in the case of GOP-led states and businesses) or dropped (climate change activists), legal repercussions are likely. In other words, the SEC will have to work to find a middle ground to avoid ramifications—and push the rule through.
Is your company ready to meet the SEC Climate Disclosure Rule?
On March 21, 2022, the SEC issued a rule proposal, also known as the SEC Climate Disclosure Rule, to force publicly traded companies to report their GHG emissions and environmental impact along with their financial statements
What Are Scope 3 Emissions?
“Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain” (EPA, 2023).
How to measure GHG emissions: A quickstart guide
Organizations may be uncertain about how to begin measuring their GHG emissions. Here are 6 steps on how to measure emissions and ensure compliance.