In March 2022, the U.S. Securities and Exchange Commission (SEC) recommend a proposed rule around climate-related disclosures that marked a very important regulatory milestone.
While businesses have been facing growing pressure from stakeholders like customers, employees, and investors to enhance environmental, social, and governance (ESG) practices, to date publicly traded corporations within the U.S. have generally not faced widespread emissions reporting requirements.
“Ultimately, that is going from voluntarily reporting your greenhouse gas emissions publicly, to this probably being the primary 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]For the reason that announcement of the proposed rule, the SEC has received some pushback, and a release of a final rule has gotten delayed. But even when the SEC finally ends up moving forward with a somewhat watered-down version of its initial plan, the trend is evident: Businesses, on this case publicly traded ones, increasingly need to offer transparency around greenhouse gas emissions.
What’s Happening With the SEC Rule?
Initially, the SEC proposed requiring registered corporations to reveal a wide range of climate-related information, similar to in 10-K reports, like:
- Material climate-related risks facing the business
- Greenhouse gas emissions, including Scope 1 and a pair of emissions broadly, in addition to Scope 3 emissions for larger enterprises
- Details on climate-related targets, amongst others
As the SEC points out, these requirements are much like what corporations often disclose already via frameworks like those from the Task Force on Climate-related Financial Disclosures (TCFD) or the Greenhouse Gas Protocol.
To that time, at GreenBiz’s Verge 2022 conference in October, Terrapass heard from a wide range of climate experts in regards to the SEC’s proposal, which they said will help investors get a transparent, 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 by way 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 “because it continues to sift through hundreds of public comments and aspects in a June Supreme Court ruling that endangers the agency’s normally broad authority to control Wall Street.”
That ruling for West Virginia v. Environmental Protection Agency, which the SEC chair acknowledged the importance of, means “agencies need clear permission from Congress to create regulations which 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 type of climate-disclosure regulation will ultimately undergo, perhaps in the primary quarter of 2023, however it’s somewhat up within the air at this point.
“Now, with formidable obstacles standing in the best way of a final rule, no person knows what to anticipate and when. Still, it’s clear that some type of the rule will ultimately pass. Investor demand for it is powerful and unrelenting, given the heightened recognition of climate risk’s potential to affect financial performance,” notes John Wheeler, Senior Advisor, Risk and Technology for AuditBoard, in an article for the corporate in November.
Though the SEC rule may not maintain its initial requirements, like Scope 3 reporting, the trendline still points within the direction of more disclosure.
When the SEC released the proposed rule in March, 15% of U.S.-listed corporations disclosed no less than some Scope 3 emissions, in keeping with MSCI. By Oct. 24, 2022, that rose to 25%.
In other words, more corporations are voluntarily providing disclosure, and it seems only like a matter of time until others follow suit, whether that’s to maintain up with competitors or due to SEC regulation.
“It’s more about transparency to investors and the general public than it’s anything to do with changing environmental actions. Creating that type of transparency, and to some extent more accuracy in reporting, I don’t see that being really a negative in many individuals’s eyes,” says Christopher Ruck, Director of Environmental Commodities Trading at Just Energy, the parent company of Terrapass.
The SEC rules could also require corporations to offer more specifics on how they’ll reach climate targets that they’ve set for themselves, though the agency doesn’t seem prone to require particular targets.
As MSCI finds, of the 792 U.S.-listed corporations with a climate goal, 44% have some type of net-zero emissions goal as of October 2022, compared with just 4% in 2015.
So, more corporations appear to be moving within the direction of setting ambitious goals, and so they’ll likely be held more accountable for reaching the targets they set.
“The SEC is saying, ‘we’re not going to inform you what to do. But we’re going to inform you to point out your investors what your climate impact is and the way you propose to handle things like climate targets’, investors could make up their minds about what to do from there,” adds Telleen.
Given these trends and potential requirements, businesses can start preparing now so that they’re not caught off guard if/when regulation comes. By calculating your greenhouse gas emissions now, you’ll be able to provide investors with the transparency they’re increasingly in search of, together with making compliance easier.
Don’t wait until it’s too late,” says Telleen. “Prepare for what’s coming and begin understanding your carbon footprint today.”
Along with offering solutions for offsetting your carbon emissions, Terrapass also provides tools like online carbon footprint calculators to assist businesses understand what their impact looks like. And if you happen to need more comprehensive services similar to around emissions data collection and processing, we will connect you with partners to assist.
To learn more about what the SEC’s proposed climate-disclosures rule could mean for your small business, or to start with addressing your greenhouse gas emissions, get in contact with our team today.
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