How to Prepare for the SEC Climate Rule

Background: 

While the final rule takes a much narrower approach than what the SEC proposed in 2022, it marks a significant change in the level of climate-related information publicly listed companies must disclose in the US. The rule requires companies to disclose details related to climate targets, plans for meeting those targets, their oversight and governance practices, and climate-related financial expenditures. Some larger companies will be required to disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions — or the emissions associated with their operations and with their purchased energy — but only if the companies deem those emissions to be material. Notably, a provision to require some companies to disclose Scope 3 emissions, or those that occur up and down a company’s value chain, was dropped from the final rule. As predicted, a lawsuit has already been filed to block the ruling, arguing that the SEC exceeded their authority. On the other side, the Sierra Club and others indicated they would take legal action alleging that the final rule did not go far enough. There will be other suits filed in the coming days, and although the rule is supposed to go into effect in 60 days, the litigation may delay implementation. Despite delays, 2024 is a crucial year for companies to focus on preparation activities. 

How to Comply:

To comply with the SEC’s new rules, eligible organizations and issuers will need to take the following annual compliance steps, starting in 2024:

Step 1: Integrate climate risk and carbon accounting into your regular financial accounting and regulatory reporting cycles.

Step 2: Track and disclose the required information – SEC reports will likely require management commentary and data on a company’s:

1. Reporting Material Scope 1 and 2 Greenhouse Gas Emissions: Large Accelerated Filers (LAFs) and Accelerated Filers (AFs) will require disclosure of Scope 1 and/or Scope 2 greenhouse gas (GHG) emissions when those emissions are material, and the filing of an attestation report; with both requirements applied on a phased-in basis. Indirect Scope 3 GHG emissions are no longer included in the final reporting mandate.  
2. Disclosure of Climate-Related Risks: Registrants must disclose material climate-related risks and their actual or reasonably likely material impacts on business operations, strategy, financial condition, and outlook. Companies must disclose financial impacts greater than 1% of profits before taxes (specifically, companies must disclose capitalized costs, expenditures, charges, and losses incurred). 
3. Mitigation Pathways: Activities taken to mitigate or adapt to a material climate-related risk or use of transition plans, scenario analysis or internal carbon prices to manage a material climate-related risk.
4. Board Oversight and Management’s Role: Information on the registrant’s board of directors’ oversight of climate-related risks and the role of management in managing these risks must be provided. 
5. Climate-Related Targets or Goals: Disclosure of any climate-related targets or goals that significantly impact the registrant’s business, results, or financial condition is required. They should also disclose expenses, capitalized amounts, and losses related to carbon offsets and RECs used for climate-related goals. Any recovery from such events must be disclosed separately. If estimates for financial statements are materially impacted by weather risks or climate plans, a qualitative description of the impact on assumptions must be provided. 
6. Disclosure of Financial Effects of Severe Weather Events: Registrants must disclose the financial impacts of severe weather events and other natural conditions, including associated costs and losses. 
7. Carbon Offsets: Use of and expenditures for carbon offsets and renewable energy credits if used as a material component of a transition plan.

Step 3: Obtain Assurance

Assurance over Scope 1 and 2 emissions disclosures will be required, initially at a limited assurance level (within 3 years of initial GHG disclosures) and ultimately at a reasonable assurance level for LAFs (within 7 years of initial GHG emissions disclosures). Companies should consider discussing with their independent auditor how generally accepted auditing and accounting standards will apply to the relevant disclosure, the company’s accounting records and the presentation of the disclosure in the notes to the audited financial statements.

Key Activities to Prepare:

Review Compliance Timetables:

Because the new climate-related disclosure rules are likely to require significant preparation for many companies, companies should begin by reviewing the compliance timetables to determine when and how these rules will apply to the company. Preparation for compliance with the new rules will be more significant in the near future for large accelerated filers than other filers since large accelerated filers will be the first group of companies that must provide the new climate-related disclosures.

Conduct a Gap Analysis:

Many companies already prepare voluntary sustainability reports. Utilizing these reports as a baseline, companies should evaluate the gaps where their current content and reporting processes do not meet new requirements. identify how you will address the gaps to comply and prioritize the areas that will need the most attention to collect more data or conduct further analysis.

Get Audit Ready:

SEC disclosures demand added rigor and accuracy in reporting and will be subject to third-party assurance requirements (limited assurance initially, then reasonable assurance). Climate disclosures should be traceable at a granular level to each transaction, emission factor, calculation, and accounting method. Companies need to engage a qualified assurance provider and integrate the new disclosures into their internal control processes.

Understand How to Model Climate Risks:

Under the new rule, companies are required to disclose the material risks posed by climate change to their business and their consolidated financial statements, including physical risks (such as sea level rise and extreme weather events) and transition risks (such as changes in regulations and market trends). Companies must also disclose the scenario analysis results (if utilized) that assess the potential impact of different climate scenarios on their business. This may involve extensive scenario analysis and calculating modeled average annual loss attributed to climate-related physical risks 

Accurately Calculate and Track Emissions:

The Final Rules limit the reporting of greenhouse gas (GHG) emissions to scope 1 emissions (direct emissions) and scope 2 emissions (indirect emissions from purchased electricity, heating or cooling) from large accelerated filers (LAF) and accelerated filers (AF) that are not smaller reporting companies (SRC) or emerging growth companies (EGC) but only if those GHG emissions are material. Companies will need to be able to calculate carbon footprints that quantify GHG emissions across the company’s operational footprint. Being able to count on an automated platform with clear metrics, defensible reporting, robust modeling, and identifiable risk and reduction targets is key.

