The final SEC climate disclosure rule differs significantly from the 2022 proposed release. The section on the GHG emissions disclosures was revised heavily. Let’s look at what the final release now requires (Pages 222 -261). For technical GHG consultants and others not familiar with US securities lingo, you might need to do some homework.
Exclusions
The most talked-about feature of SEC’s final release is of course, that Scope 3 emissions disclosures are not required. Questions are already arising about how to deal with California requirements for Scope 3 emissions disclosure. Companies are free to voluntarily disclose Scope 3 to the SEC, but it isn’t mandatory. It is far too soon to know whether companies will create separate SEC and California disclosures, or one document “to rule them all.”
Exempt emerging growth companies (“EGCs”) and smaller reporting companies (“SRCs”) are excluded from having to report even Scopes 1 and 2 emissions.
Determining if you must file emissions disclosures
Scope 1 and Scope 2 emissions must be disclosed by large accelerated filers (“LAF”) or accelerated filers (“AF”) if such emissions are “material” as the term is defined in U.S. securities law. The final release contains a lot of discussion on the concept of materiality. For this blog – intended more for technical environmental and sustainability folks – we don’t need to get into that. The truth is, the determination won’t (or shouldn’t) be made by technical GHG emissions consultants or in-house climate or environmental staff. The decision needs to be left to securities counsel, accountants, boards and executives:
“we intend that a registrant apply traditional notions of materiality under the Federal securities laws when evaluating whether its Scopes 1 and/or 2 emissions are material. Thus, materiality is not determined merely by the amount of these emissions.”
Presenting emissions data
Perhaps the easiest (or most straightforward) elements of emissions data/inventory reporting are the following:
- All emissions must be expressed in the aggregate in terms of CO2e. Emissions intensity metrics or disclosure are not required.
- Emissions must be disclosed in gross terms by excluding the impact of any purchased or generated offsets.
- A registrant may use reasonable estimates when disclosing its GHG emissions, but the assumptions underlying, and reasons for using, the estimates must be disclosed.
- The methodology, significant inputs, and significant assumptions used to calculate the GHG emissions must also be described.
Then things get more complicated:
- If any single greenhouse gas is individually material, that gas must be disclosed disaggregated from the others. “The required disaggregated disclosure of an individually material gas will help inform investors about the degree to which a registrant is exposed to transition risk as governments and markets may treat the individual GHG components differently”- such as methane.
- Registrants must disclose “the method used to determine organizational boundaries used in making GHG disclosures, and if the organizational boundaries materially differ from the scope of entities and operations included in the registrant’s consolidated financial statements.”
- Registrants must provide a “brief description of, in sufficient detail for a reasonable investor to understand, the protocol or standard used to report the GHG emissions, including the calculation approach, the type and source of any emission factors used, and any calculation tools used to calculate the GHG emissions… [r]ather than potentially requiring a lengthy explanation of the calculation approach used, the final rule will not require the disclosure of any quantitative emission factors used.”
Keep in mind that the soonest emissions data is required is 2027, reflecting fiscal year 2026 – and that is only for LAFs. There is time get ducks in a row and make key decisions, let alone see where the litigation chips may fall.
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