Testing 1, 2, 3...

What's the scoop on Scopes?

Disclosure of Scope 1 and Scope 2 emissions will be mandatory only for certain entities. Under the final rule, large accelerated filers and accelerated filers will be required to report material Scope 1 and/or Scope 2 emissions.

• Scope 1 Emissions (Company Controlled)–Emissions from corporate offices, manufacturing plants, fleets, etc.
• Scope 2 Emissions (Indirectly Caused)—Power plant emissions for purchased energy

What does the final SEC rule omit?

A complete document on The Enhancement and Standardization of Climate-Related Disclosures for Investors summarizes all the comments, reasoning, and amendments between the SEC’s proposed draft and final rules. The most striking omissions and alterations include. Scope 3 emissions. Scope 3 was originally included in the initial proposal but has been dropped from the final rule. This means companies will not be required to gather and report data on GHG emissions from their suppliers and product end-users.

The final rule also leaves it to companies’ discretion to determine whether Scope 1 (direct) and Scope 2 (indirect) emissions data is material—(that is, whether the data is  necessary for investors to make informed decisions. If Scope 1 and 2 data is not deemed material, it will not need to be reported. Small and emerging growth companies are exempt from this requirement altogether. It should be noted that many of the companies covered by the SEC rule will also be subject to the EU’s ESRS requirements and Scope 3 is required by this rule and may become by default an expectation and common practice.

What determines if Scope 1 or Scope 2 climate data is “material” or not?

Companies will have to conduct materiality assessments to determine for themselves. The determination comes down to whether a reasonable investor would consider the disclosure important when making an investment or voting decision, or whether they would view an omission of the disclosure as having significantly altered the total mix of information available. Getting it wrong may mean reissuing a financial statement.

Why did the final rule change from what was initially proposed?

The final rule is the result of a two-year process and more than 24,000 comment letters—from companies, auditors, legislators, etc.—many arguing the costs involved in more extensive (Scope 3) reporting, as well as questions over the consistency or reliability of such data points. Even despite the slackening, the rule is likely to be challenged in courts. Ten states along with various trade groups and environmental organizations have already filed petitions or threated lawsuits. Criticism is coming from anti-ESG factions that the rule goes too far, and from activist organizations that it has not gone far enough.

How does the SEC rule compare with other ESG reporting regulations, including the EU’s CSRD and California’s SB253 and SB261?

Compared to both of the above, the SEC final rule is less stringent.

Companies operating globally—generating more than €150 million in the EU— are already preparing to comply with Europe’s Corporate Sustainability Reporting Directive (CSRD), which requires Scope 3 disclosures. These firms will not have any additional requirements to address.

California’s climate disclosure laws, passed in October 2023—which affect both private and public companies—are also more demanding. They require firms operating in the state with more than $1 billion in revenue to report direct and indirect emissions, including Scope 3.

Which companies will be affected by the new SEC rule?

The final rule will affect publicly traded companies in the U.S., but only larger firms will have to address the Scope 1 and Scope 2 emissions requirements—and even then, only if material.

According to SEC estimates, roughly 2,800 U.S. companies will have to make the disclosures and about 540 foreign companies with business in the U.S. will have to report information related to their emissions. This is many fewer U.S. companies than are expected to be subject to the EU’s ESRS requirement.

When does the new SEC rule take affect?

The final rules will become effective 60 days after publication and phased in depending on a company’s filing status—accelerated filer, large accelerated filer, non-accelerated filer, smaller reporting company, etc.—with compliance dates ranging from FYB 2025 to FYB 2033.

U.S. Securities and Exchange Commission. Fact Sheet: The Enhancement and Standardization of Climate-Related Disclosures: Final Rules. 

How should companies prepare for the SEC’s new climate disclosure rules?

Many companies already issue reports on sustainability and ESG metrics, which is a useful starting point. But as climate risk reporting moves from voluntary to required, stakeholders will have a much clearer view of how companies compare with others in their sector. Forward-thinking companies will want to:

• Bring more teams into the climate conversation, so that strategies and opportunities can be explored to the fullest
• Ensure all company leaders are fluent in The Fundamentals of Sustainability Reporting
• Develop a transition plan—even though not required by the SEC—to remain competitive where others are forging ahead

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