Understanding the Proposed SEC Ruling
by Mike Troupos
On March 21, 2022, the SEC passed a rule called “The Enhancement and Standardization of Climate-Related Disclosures for Investors” by a 3-1 vote. If you are looking for some good sleeping material, the 490-page document can be found here. This rule could have significant implications for companies listed on the stock market.
What does the rule mandate?
In short, the rule requires publicly traded companies to report on their scope 1, 2, & 3 GHG Emissions annually, with the timelines and granularity varying based on company size. According to The Conference Board, 71% of the S&P 500 have disclosed GHG emissions in the past year. That means most of the large companies in the US are doing this. However, there are over 5,000 public companies; the S&P 500 represents most of the largest companies. When looking at S&P Mid-cap 400 (a sampling of 400 mid-sized companies), that percentage drops to 28%. Small-cap companies are even lower. Most public companies in the US are NOT reporting GHG emissions.
What about Scope 3?
The above data is on scope 1 & 2 emissions, which are the direct emissions from a company. However, the SEC rule also mandates reporting on scope 3 or indirect emissions. Few public companies have a robust plan for calculating and reporting on their scope 3 emissions. The main reason companies are much further behind on scope 3 is that those emissions are much more difficult to collect and calculate. Scope 1 & 2 emissions fall within a company’s operational boundary, and therefore a company can put procedures in place to collect this information. scope 3 emissions all fall outside a company’s boundary, meaning they must rely on entities they don’t have direct control over to collect emission data. Good examples of complex scope 3 emissions to collect and calculate are associated with purchased goods and services, the carbon emitted from downstream transportation, and the use of the product. Head here to learn more about the power of reducing scope 3 emissions.
Is this really going to be a rule?
This is the question I am asked the most when talking about the SEC requirements on climate disclosures. It is a great question to ask when most companies are not reporting scope 1 & 2 emissions, and only a handful of the most progressive companies are documenting scope 3 emissions. I respond by saying, yes, I believe this will become a rule, but there is a time component we must consider. Technically, this rule could become effective as soon as the comment period is complete – 60 days after the rule is published. This scenario is unlikely, given the overwhelming lack of preparedness. Additionally, many parties plan to challenge the rule altogether.
While it may not be immediate, I see this rule taking effect over the next two to three years. All the trends in the marketplace are moving in this direction. From the most prominent investment company, Blackrock, mandating it for their holdings to large companies like GM and Walmart mandating carbon disclosure for their supply chain.
Companies are feeling the pressure to report emissions to their investors and customers. The SEC adding in reporting requirements is just one of the many stakeholders pushing for more emissions transparency. The wise companies realize this and are moving on data collection, reporting, and improving their carbon emissions. These inevitable delays in the SEC mandate will give them time to comply proactively, so they can focus on the long-term health of their business. Inevitably, some companies will fight this to the end, wasting resources and putting themselves in an uncomfortable scramble to comply at the last minute.
Conclusion
If you are ready to get ahead on carbon-related disclosures, Foresight has numerous resources available, including this Ideas post from Natalie Vezina. This change in the marketplace offers your business an opportunity to strategically align with your customers, investors, employees, and government, making your business more competitive and profitable in these uncertain times. Our most recent service offering, Flourish, provides an ongoing Sustainability as a service partnership. Through Flourish, we help companies position themselves as leaders in their industry with data-driven solutions to increase profitability and optimize processes. Learn more here.
