Understanding the SEC’s new carbon disclosure rule

We’ve entered a new corporate reporting era: climate impact is increasingly being treated on par with financial data, with the same meticulous expectations for measurement, management, and disclosure. The European Union and the UK are leading this global trend with rigorous regulations, including the EU’s Corporate Sustainability Reporting Directive (CSRD).

To help the US catch up to new carbon-disclosure standards across the industrialized world, the SEC put forward its own proposal in March 2022. The final rule is expected to be released later in 2023. In this guide we cover which companies the proposed rule applies to, what it asks for, and what the proposed compliance timeline looks like, and how companies should prepare for the future of carbon disclosure–regardless of what is in the final SEC rule.

But the most important thing for companies to plan for isn’t just the specifics of the SEC proposal, it’s the trendline. Major national governments are acting in unison, and individual US states like New York and California are following close behind. Many growing companies will have robust climate reporting obligations in multiple jurisdictions, as soon as 2024. And while these programs are increasingly aligned in what they ask for, companies that are swift and proactive about collecting and acting on this data will see lower compliance costs, higher investor confidence and stronger business resilience.

Which companies are affected by this proposal?

All public companies with an existing SEC reporting requirement, including all non-US companies with US-traded shares that currently file a Form 20-F. While most private US companies are exempt, those on path to an IPO often elect to begin filing public disclosures in advance—in which case they’re likely to be asked to include this data by their investors. These disclosures will also be part of their eventual IPO registration statements.

What does the SEC's proposed climate rule ask for?

Much of the SEC’s proposal builds closely on the work of the Taskforce for Climate-related Financial Disclosures (TCFD), a public-private partnership that came up with 11 core questions that companies across the globe now use to ensure their stakeholders have full insight into the carbon and climate risks in their portfolios.

The SEC’s proposal is for a TCFD+ filing—to be reported alongside financial results, within your annual 10-K report—with focus on three particular areas:

Measuring and disclosing climate data

The SEC wants companies to disclose their emissions, plans, and progress in detail, including at least:

All Scope 1 and 2 greenhouse gas emissions—i.e. direct emissions and those from purchasing electricity, heating, and cooling—with any carbon credits listed separately so that investors can see total emissions in isolation

• An intensity factor—ie. dividing total emissions by a fixed business metric like revenue or number of employees to provide investors with an apples-to-apples figure
• Any internal carbon price used and the logic used to calculate it (this price also has to be consistent between internal use and external PR; there can’t be two prices)
• Updates on plans and progress against any climate pledges or targets

Large public companies will also need to include Scope 3 emissions—i.e. from their suppliers—if those emissions are considered “material” or if they have a GHG emissions reductions target that includes Scope 3 emissions. While the emerging global threshold for materiality is if Scope 3 accounts for more than 40% of a product or service’s end-to-end emissions, the SEC acknowledges this while also holding that quantitative analysis is not enough on its own. The SEC instead uses a well established precedent: any substantial likelihood that a reasonable investor would consider them important when making an investment or voting decision.

For most companies, Scope 3 emissions make up the majority of their footprint, making it likely for them to be judged material. To confirm this share for your own operations, the best place to start is with a full-footprint measurement. Scope 3 emissions disclosures are also protected by a legal safe harbor within the SEC rule.

Assessing and disclosing climate risks

The upshot: climate risks are financial risks, and must be identified and managed with unprecedented rigor.

These risks can be physical (e.g. extreme weather impacts) or transitional (e.g. customer tastes shifting as climate change worsens). When assessing and disclosing these risks, filers must break them down over short, medium, and long-term time horizons. They must also disclose actual and potential impacts on their business models, strategies and outlooks—stretching across their products, physical operations, and even R&D expenditures.

Large public companies also need to spell out the financial implications. First in narrative form. A freight company, for example, might discuss impairment charges for older equipment that it expects won’t pass coming regulatory thresholds. Secondly in quantitative form, where line items like revenue, inventory, and debt are matched with projected impacts from these climate risks (for each line item where expected impact is likely to be greater than 1%).

Lastly, these filings must include their own meta—i.e. they must outline the methodology used for identifying and assessing risks, and detail how they factored dynamics like existing or likely regulations, shifts in customer or counterparty preferences, technological changes, etc.

Integrating climate thinking

Investors want more than just plans and data: they want evidence that climate action isn’t just the product of one isolated team within a company. They want to understand exactly how climate data—really climate thinking—is incorporated into daily decision-making, especially within the C-suite and the boardroom. That includes the level of board expertise on climate-related risks, and how the board discusses those risks. Companies will also have to show exactly how climate risk is integrated into their wider risk-management processes.

Though the proposed rules here focus on transparency rather than forcing specific actions, they will be a significant measure by which investors themselves judge the quality of disclosures. ESG isn’t just a buzzword to them. They know that climate action (or inaction) will soon affect the financial trajectory of every company.

Will climate data require attestation?

Yes, scope 1 and 2 emissions data will require attestation for large filers. The attestation requirement will be phased in, moving first to a limited assurance standard and then to reasonable assurance.

Large filers will have to provide at least limited assurance on their 2024 emissions, and reasonable assurance starting 2026. To meet reasonable assurance requirements, companies will need to implement internal controls and data governance for their carbon measurement process.

What stage is the proposal at?

The final rule is expected at some point later in 2023. To approve the final rule, the SEC will take a vote at an Open Commission Meeting, which will be broadcast online. As agendas for said meetings are usually published about a week prior, this will tell us when the final rule is imminent. Watershed is keeping close track and will update this blog as soon as more is known.

When are these requirements expected to take effect?

(The SEC’s most recent rules on who is considered a large or accelerated filer can be found here.)

When should companies begin preparing?

Now. While the rules as proposed would require reports from the largest companies in 2024 (on 2023 data), this proposal is just one part of a much larger wave. Governments globally are demanding more transparency and more climate action from companies of all sizes. New rules in the US will also soon apply to federal contractors—including their supply chains—as well as to companies doing business in the most populous states. Employees and investors are also increasingly demanding this data. Getting ahead of the wave saves in costs, arms your climate allies, and amplifies the impact of early action.

How Watershed can help

Watershed is the trusted enterprise climate platform that enables businesses to understand, report, and reduce their carbon footprints and demonstrate results with confidence. Watershed currently works with companies to navigate a host of global climate reporting requirements and produce audit-grade reports. The comprehensive platform has everything you need to help your business meet SEC disclosure requirements with rigorous measurement and audit-grade reporting, climate intelligence at your fingertips, and enterprise controls all built-in. To learn more, visit watershed.com/sec or get in touch.