Lythouse Logo
Register Now for Launch of our ESG platform, explore the ESG trends for 2024.

Home » Blog » ESG Governence » Decoding the SEC ESG Disclosure Rules

Decoding the SEC ESG Disclosure Rules

SEC's Enhanced Climate Disclosure Rules for US Companies

Introduction 

On March 6, 2024, the Securities and Exchange Commission (SEC) finalized its rules on SEC ESG disclosure, marking a significant step towards increased transparency and accountability for public companies on environmental, social, and governance (ESG) factors. Now, investors will have access to more consistent and comparable information about how climate change and other sustainability considerations can impact a company’s financial performance. Let’s unpack the key requirements of the SEC’s ESG disclosure rules, who they apply to, what needs to be reported, and the implementation timeline. 

SEC ESG Disclosure Rules: At a Glance 

The SEC’s final rules emphasize a principles-based approach, focusing on materiality. This means companies are required to disclose ESG factors that could have a significant impact on their financial performance, business strategy, or overall operations. Here’s a closer look at the core requirements: 

1. Climate-related Risks: Companies must comprehensively describe the material climate-related risks they face. These risks can be categorized into two main groups: 

  • Physical Risks: These encompass potential threats arising from extreme weather events such as floods, droughts, wildfires, and rising sea levels. Companies need to assess the potential financial impacts of these events on their operations and assets. 
  • Transition Risks: These stem from the shift towards a low-carbon economy. Companies need to consider how changing regulations, consumer preferences, and technological advancements related to climate change could affect their business model and long-term viability. 

2. Impacts of Climate-related Risks: Companies must discuss the actual or potential financial and operational impacts of identified climate-related risks. This could involve disruptions to supply chains, changes in insurance costs, or damage to property from extreme weather events. 

3. Governance and Risk Management: The rules require companies to explain how their board of directors oversees climate-related risks. This includes the board’s role in setting climate-related goals, monitoring progress, and ensuring these risks are integrated into the overall risk management framework. 

4. Greenhouse Gas (GHG) Emissions: Public companies must disclose their Scope 1 and Scope 2 GHG emissions. 

  • Scope 1 emissions are direct emissions from sources controlled or owned by the company (e.g., company vehicles, manufacturing facilities). 
  • Scope 2 emissions are indirect emissions from purchased electricity, heat, or cooling. 

While not mandatory at this point, the SEC encourages companies to disclose Scope 3 emissions, which encompass their entire value chain (e.g., emissions associated with business travel by employees or raw materials from suppliers). Companies disclosing Scope 3 emissions are given safe harbor protections from certain liabilities. 

Who Needs to Comply? 

The SEC’s ESG disclosure rules apply to all public companies registered with the Commission. This includes the following categories: 

  1. Large Accelerated Filers (LAFs): These are companies with over $260 million in public float. 
  2. Accelerated Filers (AFs): These are companies with over $75 million in public float. 
  3. Non-Accelerated Filers (NAFs): These are companies with less than $75 million in public float that meet certain other listing standards. 
  4. Smaller Reporting Companies (SRCs): These are companies that meet specific criteria regarding revenue, public float, and number of public shareholders. 
  5. Emerging Growth Companies (EGCs): These are companies that meet definition set forth in the Jumpstart Our Business Startups Act (JOBS Act). 

It’s important to note that there are some exemptions for SRCs and EGCs. These companies are not required to disclose Scope 1, 2, or 3 GHG emissions. 

Exclusions from the GHG Emissions Disclosure Requirement 

1. Scope 3 Emissions Disclosure:

The passage states that, at the moment, there is no provision requiring registrants to disclose their Scope 3 emissions. This decision is influenced by concerns about potential burdens on registrants, as well as uncertainties regarding the reliability of data associated with Scope 3 emissions. However, it acknowledges that disclosure of Scope 3 emissions could provide investors with a more comprehensive understanding of a registrant’s transition risk exposure. Despite this, Scope 3 emissions disclosure will remain voluntary for now. 

2. Exemptions for Small Reporting Companies (SRCs) and Emerging Growth Companies (EGCs):

Unlike the proposed rule, which would have exempted SRCs from disclosing Scope 3 emissions, the final rule exempts both SRCs and EGCs from disclosing any GHG emissions, including Scopes 1 and 2. This exemption aligns with a scaled disclosure approach often applied to SRCs and EGCs, recognizing that these companies may face significant burdens and costs in complying with GHG emissions disclosure requirements. 

3. Exclusion of GHG Emissions from Manure Management Systems:

The passage notes an exclusion from the GHG emissions disclosure requirement for emissions from manure management systems. This exclusion is in response to the 2023 Consolidated Appropriations Act, which prohibits the use of funds to implement provisions requiring mandatory reporting of GHG emissions from manure management systems. As a result, agricultural producers or other registrants operating such systems are not required to include GHG emissions from them in their overall Scopes 1 and 2 emissions disclosures. 

Timeline for Implementation: A Phased Approach for Compliance 

The SEC acknowledges the complexities of implementing new ESG reporting practices. Therefore, they have adopted a phased-in approach for compliance, with deadlines varying depending on the company’s size and the nature of the disclosure. Here’s a simplified overview of the timeline: 

1. Large Accelerated Filers (LAFs): 

  • Non-emissions disclosures: Begin reporting for fiscal years ending after December 31, 2023 (already passed). 
  • Scope 1 & 2 emissions disclosures: Begin reporting for fiscal years ending after December 31, 2025. 
  • Limited assurance for emissions disclosures required for fiscal years ending after December 31, 2029. 
  • Reasonable assurance for emissions disclosures required for fiscal years ending after December 31, 2034. 

