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SEC Adopts New Climate Disclosure Rule

May 13, 2024

In a bid to enhance transparency and standardize climate-related disclosures, the U.S. Securities and Exchange Commission (SEC) finalized its amendments to the Climate-Related Disclosures rule on March 6, 2024. This rule is expected to have a significant impact across various industries, including electric services, maritime transportation, steel manufacturing, paper and forest products, oil and gas, and other large sector organizations. As with any new rule of this magnitude, most are expecting litigation on the rule and the requirements.

Overview of the Rule

The Climate-Related Disclosures rule requires publicly traded companies to provide comprehensive disclosures regarding climate-related risks and their financial impacts. This includes disclosures on governance, business strategy, greenhouse gas (GHG) emissions, risk management, and the effects of climate change on financial metrics.

GHG Inventories and Planning

• Emissions Disclosure – Detailed reporting of GHG emissions, including direct emissions from company-owned sources (Scope 1) and indirect emissions from purchased energy (Scope 2). Scope 3 emissions were not included in the rule language.
• Climate-Related Targets or Goals – Reporting on specific targets or goals set by the company to address climate change, along with associated efforts to achieve them.
• Carbon Offsets and Renewable Energy Credits – Reporting on the use of carbon offsets and renewable energy credits as part of the company’s efforts to mitigate its carbon footprint and achieve GHG reduction goals.

Risk Management and Financial Impacts

• Climate-Related Risks and Impacts – Disclosing potential risks associated with climate change and how these risks may impact company operations and financial standing.
• Mitigation and Adaptation Activities – Disclosing actions taken to minimize or adapt to climate-related risks, such as implementing renewable energy initiatives or developing resiliency strategies.
• Board Oversight and Management Role – Describing the role of the Board of Directors in overseeing climate-related risks and involvement in assessing and addressing these risks.
• Risk Management Processes – Explaining the processes in place to identify, assess, and manage climate-related risks within the company’s operations and supply chain.
• Financial Impacts of Severe Weather Events – Disclosing the financial effects resulting from severe weather events and other natural conditions, such as hurricanes, floods, or wildfires.

Understanding Emissions Disclosure

For companies required to disclose emissions, understanding the intricacies of emissions disclosure is vital. One of the first requirements is GHG quantification and reporting.  As of the latest update of this article, the rule as currently written requires disclosure of GHG emissions information for a company’s U.S. and international operations.

Scope 1 and Scope 2 Emissions Reporting – For large, accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions is required by the rule schedule (see the table below).

• Scope 1 Emissions – Scope 1 emissions represent direct GHG emissions from sources that are owned or controlled by the company. These typically include emissions from company-owned facilities, such as emissions from combustion processes, on-site transportation, and fugitive emissions.
• Scope 2 Emissions – Scope 2 emissions refer to indirect GHG emissions associated with the consumption of purchased or acquired electricity, steam, heat, or cooling. These emissions occur because of the generation of purchased energy off-site; however, they are considered indirect emissions attributable to the company’s activities.

Disaggregated Emissions Data – The rule mandates companies to furnish a detailed breakdown of their emissions data, delineating the quantity of each GHG emitted, expressed in terms of carbon dioxide equivalent (CO₂e).

Assurance Reports – Certain companies, particularly those with significant emissions, are obligated to obtain assurance reports from external auditors to enhance the reliability and accuracy of emissions disclosure.  These assurance reports provide independent verification of the emissions data, ensuring compliance with reporting standards.

Methodology and Assumptions – Companies are required to describe the methodology, significant inputs, and assumptions used to calculate GHG emissions and metrics. Methodology and assumptions can be thought of as the blueprint and construction materials used when building a house. Just as a blueprint outlines the construction process, companies must describe the methodology and assumptions behind their emission calculations.

Integration with Financial Reporting – Emissions data must be disclosed in conjunction with financial reporting, ensuring alignment with other disclosures in registration statements and annual reports.

What’s Next?

Compliance for the final rule will be phased in per the table below.

Yorke Engineering can assist with your climate disclosure planning and compliance. This year is a good time to prepare corporate procedures and record-keeping to establish GHG inventories. GHG quantification starts in 2025. To learn more about how Yorke Engineering can help your company, please visit our website at www.YorkeEngr.com or click here for the GHG Inventories and Carbon Footprint page on our website:  GHG Inventories and Carbon Footprints.

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For more information and detail on the SEC’s Climate Disclosure Rule, please visit the U.S. Securities and Exchange Commission’s website here: SEC.gov | SEC Adopts Rules to Enhance and Standardize Climate-Related Disclosures for Investors

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