Many Companies Are Closer to SEC Climate Rule Compliance than They Think: Four Next Best Steps in the Climate-Reporting Journey

The Securities and Exchange Commission (SEC) released its final climate rule on March 6, 2024, capping off a rule-making process that began back in 2021. The long anticipated 886-page rule gives many companies insight into the climate-related reporting requirements they will be expected to meet over the next several years. While it may appear intimidating on the surface, companies that have been keeping up with escalating climate reporting expectations and other related regulations won’t find any surprises in the pages of the new rule.  

As expected, the rule requires many publicly traded companies in the United States to disclose certain climate-related information consistent with standards such as the Task Force on Climate-related Financial Disclosures (TCFD) and the Greenhouse Gas (GHG) Protocol. While the new climate rule’s implementation timeline for each type of filer differs in some ways from other climate reporting requirements in the United States and around the world, there are many consistencies between the various directives that should make compliance easier for organizations, especially those that have already begun their climate reporting journey.

Alignment with other climate-related directives helps simplify SEC climate rule compliance

Again, there aren’t any surprises in the new SEC climate rule. Companies have seen and heard versions of all of the climate-related disclosures required by the final rule before, either from another US or global requirement, such as the California’s Climate Accountability Package or the European Union Corporate Sustainability Reporting Directive (CSRD), or from one of the multitude of voluntary frameworks capturing the attention and focus of investors, such as TCFD and CDP.  

Let’s take a closer look at how the final SEC climate rule compares to other rules and frameworks across several important climate-reporting topics.  

Governance

In companies where the board of directors oversees climate-related topics, the final SEC climate rule requires filers to identify a board committee or subcommittee responsible for overseeing climate-related risks. Filers must describe the processes by which the board or subcommittee is responsible for this risk. This requirement aligns with the TCFD’s recommended disclosures related to governance—recommendations that also serve as the building blocks for most other global climate regulations and frameworks, including CDP and the International Sustainability Standards Board (ISSB) IFRS Sustainability Disclosure Standards.  

Similarly, if management oversees climate-related risks, the final SEC rule requires companies to describe the processes for identifying, assessing, and managing material climate-related risks. While the SEC rule uses “climate-related risk” to encompass both physical and transition risk as a way to simplify the requirement, this portion of the rule also directly aligns with TCFD and CDP.   

Scope 1, 2, and 3 Emissions 

Not surprisingly, the SEC climate disclosure rule overlaps with California’s Climate Accountability Package, passed in October 2023. Between the two rules, California’s rule is more robust. The SEC rule mandates scope 1 and 2 disclosures only if the company deems these emissions as material to the business while California requires these disclosures for any reporting company that exceeds $1 billion in revenue and does business in California. Further, the SEC final rule excludes scope 3 emissions while California’s legislation mandates scope 3 disclosures by 2027.   

GHG Protocol and Targets  

The SEC climate rule references the GHG Protocol, a globally recognized standard for GHG emissions, when defining the concepts of direct and indirect emissions. The Commission used a common vocabulary with the GHG Protocol to elicit consistent and comparable climate-related information for investors. Similarly, the EU CSRD regulation and the voluntary ISSB ESG framework both require GHG emissions disclosures as described by the GHG Protocol. 

Further, CSRD and ISSB fully align with TCFD disclosures for other climate-related disclosures. Companies disclosing under CSRD or ISSB must describe their key climate-related targets and progress toward reaching them. Under the SEC rule, targets are not required, but companies that disclose them must meet additional requirements including material expenditures and actions taken to make progress toward meeting such targets or goals. 

Voluntary Disclosures Address Many Requirements in the New SEC Climate Rule

Four key steps on the roadmap to compliance

While compliance with the new SEC climate rule may seem daunting, many companies will find that they are already well-positioned to meet the requirements, especially those filers that are already implementing any of the existing disclosure frameworks, questionnaires, or regulations. Wherever a company currently stands in its climate-reporting journey, the most important next steps for ensuring SEC climate-rule compliance relate to ensuring the quality and integrity of GHG data and disclosures. 

(1) Ensure GHG emissions data collection and climate risk management are part of your company’s ESG Governance.

The SEC rule requires companies to disclose a description of board and management-level oversight and governance of climate-related risks. This ensures that climate considerations are integrated into a company’s overall strategy and risk management alongside other material factors. Board and management oversight of climate-related risks will also make reporting this information to multiple jurisdictions important to ensure complete and accurate reporting. 

Establishing collaboration across teams will ensure accountability as climate-related work progresses. It’s also important to align internal teams on monitoring realized weather or natural hazard-related impacts across the organization to address the SEC’s financial impact disclosure. 

(2) Understand the company’s current alignment with climate reporting frameworks and climate risk management best practices

The SEC climate rule, as well as California’s climate rules and rules from other jurisdictions, map back to the TCFD framework. TCFD recommends that companies assess and disclose climate-related risks and opportunities along with how management of these risks is included in their overall business strategy. Companies that are already reporting or starting to report aligned with the TCFD framework should collect and organize all content that already addresses climate disclosure requirements and use this as the basis for new SEC disclosures.  

It’s also a good idea to take a look at how industry peers are addressing TCFD requirements. This can help companies finetune their own disclosures for the SEC and other related reporting frameworks.  

(3) Take stock of data sources for scopes 1 and 2 emissions and work to identify reporting gaps

Data for calculating scopes 1 and 2 emissions includes direct and indirect energy use at the company’s facilities. These types of data may come from utility bills. Sometimes data comes from purchase agreements for certain fuels and gases. Gathering what is available and understanding where the company may need to dig deeper for the required information is best done sooner than later. 

(4) Prepare for attestation requirements

Creating annual GHG inventories requires creating an effective and efficient control environment. For many companies, this work will entail building out and documenting the procedures necessary for identifying data sources and tracking the flow of GHG data from emissions sources through the calculation process. This can be a complex and time-consuming process. Taking steps to establish an audit-ready GHG data collection process now is the best way to prepare for meeting attestation requirements outlined in the SEC climate rule and other related regulations.  

Take the next steps toward compliance today  

After a very long wait, the SEC climate rule is here, and all filers need to take action to meet compliance timelines. Whether your company is already a climate reporting veteran or is developing its very first disclosures, Riveron can help define and implement the right next steps for you. Reach out today to learn how a trusted partner can make the difference in successfully meeting climate-related disclosure requirements for new and upcoming regulations.