Deep Dives

What yesterday’s SEC ruling means for sustainability moving forward

March 7, 2024
Deep Dives

What yesterday’s SEC ruling means for sustainability moving forward

Yesterday, the SEC announced its decision on The Enhancement and Standardization of Climate-Related Disclosures for Investors rule, which has been hotly debated, and eagerly anticipated, for over two years.

Disclosure required: Emissions Annual Scopes 1 and 2 GHG emissions, if determined material for investors
Timeline for disclosure: Emissions Large accelerated filers (LAFs)2: FYB1 2026
Accelerated filers (AFs)3: FYB 2028
Smaller reporting company (SRCs)4, emerging growth company (EGCs)5, and non-accelerated filers (NAFs): not applicable
Disclosure required: Climate risk Climate-related risks, board oversight of climate risks, and process for identifying, assessing, and managing climate-related risks
Timeline for disclosure: Climate risk LAFs: FYB 2025
AFs: FYB 2026
SRCs, EGCs, and NAFs: FYB 2027
Timeline for assurance LAFs: FYB 2029 limited assurance, FYB 2033 reasonable assurance
AFs: FYB 2031 limited assurance (no reasonable assurance required)
Who needs to comply? Disclosure requirements begin with LAFs in 2025, with phased in requirements for other publicly-held companies noted above

FYB refers to “fiscal year beginning” in the calendar year listed
2Large accelerated filers (LAFs) refers to companies with $700 million+ in publicly held shares
3Accelerated filers (AFs) refers to companies with $75 million+, but less than $700 million, in publicly held shares
4 Smaller reporting company (SRCs) have public float of less than $250 million or less than $100 million in annual revenues and no public float or public float of less than $700 million
5 Emerging growth company (EGCs) have total annual gross revenues are $1.235 billion or more or they have issued more than $1 billion in non-convertible debt in the past three years

In addition to emissions and climate-risk reporting requirements, the announcement also outlines a “safe harbor from private liability” for climate-related disclosures, which will shield companies from legal challenges over transition plans, targets and goals, and use of an internal carbon price that they submit to the SEC. This does not apply to historical disclosures, but will apply to future disclosures. The rule also outlines phased-in guidance for inline digital (XBRL) tagging requirements.

The ruling allows companies to use a reasonable estimate for Q4 GHG emissions if the data is not available by the filing of annual reports, with the expectation that each company will disclose in a subsequent filing a correction of any material differences between the Q4 estimates and Q4 actual, once data measurement is complete. 

What’s not in the regulation?

Scope 3 emissions, board members’ expertise in climate-related risks and opportunities, and requirements to delineate physical and transition risks on each line item of a company’s consolidated financial statements have been removed. Removing Scope 3, scaling back of Scope 1 and Scope 2 disclosure requirements for many publicly-traded companies, and removing other climate risk reporting requirements may lessen (but not eliminate) litigation.

Creating less completeness, consistency, and comparability (not more)

Emissions reporting regulation does move the U.S. somewhat closer to international regulation, where emissions reporting requirements are already in place. Regulation has historically been a strong, if not the strongest, driver for companies to take their impacts seriously. The issue cannot be brushed aside or ignored if it is required. 

However, the decision fails to adequately address climate impacts and creates more inconsistency. By not accounting for Scope 3 emissions, the legislation is missing a huge opportunity to adequately address the most complete picture of a company’s total GHG emissions. Additionally, existing CA legislation and EU and UK legislation requires reporting Scope 3 emissions, oversight and knowledge of the highest governing body, and detailed disclosure of climate-related risks and opportunities. The SEC’s goal to create complete, consistent, and comparable disclosures is undermined when it requires less than other international and state regulatory bodies and adds a financial materiality threshold.

A failure of business leaders (and sustainability professionals)

While measurement is important, this regulation focuses on data collection and reporting as opposed to decarbonization and robust emissions reduction strategies. Reducing emissions is what makes an impact; measurement and disclosures are mechanisms to get there. Many business leaders (and maybe sustainability professionals, too) have failed. While nominally increasing budgets over the last two years and making public pledges to reach net zero, they have been quietly instructing government affairs and lobbyists to weaken the regulation and have hid behind non-transparent industry groups.

We can, and need, to do better

We need to be louder, better, and demand immediate action. 69% of Americans want the U.S. to be carbon neutral by 2050. This regulation doesn’t get us there. We need to regroup, recommit, and ensure accountability. Enough of proclaiming voluntary, ambitious goals for 2050 while we spout excuses, loopholes, and caveats in 2024.  We need more metaphoric “sticks” now if we are going to meet the goals of tomorrow. Yes, our government has failed us, but the more striking takeaway from this two-year process is that the SEC has watered down the regulation because of pressure from our CEOs, boards, clients, colleagues, industry leaders, and partners.  

We as sustainability professionals are failing. We need to be better communicators. We need to be more strategic. And we need to act fast.

What yesterday’s SEC ruling means for sustainability moving forward
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