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SEC Carbon Disclosure: Untangling the Rules for a Sustainable Future

SEC Carbon Disclosure

Financial investors now demand ever-greater transparency regarding a company’s environmental impact, particularly its contribution to climate change. This demand translates into a pressing need for robust, standardized carbon disclosure practices, and here, the SEC carbon disclosure rules come into the limelight. 

The US Securities and Exchange Commission (SEC) has a groundbreaking set of rules designed to revolutionize corporate climate reporting. This blog unpacks these new regulations, explains what they entail for companies, and explores the broader implications for the future of ESG (Environmental, Social, and Governance) reporting. 

As seasoned ESG and sustainability professionals, you already understand the importance of carbon accounting. This blog dives deeper into the specifics of the SEC’s carbon disclosure rules, highlighting why Scope 3 emissions (even though not currently mandated) remain crucial for a comprehensive ESG strategy. 

We’ll also explore how international regulations like the EU’s CSRD and California’s climate rules shape the global landscape of carbon disclosure. 

Understanding SEC Carbon Disclosure and Carbon Accounting: The Building Blocks 

Before we delve into the SEC’s regulations, let’s establish a common ground by revisiting the fundamentals of carbon accounting. 

What are Scope 1, Scope 2, and Scope 3 Emissions? 

  • Scope 1 Emissions: These are direct emissions from a company’s own operations, such as burning fossil fuels in on-site facilities for electricity generation or vehicle use.
     
  • Scope 2 Emissions: These are indirect emissions from purchasing electricity, heat, or cooling. While the company doesn’t directly generate these emissions, they are still associated with its energy consumption.
     
  • Scope 3 Emissions: This category encompasses all indirect emissions that occur throughout a company’s value chain, from the extraction of raw materials to the disposal of products at the end of their life cycle. On average, Scope 3 emissions are significant and account for almost 78% of corporate emissions. 

Why is Carbon Accounting Important? 

Why is Carbon Accounting Important?

Carbon footprinting offers a critical tool for companies to: 

  • Assess their environmental impact: Companies gain valuable insights into their sustainability performance by measuring greenhouse gas emissions across all scopes
  • Identify areas for improvement: Understanding the breakdown of emissions across different activities helps companies prioritize areas for emission reduction strategies. 
  • Manage financial risks: Climate change poses significant financial risks, including potential carbon taxes and stranded assets (fossil fuel reserves rendered unusable due to stricter regulations). 
  • Meet growing investor demands: Investors increasingly integrate ESG factors into their decision-making processes, and robust carbon accounting demonstrates a company’s commitment to sustainability.
  • Support carbon neutrality pledges: Many companies are setting ambitious goals to achieve carbon neutrality; for example, KPMG plans to reduce carbon emissions by 50% by 2030. Accurate carbon accounting forms the foundation for tracking progress toward these goals. 

The SEC Steps In: Unveiling the Carbon Disclosure Rules 

The SEC’s new climate disclosure rules represent a watershed moment for ESG reporting in the US. Let’s dissect what these regulations require companies to disclose: 

What Does the SEC Require Companies to Disclose? 

The SEC’s rules focus on the following key aspects: 

1. Material Climate-Related Risks: Companies must disclose any climate-related risks that are reasonably likely to significantly impact their business strategy, financial performance, or overall health. These risks can be categorized into two main groups: 

  • Physical Risks: These encompass the potential impacts of extreme weather events, rising sea levels, and other climate change-related phenomena that can disrupt operations, damage infrastructure, and disrupt supply chains.
     
  • Transition Risks: These relate to the potential economic and regulatory changes driven by efforts to mitigate climate change. Examples include shifts in consumer preferences towards sustainable products, the introduction of carbon pricing mechanisms, and stricter regulations on greenhouse gas emissions

2. Governance Structure and Oversight: The SEC mandates companies to disclose details about their governance structure regarding climate risks, which includes outlining the role of the board of directors in overseeing climate-related issues and how management is tasked with identifying, assessing, and managing these risks. 

