In March 2022, the U.S. Securities and Exchange Commission (SEC) put forward a proposed rule around climate-related disclosures that marked an important regulatory milestone.
While businesses have been facing growing pressure from stakeholders like customers, employees, and investors to improve environmental, social, and governance (ESG) practices, so far publicly traded companies in the U.S. have generally not faced widespread emissions reporting requirements.
“Ultimately, this is going from voluntarily reporting your greenhouse gas emissions publicly, to this probably being the first major regulation of greenhouse gas emissions disclosure that the U.S. has had,” says Sam Telleen, General Manager and Director of Renewable Solutions at Terrapass. [Text Wrapping Break][Text Wrapping Break]Since the announcement of the proposed rule, the SEC has received some pushback, and a release of a final rule has gotten delayed. But even if the SEC ends up moving forward with a somewhat watered-down version of its initial plan, the trend is clear: Businesses, in this case publicly traded ones, increasingly need to provide transparency around greenhouse gas emissions.
What’s Going on With the SEC Rule?
Initially, the SEC proposed requiring registered companies to disclose a variety of climate-related information, such as in 10-K reports, like:
- Material climate-related risks facing the business
- Greenhouse gas emissions, including Scope 1 and 2 emissions broadly, as well as Scope 3 emissions for larger enterprises
- Details on climate-related targets, among others
As the SEC points out, these requirements are similar to what companies often disclose already via frameworks like those from the Task Force on Climate-related Financial Disclosures (TCFD) or the Greenhouse Gas Protocol.
To that point, at GreenBiz’s Verge 2022 conference in October, Terrapass heard from a variety of climate experts about the SEC’s proposal, which they said will help investors get a clear, consistent view of climate risk amidst what can otherwise be a mish-mosh of voluntary standards.
But while the regulation has many supporters, some think it’s excessive, particularly in terms of requiring disclosure on indirect emissions, i.e., Scope 3.
And Bloomberg Law reported in October that the SEC missed its own deadline on a final rule “as it continues to sift through thousands of public comments and factors in a June Supreme Court ruling that endangers the agency’s normally broad authority to regulate Wall Street.”
That ruling for West Virginia v. Environmental Protection Agency, which the SEC chair acknowledged the significance of, means “agencies need clear permission from Congress to create regulations that have major economic or political effects,” adds Bloomberg.[
Some politicians from both sides of the aisle have also expressed concerns about the extent of the regulation, so it’s possible that the proposed rule won’t go through exactly as planned.
Meanwhile, some House Republicans have introduced legislation that could block the SEC’s proposal, notes a December Pension & Investments article. [Text Wrapping Break][Text Wrapping Break]That being said, there’s still optimism that some form of climate-disclosure regulation will ultimately go through, perhaps in the first quarter of 2023, but it’s somewhat up in the air at this point.
“Now, with formidable obstacles standing in the way of a final rule, nobody knows what to expect and when. Still, it’s clear that some form of the rule will ultimately pass. Investor demand for it is strong and unrelenting, given the heightened recognition of climate risk’s potential to impact financial performance,” notes John Wheeler, Senior Advisor, Risk and Technology for AuditBoard, in an article for the company in November.
Prepare Proactively
Even though the SEC rule might not maintain its initial requirements, like Scope 3 reporting, the trendline still points in the direction of more disclosure.
When the SEC released the proposed rule in March, 15% of U.S.-listed companies disclosed at least some Scope 3 emissions, according to MSCI. By Oct. 24, 2022, that rose to 25%.
In other words, more companies are voluntarily providing disclosure, and it seems only like a matter of time until others follow suit, whether that’s to keep up with competitors or because of SEC regulation.
“It’s more about transparency to investors and the public than it is anything to do with changing environmental actions. Creating that kind of transparency, and to some extent more accuracy in reporting, I don’t see that being really a negative in many people’s eyes,” says Christopher Ruck, Director of Environmental Commodities Trading at Just Energy, the parent company of Terrapass.
The SEC rules could also require companies to provide more specifics on how they’ll reach climate targets that they’ve set for themselves, though the agency doesn’t seem likely to require particular targets.
As MSCI finds, of the 792 U.S.-listed companies with a climate target, 44% have some sort of net-zero emissions target as of October 2022, compared with just 4% in 2015.
So, more companies seem to be moving in the direction of setting ambitious goals, and they’ll likely be held more accountable for reaching the targets they set.
“The SEC is saying, ‘we’re not going to tell you what to do. But we’re going to tell you to show your investors what your climate impact is and how you plan to address things like climate targets’, investors can make up their minds about what to do from there,” adds Telleen.
Given these trends and potential requirements, businesses can start preparing now so they’re not caught off guard if/when regulation comes. By calculating your greenhouse gas emissions now, you can provide investors with the transparency they’re increasingly looking for, along with making compliance easier.
Don’t wait until it’s too late,” says Telleen. “Prepare for what’s coming and start understanding your carbon footprint today.”
In addition to offering solutions for offsetting your carbon emissions, Terrapass also provides tools like online carbon footprint calculators to help businesses understand what their impact looks like. And if you need more comprehensive services such as around emissions data collection and processing, we can connect you with partners to help.
To learn more about what the SEC’s proposed climate-disclosures rule could mean for your business, or to get started with addressing your greenhouse gas emissions, get in touch with our team today.
Brought to you by terrapass.com
