Will the SEC climate disclosure rules now be delayed?

We’ve been waiting on potential SEC climate disclosure rules for most of 2023 now, but it appears they might be delayed. According to SP Global, Robert Jackson (a law professor at New York University and former SEC commissioner) appeared on an April 27 webinar hosted by the carbon accounting firm Watershed, and said he learned the rule will be delayed until the fall.

“I’ve just understood over the last few weeks that it looks like the rule is going to be pushed back a little further than many had thought, including myself,” Jackson said. “It [now] looks more like the fall of this year.”

Given the new time frame, financial statements and disclosures under the rule would not be due until 2024, Jackson said.

 

How we got here on climate-related financial disclosures

Obviously, we first got here with increasing awareness of climate-related risks and the role (often out-sized role) that businesses and their corresponding business model play in climate risk overall.

More recently, though, the Securities and Exchange Commission issued a proposal in March 2022 which would require public companies to report climate-related risks and emissions data, including so-called Scope 3 emissions that come from a company’s supply chain.

In part due to the rise of the ideology and culture wars, and in part because of the general nature of politics, the proposed rule became contentious. Republican officials in several states say the agency has overstepped its mandate in trying to address the complex challenges posed by greenhouse-gas emissions. A group of state attorneys general has warned the SEC to abandon its effort or face “strife.”

A lot of the backlash was about cost, as you can see in this chart:

 

The good news, as The Wall Street Journal mentions here, is that many companies still plan on complying regardless of any continued date-pushing from the Securities and Exchange Commission:
 

But many companies, pushed by a variety of groups—including sustainability-focused shareholders, regulators in other jurisdictions and eco-conscious consumers—are proceeding as though the rule is in force. About 70% of companies intend to comply with the SEC rule regardless of when it becomes final, according to a survey released in March by accounting firm PwC and reporting software company Workiva Inc.

The battle lines around climate disclosure are generally:

• “This will pose significant financial risks and I’m comfortable with business as usual.”
• “Climate risks are dire and businesses need to act now, especially public companies. I’ll do my part.”

It’s not quite that binary, but those are the general camps that companies are organizing into around their audited financial statements and relevant risk management processes.

 

The reality of “business as usual” in recent years with increased climate risk

You wouldn’t necessarily know it based on some companies, but in reality “business as usual” is slowly headed out the door. To wit:

• The AIM Act, now in Phase II
• Section 608 of the EPA
• Increased investor focus on ESG reporting requirements
• The shifting environment in 19+ states around transition risks and ESG in general

This is a new era for businesses in terms of their financial statements, their responsibilities around greenhouse gas emissions, and their role in climate risks. While climate-related financial disclosures obviously scare some CFOs (see above chart), the sheer reality of climate-related risks has become too great for public companies (and some non-public) to avoid. It’s not a “sea change” because it’s taken decades to even get to this point, but there is progress, and the world of financial statements in 2027 will look a lot different than it does even today.

 

A refresher on Scope 1 emissions vs. Scope 3 emissions

This is the contentious point and probably the main reason for the delay in pushing the proposed rule.

In short, as we detailed here earlier this year:

Scope 1 emissions are included in your Environmental, Social, and Governance (ESG) reporting. They are direct emissions from owned or controlled sources. “Emissions” generally refers to carbon emissions, and there are both direct and indirect emissions. The entire landscape here refers to the greenhouse gas emissions inventory.

For reference, EPA Scope 2 emissions are “indirect GHG emissions associated with purchasing electricity, steam, heat, or cooling. Although scope 2 emissions physically occur at the facility where they are generated, they are accounted for in an organization’s GHG inventory because they result from the organization’s energy use.”

And Scope 3 emissions are “the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects its value chain. Scope 3 emissions include all sources not within an organization’s scope 1 and 2 boundaries.”

So: Scope 1 emissions are direct, and Scope 3 emissions are indirect emissions, which means companies would need better control of their supply chains and reflect that understanding on their audited financial statements. That scares companies, because it’s more work, more cost, and they don’t have the people in-house to do it.

 

But as you deal with climate-related risks, Scope 1 emissions are still your biggest reporting

Trakref has established itself as a leader in Scope 1 reporting compliance, skillfully guiding companies through the challenges presented by the SEC’s new climate disclosure requirements. As regulations evolve, we remain committed to providing businesses with the necessary tools and resources to comply with the mandated reporting of their direct greenhouse gas (GHG) emissions.

By partnering with Trakref, companies can confidently navigate the complexities of climate-related financial disclosures and ensure their operations are aligned with today’s regulatory landscape.

Here’s what you’ll get with us:

• Customized climate reporting solutions
• Securities and Exchange Commission-aligned requirements
• Easy integration of Environmental Social and Governance (ESG) metrics into financial statements and reporting
• Comprehensive climate risks assessments
• Climate-related risks management strategies
• Evaluating and identifying material impact and material climate risks

We are also partners with Effecterra, whose aim is to “create a more resilient and abundant future for our planet.” In principle, they are consultants, but in reality, they are solution providers. They provide talent and technology to move along action (not just advice) in the name of accelerating climate solutions globally, at scale and pace, specifically around refrigerants.

Basically, we leverage each other’s expertise to craft comprehensive solutions. The benefit to our end clients is you get access to a wider range of services and tools, as well as an improved ability to navigate complex climate-related risks and climate disclosure rule changes.
If you’re a compliance leader who needs help with tracking in light of new regulations or hundreds of new assets to keep compliant, let’s talk.

 
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The partnership with Effecterra is part of the “secret sauce” that helps Trakref provide you with the best, most-compliant approach to climate-related disclosures.

 

“A wall of industry resistance”

That’s how The Washington Post described the potential pushback (mostly legal) to the eventual release of rules around climate-related disclosures. That article also notes that any Securities and Exchange Commission disclosure rules would have to radically transform the purchasing power of the federal government itself:

“Number one, the entire sustainability agenda is built on the premise that we have to lead by example, right?” Brenda Mallory, chair of the Council on Environmental Quality at the White House, said at a recent Washington Post Live event. “We are the largest employer in the nation. We have the most real estate in the nation, and so these all give us tools that are really important for us to take advantage of.”

Obviously, this is an interesting space to watch in the next five to six months and beyond. If we know anything about human behavior or anything about corporate behavior, we do know that incentives matter — so having climate-related disclosures is a good thing long-term, because climate-related disclosures can hold feet to fires, and that’s what we need in the broader modern moment.