Understanding the SEC’s new carbon disclosure recommendations
The SEC has released a new proposal: that public companies begin reporting their carbon emissions and reductions progress alongside their financial results—with the same rigor.
In this guide we cover who this proposal applies to, what it asks for specifically, and what the SEC’s next steps are.
Which companies are affected by this proposal?
All public companies with an existing SEC reporting requirement (which includes non-US companies with US-traded shares who currently file a Form 20-F). While private companies are exempt from SEC filing rules, many companies on the path to an IPO elect to begin filing in advance—in which case they’re likely to be asked to include this data by their investors.
What does the proposal ask for?
The SEC wants companies to disclose their greenhouse gas emissions and climate risks in a standardized way. And they want this because investors want this.
Much of the SEC’s proposal builds on the work of the Taskforce for Climate-related Financial Disclosures (TCFD), which came up with 11 questions for companies to answer to ensure investors have full insight into the carbon and climate risks in their portfolios.
With this proposal, companies would need to submit the following alongside their financial disclosures in their annual reports:
Their answers to the SEC’s version of TCFD’s questions (expected to be very similar)
Their Scope 1 and 2 greenhouse gas emissions (i.e., direct emissions and those from purchasing electricity and heating/cooling; more on Scope 3 in the next section)
An intensity factor (i.e., dividing total emissions by a fixed business metric like revenue or number of employees to give 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 public climate pledges or targets
Emissions figures would also have to list any carbon credits separately so that investors can see total emissions in isolation.
What about Scope 3 emissions?
These emissions happen in a company’s value chain—mostly with suppliers—and often make up 90% or more of a product or service’s total emissions.
Companies will be required to include Scope 3 data if those emissions are deemed by investors to be “material”. While there’s no official guidance there yet, it’s expected that the largest filers—like Fortune 500 companies—will all be covered.
While smaller companies may not have a direct requirement to report Scope 3 emissions, the SEC’s proposal includes a new rule: if you have a public emissions-reduction goal, you must disclose your plan and progress against that specific goal. So if your public goal includes Scope 3 emissions, you must include Scope 3 progress in your SEC reports.
Will there be an auditing requirement?
Yes, for everything except Scope 3 disclosures. Though the auditing requirement will phase in over two years, and will only apply to large filers initially.
What stage is the proposal at?
The SEC’s initial proposal has now passed 3-1, and is headed to the public for 60 days of open comments. The SEC will then review those comments and incorporate them into their final draft. Their hope is to pass the rule in H2 2022, and to apply it for 2023 (and beyond) reporting years.
When will these requirements take effect?
Note that these tables assume that the proposed rules will be adopted within 2022 and that the filer has a December 31st fiscal year-end.
|Registrant Type||Disclosure Compliance Date|
|All proposed disclosures, including GHG emissions metrics: Scope 1, Scope 2, and associated intensity metric, but excluding Scope 3||GHG emissions metrics: Scope 3 and associated intensity metric|
|Large Accelerated Filer||Fiscal year 2023 (filed in 2024)||Fiscal year 2024 (filed in 2025)|
|Accelerated Filer and Non-Accelerated Filer||Fiscal year 2024 (filed in 2025)||Fiscal year 2025 (filed in 2026)|
|SRC||Fiscal year 2025 (filed in 2026)||Exempted|
|Filer Type||Scopes 1 and 2 GHG Disclosure Compliance Date||Limited Assurance||Reasonable Assurance|
|Large Accelerated Filer||Fiscal year 2023 (filed in 2024)||Fiscal year 2024 (filed in 2025)||Fiscal year 2026 (filed in 2027)|
|Accelerated Filer||Fiscal year 2024 (filed in 2025)||Fiscal year 2025 (filed in 2026)||Fiscal year 2027 (filed in 2028)|
(The SEC’s most recent rules on who is considered a large or accelerated filer can be found here.)
When should companies begin preparing?
This proposal is part of a much larger wave: governments are demanding more transparency and more climate action. If we look at disclosure mandates in Europe, we can see a year or two into the future. Regularly disclosing emissions and reductions plans is the new normal.
While some of these new reports won’t be due until 2024, many companies aren’t waiting to get started. Investors—and employees!—are asking for this data now, and companies that have it in hand will both be able to satisfy those questions and get a head start on what really matters: making real carbon reductions fast.
If we can help with measurement or with further questions about this proposal, please get in touch.