The U.S. Securities and Exchange Commission’s new rule on corporate climate risk disclosure was a disappointment to those who felt it did not go far enough but it nonetheless offers clarity for companies juggling multiple international jurisdictions, sources told GreenBiz.
The SEC adopted the rule last week after two years of considering more than 24,000 comment letters. The rule is weaker than the original proposed in 2022: Companies won’t have to disclose their Scope 3 indirect emissions from supply chains and customers. And smaller public companies with a market cap of less than $75 million are exempt.
Still, the new mandate — requiring disclosure of direct Scope 1 and 2 emissions — will force companies to publish their environmental data on the same schedule as their routine SEC filings and account for it in a more rigorous way.
“Companies will be looking closely at the detail for the distance between the SEC and existing disclosure requirements,” said Amy Brachio, global vice chair of sustainability for consulting firm EY, pointing to the EU’s Corporate Sustainability Reporting Directive and to voluntary disclosure frameworks, such as the International Sustainability Standards Board.
“While these approaches might differ slightly, the intent to create reporting and information for stakeholders is the same,” she said. “It’s critical that companies can find common ground on data requirements and processes to manage multiple jurisdictions’ requirements.”
At more than 800 pages, the SEC’s new regs are a lot to digest. Many key changes are summarized in this Deloitte analysis, including:
If you use TCFD, you’re ahead of the game
Companies that moved early to align their disclosures with recommendations from the Task Force on Climate-related Financial Disclosure should have a leg up on compliance across jurisdictions. (The TCFD was recently rolled into the IFRS Foundation and merged with the International Sustainability Standards Board framework.)
“What we saw didn’t really give us a lot of pause, other than the absence of Scope 3,” said Emilio Tenuta, chief sustainability officer at Ecolab, which adopted TCFD in 2017. “We’ve been regularly reporting on our GHG data in a very granular fashion.”
The new rule also validates the ongoing role played by the Greenhouse Gas Protocol, which is updating its guidance, by establishing it as a key carbon accounting method. A draft of its recommendations is due this year, and new rules are anticipated in 2025.
“There is a common direction of travel emerging,” said Kristina Wyatt, a former SEC lawyer who is now chief sustainability officer at carbon accounting software firm Persefoni.
Financial and ESG disclosures will be aligned
One big change for teams producing voluntary emissions and ESG progress reports will be the timing in which disclosures are due.
Historically, many of the big voluntarily generated reports were filed months after the company’s annual report. Alphabet, eBay, Intel, Meta and Paypal wanted to retain that relaxed timeframe. In a letter to the SEC they advocated for disclosures to be allowed in a separate report filed “at least 180 days after a registrant’s fiscal year-end.”
But the SEC’s new rule requires certain environmental disclosures to be published as footnotes to the regular quarterly and annual financial statements:
- Costs related to severe weather or other natural conditions.
- Information about carbon offsets or renewable energy certificates.
“SAP, in general, has been doing integrated reporting for years and we will continue exactly as we were,” said Sophia Mendelsohn, chief sustainability and commercial officer at SAP and co-general manager for SAP Sustainability.
“You’re still burning energy because of what you move, what you make and where you do it,” said Mendelsohn. “Take your information from what you buy and make, and how, and put it next to your financial data.”
Ecolab is preparing by updating the “data lake” where information is gathered to support the new reporting cadence, and it is moving toward a quarterly process. “We want to make sure we are ready and prepared to go,” Tenuta said.
The rule will be phased-in over three years, with the first disclosures required in early 2026 for metrics related to 2025 fiscal years.
It may be time to hire an ESG controller
Reporting standards are about to get more rigorous. All companies will be required to provide a minimum standard of “limited assurance” for the accuracy of their environmental disclosures. That’s an independent verification that the right accounting controls are in place. It’s a less rigorous standard than “reasonable assurance,” which is similar to a deep financial audit.
In their SEC letter, Alphabet and others advocated for limited assurance, which costs less for companies to support. They’re getting their way, at least initially: Large companies will need to provide limited assurance data by 2029; four years later, they’ll need to provide reasonable assurance for those metrics.
That requirement may prompt more companies to hire ESG controllers, a counterpart to the financial controllers who govern those reporting processes. Ecolab doesn’t have an ESG controller, but “conversations are happening,” Tenuta said.
That evolution is only natural, said SAP’s Mendolsohn. “In order to report your emissions data with confidence and to be able to get them assured and put them into a 10-K, you need to treat them like financial numbers,” she said. “That mindset doesn’t exist in the sustainability function.”