2. Accelerated Filers (AFs) and Non-Accelerated Filers (NAFs):

Follow a similar timeline, with a one-year delay compared to LAFs. This means they begin non-emissions disclosures for fiscal years ending after December 31, 2024, and Scope 1 & 2 emissions disclosures for fiscal years ending after December 31, 2026. 

3. Smaller Reporting Companies (SRCs) and Emerging Growth Companies (EGCs):

Are exempt from disclosing GHG emissions (Scopes 1, 2, and 3). This aligns with a scaled disclosure approach often applied to these companies, recognizing the potential burdens associated with implementing new reporting requirements. 

It’s important to consult the SEC’s final rules for specific details and exceptions. Companies should also stay updated on any potential adjustments to the timeline as the regulations evolve. 

Strategic Responses for Corporates

Strategic foresight and proactive measures are imperative for companies to not only meet regulatory standards but also to emerge as leaders in sustainability reporting. In this section, we’ll explore strategic responses that corporates can adopt to not just comply with regulations but also drive meaningful change and create long-term value. Let’s dive in.

1. Adoption of ISSB Standards (IFRS S1 and S2):

  • Familiarize yourself with the General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2) released by the International Sustainability Standards Board (ISSB) in June 2023.
  • Align your reporting practices with the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) incorporated into these standards.

2. Global Adoption of ISSB Standards:

  • Monitor the developments in various jurisdictions, including Australia, Brazil, Canada, Hong Kong, Japan, Malaysia, Nigeria, Singapore, and the United Kingdom, regarding the adoption or alignment with ISSB standards.
  • Stay updated on the integration of ISSB standards into foreign legal frameworks to ensure compliance with evolving international reporting standards.

3. Compliance with EU’s CSRD:

  • Ensure readiness to comply with the European Union’s Corporate Sustainability Reporting Directive (CSRD), which mandates reporting sustainability-related issues according to European Sustainability Reporting Standards (ESRS).
  • Particularly for large and listed companies operating within or having significant business ties with the EU, prepare to meet the reporting requirements specified by the CSRD.

4. Compliance with California’s Climate-Related Financial Risk Act and Climate Corporate Data

Accountability Act:

  • For companies operating in California with over $500 million in annual revenues, prepare to disclose climate-related financial risks based on TCFD recommendations or a comparable regime, starting no later than January 2026 (Senate Bill 261).
  • Ensure compliance with the disclosure requirements for greenhouse gas (GHG) emissions, including Scopes 1, 2, and eventually Scope 3 emissions by 2026 and 2027, respectively (Senate Bill 253).

5. Disclosure of GHG Emissions Metrics:

  • Disclose Scope 1 and Scope 2 emissions separately, if any constituent gas is individually material.
  • Exclude the impact of purchased or generated offsets when disclosing Scope 1 and Scope 2 emissions in gross terms.
  • Provide detailed descriptions of the methodology, significant inputs, and assumptions used to calculate disclosed GHG emissions.
  • Disclose the protocol or standard used to report GHG emissions, including the calculation approach and emission factors.

6. Transition to New Reporting Practices:

  • Adapt reporting practices to incorporate the new disclosure requirements, ensuring transparency and consistency in reporting climate-related information.
  • Consider the phased-in approach for reporting GHG emissions metrics, incorporating the guidance provided by the SEC for timely and accurate disclosure.

7. Considerations for Scope 3 Emissions:

  • Although not mandatory, evaluate the potential benefits of voluntarily disclosing Scope 3 emissions to provide investors with a more comprehensive understanding of transition risk exposure.
  • Monitor developments in reporting requirements related to Scope 3 emissions and be prepared to adjust disclosure practices accordingly.

8. Exemptions for SRCs and EGCs:

  • Understand the exemptions granted to Small Reporting Companies (SRCs) and Emerging Growth Companies (EGCs) from disclosing GHG emissions, including Scopes 1 and 2, recognizing the scaled disclosure approach applied to these entities. Refer to the page 804 of Final Rule: SEC Issued Version.

9. Timeline for Reporting GHG Emissions Metrics:

  • Ensure compliance with the specified timeline for reporting GHG emissions metrics, considering the deadlines for different types of filings, including annual reports, registration statements, and amendments.

10. Global Reporting Standards Integration:

  • Stay informed about global initiatives aimed at standardizing sustainability reporting practices, such as the ISSB standards, to align reporting practices with evolving international standards.
  • Monitor regulatory developments in different jurisdictions to ensure alignment with global reporting standards and enhance comparability of disclosed information across borders.

Conclusion

The SEC’s new climate-related disclosure rules signify a paradigm shift in corporate reporting, emphasizing transparency and accountability in addressing climate risks. As sustainability takes centre stage in investment decisions, companies must prioritize transparency and accountability to thrive. By aligning with global standards and disclosing emissions metrics transparently, businesses can gain a competitive edge in a rapidly evolving market.

Ready to lead the way towards a greener future? Let’s connect to navigate the complexities of climate disclosure and become sustainability champions together.

Book a demo today!

________________________________________________________________________________________________________________________________________________________

For everyday updates, subscribe here.

GDPR