A New SEC Rule Targets Climate Disclosures

The US Securities and Exchange Commission (SEC) revealed a groundbreaking new rule demonstrating it’s serious about climate reporting. Is your company ready?

Depiction of greenhouse gas emission scopes. Source: Save Money Cut Carbon

The SEC recently proposed a groundbreaking climate-related reporting requirement for US-listed companies. If enacted, the rule would require companies to disclose audited greenhouse gas emissions (GHG) inventories from their operations, similar to existing disclosures for audited corporate financials.

This proposed rule is notable for several reasons. Most prominently: It’s the SEC y’all!

One Federal Regulatory Body to Rule them All

For years, consultants, activists, and emission wonks have dreamed of a large, centralized governing body (with enforcement authority) stepping up to create universal corporate climate reporting guidelines.

Today, corporate GHG emissions disclosure is completely voluntary and wildly variable. Investor-led efforts, while well intentioned, opened the door for the emergence of several standards and frameworks. I covered the most popular standards and frameworks in a previous post.

The current menagerie of corporate climate reporting options has left companies scrambling to select the “right” standard. Many companies even generate duplicate reports just to meet their stakeholders’ various demands. Many argue the current system is inefficient, wasteful of valuable company resources, and generally confusing for businesses and stakeholders.

It’s become a large enough strain that the SEC is ready to get involved.

Climate Collaborative

While all emissions are important, the spirit of the SEC’s proposed rule starts with standardizing disclosures of direct (Scope 1) and indirect (Scope 2) emissions.

Direct emissions include all onsite emissions under the direct control of an organization. For example, the emissions from burning natural gas in an onsite furnace for office heat. Or tailpipe emissions from company vehicles driving on the premises.

Indirect emissions result from providing electricity or other forms of energy combusted offsite for business operations from an outside entity. For example, the emissions from a natural-gas power station the next town over to power a company’s factory.

All other emissions from the supply chain to product end-use are generally labeled “Scope 3” emissions. Due to its complexity and all-encompassing nature, the SEC is less stringent on Scope 3 reporting. For now.

ESG Investing Trends

Globally, sustainable fund assets increased by 9% to $2.74 trillion at the end of 2021, according to Morningstar Direct. A record $71 billion flowed into U.S. environmental, social, and governance-focused (ESG) funds just in the last year. And there’s no sign of investments tapering.

Proponents applaud the SEC’s efforts to standardize corporate GHG emissions reporting. Many ESG fund managers and investors, representing $3 trillion in sustainable fund assets under management, welcome increased transparency, accuracy, and reliability for GHG reporting.

Impacts to My Business?

If approved, the first audited GHG reports would be due for some companies in 2024, based on FY2023 data. Accurate climate reporting will soon be a prerequisite for participation and access to capital markets for US-listed companies.

Forward-looking companies seeking to stay ahead of regulatory hurdles and mitigate risk recognize there isn’t a better time to begin getting a handle on their GHG emissions. 

Preparing for a future of emissions reporting will help businesses’ standing with both investors and the SEC. Public reporting will make entry into ESG funds more competitive. Failure to report could result in SEC sanctions.

How to Prepare: A Roadmap

If you’re not already doing so, there’s no better time to begin a corporate emissions inventory.

Setting a baseline is the first step in creating a comprehensive corporate decarbonization plan. Then, aligning corporate emissions reduction targets with science-based goals is a natural next step. Finally, senior leadership should develop a comprehensive corporate roadmap guiding strategic investments with ongoing GHG emission monitoring at the core. 

Not all companies will get their climate planning right the first time. It will be an iterative process. 

Whether you’re seeking energy security, transparency, or compliance, we understand you want to stay ahead. We’d like to show you how we’re helping our clients save money, mitigate long-term risk, mitigate emissions, and report progress to stakeholders.

About the Author

I’m working alongside a talented team to provide organizations with intelligent onsite solutions that enable carbon-free electrification and transportation.

If you’re considering onsite solutions such as electric vehicle charging stations, solar, or battery storage to reduce corporate greenhouse gas emissions and improve operational efficiency, let’s see if we can help. You can reach me at alex.kaufman@powerflex.com.

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