Now that the Securities and Exchange Commission has finally issued its long-debated and largely expected greenhouse gas emissions disclosure requirements for public companies, they can all start the hard work of doing what they thought they’d be doing: Gathering a lot of data and making sure their CFOs can handle the workload.
That’s the biggest takeaway from Wednesday’s announcement. Data. What is it, where is it, can you get it and do you have the people and processes to do so?
The final rules, according to the SEC, require a registrant to disclose, among other things: “material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant’s board of directors’ oversight of climate-related risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the registrant’s business, results of operations, or financial condition.”
In addition, some 2,800 U.S. public companies and 500+ non-U.S. companies will, as expected, be required to disclose their Scope 1 and/or Scope 2 emissions related to their business. After more than a year of backroom brawling the SEC left out the most complex, burdensome and controversial part of their original plan, requiring companies to disclose Scope 3 emissions—ie, those of their downstream customers and others in their orbit.
CFOs and boards across America are likely neither fazed nor surprised by the outcome as the end result was telegraphed for months, and, for most firms, none of this kicks in until at least 2026. But that doesn’t mean it won’t be—or already isn’t—a mountain of additional work, and few will wait for the outcome of the lawsuits to see what happens. Besides, as The Wall Street Journal reminds, California already has a Scope-3 requirement—which is being challenged, of course—and a similar mandate in the EU goes into effect next year.
“I’m excited that we finally have some regulation to start talking about and start moving forward with clarity,” Sam Holroyd, board member at Chord Energy and Amerant Bank, said at a session during our Board Forum in Dallas, “because I think right now a lot of us have been swimming around in deep water, not knowing what’s coming. Now it’s on the table. We don’t love all of it, but it’s a great forward path.”
Kensey Biggs, managing director and head of U.S. corporate ESG for Teneo said the clients she was hearing from were unsurprised about Scope 3 being dropped and mostly focused on pragmatic questions like what exactly ended up being included and what was not. “It doesn’t matter for large companies because they are going to have to abide by California regulations and EU regulations and report Scope 3 either way,” she said.
Here’s what the SEC will require a registrant to disclose:
• Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
• If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
• For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
• For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
• If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.
Meanwhile, expect a wave of lawsuits, counter-suits and politicking to begin ASAP. As Teneo pointed out in a client note, The Sierra Club, a coalition of 10 states led by West Virginia, and GOP members of Congress have all pledged to fight—for one reason or another—the new regulations.
So no matter what you think of the regs, you have to hand it to the SEC: If you’ve got both the Sierra Club and West Virginia unhappy, you’ve probably landed in the right spot.