Reduce Data Silos

Sustainability will become less of an optional, segregated department within a larger operational strategy and instead require cross-functional roles and business units. Complying with SEC regulations will require the cooperation of all company teams in order to cross data silos and collect the necessary sustainability information for financial reports.

Lean on Voluntary Disclosures:

If you’ve reported to CDP, or created internal sustainability reports in line with TCFD, SASB, or GRI you are at least part of the way there. Because the SEC ruling is in part based on guidance from the TCFD, reviewing this framework and all the resources they have to offer is a great place to start. In the final rule, the SEC wrote that its reporting framework has elements in common with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, calling it “an appropriate reference point for the final rules.” The TCFD framework is also the common denominator in shaping other major climate standards (e.g., the EU and ISSB Standards). Companies should also utilize the Greenhouse Gas Protocol for guidance on carbon accounting. 

Be Aware of Other Regulations:

The SEC rule simply adds to the growing number of policies requiring climate disclosure. During the two years of waiting for the SEC to finalize their rule, the rest of the world moved ahead with more stringent requirements. Companies should review the interaction of the SEC’s new climate-related rules on the disclosures required by other regulators, including certain U.S. states (for example, California) and non-U.S. jurisdictions (for example, the European Union).  Areas of potential concern may include potentially duplicative or inconsistent regulatory reporting and/or public disclosure requirements and different protocols or frameworks that apply to these requirements

While the SEC did not provide much guidance on equivalency with other similar requirements, they did reference both the CSRD and California’s climate bills, how many companies will be covered by both the SEC rules and these other rules (~3,700 and ~2,520, respectively). Many multinational U.S.-based companies operate in the EU, which will subject them to rules even more stringent than those proposed by the SEC (CSRD and ESRS). The SEC concluded that complying with these other rules would provide affected companies with systems and processes to comply with the SEC rule

• California’s rule mandates that any company generating annual revenue of over $1 billion that does business in the state measure and publicly report Scope 1 and 2 greenhouse gas emissions starting in 2026, and begin disclosing Scope 3 emissions starting in 2027.
• Under the European Union’s Corporate Sustainability Reporting Directive, all organizations listed in an EU-regulated market with 500 or more employees must start reporting in 2025 with data for the 2024 financial year. Other large companies will be required to do the same in subsequent years, followed by small and midsize enterprises. Under the ESRS, companies are required to disclose material environmental, social and governance impacts and risks within their upstream and downstream value chains – for example, Scope 1, 2 and 3 emissions as well as total greenhouse gas emissions. 

Dont Ignore Scope 3: 

Although Scope 3 was dropped from the final ruling, all signals point towards Scope 3 being a regulatory requirement in other jurisdictions and a market norm. Furthermore, companies must disclose material climate risks and many of these risks occur in value chain activities (Scope 3). The ESRSs, ISSB, and California law all include scope 3; they recognize that a carbon footprint without scope 3 is not only incomplete, it can also be misleading. Investors also know that Scope 3 is, for many companies, the vast majority of their overall emissions, and as more and more global companies are required to disclose Scope 3, others will be expected to follow. Even in jurisdictions where scope 3 might not be required, companies will want to think carefully about whether the disclosure is necessary to round out the picture and prevent the required disclosures from being misleading.

Questions To Consider:  

1. How do we operationalize data collection and use of technology to accurately measure, manage, and monitor our carbon footprint? 
2. Have we conducted a thorough assessment to identify potential climate-related risks that could impact our operations, supply chain, or market position? 
3. What are our climate-related targets, goals, and risks? 
4. How do we build controls for non-financial reporting and what climate considerations are built into the governance structure of our company? 

About WatchWire

WatchWire by Tango is a market-leading, energy and sustainability data management platform that uses cloud-based software to collect, automize, and analyze utility, energy, and sustainability data metrics. WatchWire streamlines, automates, and standardizes your sustainability reporting process by integrating directly and/or providing reporting exports to ENERGY STAR Portfolio Manager, LEED Arc, GRESB, CDP, SASB, GRI, and more. The platform provides customizable dashboards, which allow asset managers, sustainability managers, engineers, and more to monitor individual key performance indicators (KPIs) and create custom views for specific use cases. WatchWire provides:

• Automatic collection of energy, utility, sustainability, and emissions data through real-time metering. The data is then fully audited and organized in one place
• GHG emissions tracking
• Goal tracking (e.g., Net Zero, SBTi, waste diversion)
• Carbon offset view of power purchases from the grid vs. on-site renewables generated vs. off-site RECs.
• Opportunities to implement projects (track EEMs) and monitor distributed energy resource production (e.g. on-site solar)

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