Opinion – SEC Climate Disclosure Proposal (March 2022)

25 March, 2022

U.S. Securities and Exchange Commission (SEC) — Climate Disclosure Proposal Overview

On Monday 21 March, the U.S. Securities and Exchange Commission (SEC) formally proposed that US listed companies should be required to disclose climate-related information in filing statements and annual reports.

This marks a significant regulatory step, potentially forcing large US-listed companies to address the risks posed by climate change more seriously. It will also give investors better information with which to allocate capital and engage with companies on the climate strategies.

The proposal follows on from SEC guidance dating back to 2010 – during the middle of the Kyoto Protocol – which just “advised” companies to provide more information on climate related risks.

In its current guise, this new proposal would impose several requirements on US listed companies:

  • Larger companies to report Scope 1 and 2 emissions by 2024. Reporting of Scope 3 emissions to be phased in from 2025 where value chain emissions are material to investor considerations or company has a scope 3 emissions target. Exemptions would be available for smaller companies.
  • Scope 3 emissions reporting would be exempt from third party verification, protected from liabilities, and not required to follow PCAF or GHG Protocol accounting standards.
  • Plans for how climate-related targets will be met, including the intended use of carbon offsets / removals. No requirement for companies to disclose offset use outside of climate commitments.

The SEC’s proposal is based on the Task Force on Climate-related Financial Disclosures (TCFD) framework, covering corporate governance, risk management, climate strategy, and target setting metrics. Over recent years investors have become increasingly concerned about the risks that companies are exposed to in relation to climate change and the TCFD has been instrumental in developing a process to enable better assessment and comparison.

Implications for corporate climate commitments and the use of carbon credits

If approved and implemented the SEC’s proposal could have four impacts on corporate climate action…

Firstly, it will force large US listed companies to take climate change more seriously. It may not change the strategies of some companies in the short term, as the proposals simply refer to disclosures rather than action, but for many it will force climate risk decisions into the board room. Companies will be benchmarked and in turn these may well alter long term strategic decisions.

Arguably, the additional reporting burden might put-off some companies going or remaining public, but this risk is low. The proposed requirements do not appear overly onerous on companies that are already taking proactive steps on their climate commitments and disclosures. Generally, companies have welcomed similar disclosure requirements in countries including the UK, France, and New Zealand.

Secondly, the SEC’s proposal would improve the availability of Scope 1 and 2 emissions making it easier for investors / institutions to understand these risks. That said, until Scope 3 emissions are disclosed, a big piece of the puzzle will be missing as they represent over 80% of emissions in many sectors.

Thirdly, wider reporting under regulatory oversight will improve the quality and consistency of emissions reporting. Trove Research highlighted widespread problems in GHG emissions reporting in our review of over 900 companies in January this year. In particular, companies should be explicit about the methodologies for reporting Scope 2 emissions, and the boundaries and assumptions used to report Scope 3 emissions. Companies that have already begun to assess and report their value chain emissions will be ahead of the curve when (/if) Scope 3 disclosure requirements are expanded.

Fourthly, the SEC’s proposal to require companies to report of how offsets are used towards commitments, will help expose the underlying financial risks faced by companies as they embark on their net zero pledges. At the same time, disclosures on offset use will likely invite greater scrutiny from investors and environmental organisations on the integrity and permanence of the offsets themselves. This will be a wholly positive move for the voluntary carbon market, which has been plagued by criticisms of poor quality offsets.

Call for public comment on the SEC’s proposal

The SEC invites stakeholders to comment on the proposal through a public forum, open until 30 June. While the SEC is likely to implement climate disclosure requirements in the second half of this year, the proposals may be subject to changes in coming months. Opposition has mounted within the SEC and from congressional adversaries, with some anticipating that the conservative-leaning Supreme Court could limit the SEC’s authority to define materiality of Scope 3 emissions. Investors eager for strong disclosure requirements should provide feedback to the SEC during the consultation phase.