Focus on SEC Carbon Emissions Reporting 

While the SEC’s rules represent a significant step forward, it’s essential to understand that they currently only require reporting of Scope 1 and 2 emissions. This decision likely stems from concerns about the consistency and reliability of data collection methods for Scope 3 emissions, which can be complex to track across a company’s entire value chain. 

Beyond the SEC: The Looming Shadow of Scope 3 

  • Scope 3 Can Be a Significant Contributor: For many companies, particularly those in service industries or with complex supply chains, Scope 3 emissions can represent the largest portion of their overall carbon footprint. Ignoring them paints an incomplete picture of a company’s actual environmental impact. 
  • Addressing Scope 3 Demonstrates Leadership: Companies that proactively address Scope 3 emissions are committed to comprehensive sustainability practices. This leadership can enhance brand reputation and attract investors seeking ESG-conscious investments. 

International Regulations: A Broader Context 

While the SEC’s rules are a significant development in the US, they are not happening in isolation. Let’s explore how international regulations are shaping the global landscape of carbon disclosure: 

1. The CSRD and its Implications for US Companies in the EU 

The European Union’s Corporate Sustainability Reporting Directive, which comes into effect in December 2023, mandates comprehensive sustainability reporting for companies operating in the EU, regardless of their headquarters location. 

This includes mandatory reporting of Scope 3 emissions, raising the bar for multinational corporations with a presence in the European market. US companies with subsidiaries in the EU will need to adapt their reporting practices to comply with the CSRD’s stricter requirements. 

2. California Leading the Way: The Golden State’s Climate Rules 

California has long been a trailblazer in climate policy. Its landmark climate regulations include mandatory Scope 3 reporting for certain high-emitting industries such as oil and gas, retail, and manufacturing. This sets a precedent for other US states to follow suit, potentially leading to a patchwork of regulations across the country. 

A Global Trend Takes Shape: The Future of Carbon Disclosure 

The growing momentum for mandatory Scope 3 reporting is undeniable. Several countries, including Canada and Japan, are actively developing or considering similar regulations. The SEC’s new rules and international pressure suggest that a more holistic approach to carbon accounting will likely become a norm. 

Why SEC Regulation Matter? 

Why SEC Regulation Matters?

The SEC’s carbon disclosure rules are a wake-up call for companies to prioritize robust carbon accounting practices. Here’s why you should take action: 

  • Stay Ahead of the Curve: As global regulations evolve towards mandatory Scope 3 reporting, companies with established practices will be well-positioned to navigate the changing landscape. 
  • Enhance Transparency and Investor Confidence: Robust carbon accounting demonstrates a company’s commitment to ESG principles and fosters trust with investors who are increasingly focused on sustainability. 
  • Drive Innovation and Efficiency: Understanding your carbon footprint across all scopes can unlock opportunities for emission reduction strategies, leading to cost savings and operational efficiencies. 

The future of ESG reporting is about transparency and accountability. By embracing comprehensive carbon accounting practices, enterprises can comply with regulations and become global leaders while transitioning toward a more sustainable future. 

Industry Expert Quote: 

With the final SEC Climate Rule comes clarity in what transparency is required. Companies now have a defined destination and can put all their effort into creating a rigorous, repeatable, timely climate reporting process.Maura Hodge (KPMG US Audit ESG Leader) 

Looking Forward with Optimism 

The evolving landscape of carbon disclosure presents both challenges and opportunities. By staying informed, adopting proactive measures, and integrating comprehensive carbon accounting into their ESG strategies, companies can emerge as leaders in the race toward a sustainable future. 

At Lythouse, we’re passionate about empowering businesses with the tools and expertise they need to navigate this changing landscape. Let’s connect and discuss how we can help your company thrive in a sustainability-driven world. Book a demo today! 

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