In all our recent workshops, chats, and client interactions, we've consistently emphasized the importance of embracing sustainability practices, and an essential aspect of that has been discussing the upcoming SEC regulations. We've stressed the need for businesses to prepare themselves, especially considering how other entities like the EU and progressive states like California are tightening up their rules, such as CSRD in the EU and with laws like SB253 and SB261 in California.
The SEC rules primarily affect public companies. However, private firms planning an IPO should also pay attention to these requirements and strengthen their capabilities to address climate risks, setting the stage for future success. Other private companies must also grasp the implications, as these regulations represent just the beginning.
The new SEC regulations are supposed to provide clarity on reporting frameworks, and demand increased transparency and accountability. Investors have long sought reliable information on how climate-related risks could impact operations, and these regulations aim to address that demand.
Later in this article, we will delve into the implications for public companies.
The regulations mandate that public companies detail their efforts to integrate climate-related risks into their operations, recognizing these risks as financial and thus considering climate-related data as financial data. Consequently, scenario planning becomes imperative for all businesses, regardless of size, industry, or location, to proactively identify and address risks effectively. Smaller entities looking for future capital-raising efforts should consider this. Simply put, it's crucial to dispel any false sense of invulnerability and instead embrace the notion of potential extreme weather-related disasters impacting operations.
Companies must strategize how they will respond and mitigate these risks moving forward.
Carbon accounting is becoming increasingly important. The new regulations require public companies to report only their Scope 1 and 2 carbon emissions, leaving out Scope 3 emissions. This change from the original proposal provides some relief to smaller entities that conduct business with public reporting entities. However, we believe that companies that have already begun to demand carbon emissions data from their partners will continue to do so, and while mandatory disclosure may not occur immediately, being proactive in carbon accounting can be beneficial. Not surprisingly, there has been an increase in carbon accounting tools that offer solutions for measuring, managing, and reporting carbon emissions. Contact us if you would like to learn more about our carbon accounting services.
Furthermore, companies that rely solely on carbon offsets or renewable energy credits instead of genuinely reducing emissions may be flagged, emphasizing the importance of authentic emission reduction efforts. This is crucial, as it signals a shift towards actual decarbonization of our economy rather than merely applying temporary fixes. Such developments are particularly encouraging for sustainability consultants like us, as they demonstrate the SEC's commitment to fostering positive impact outcomes.
Finally, as previously stated, businesses operating in regions like the EU and California are already subject to stricter climate-related regulations. Adherence to these regulations is critical to compliance and sustainability.
As businesses navigate the changing regulatory landscape, embracing sustainability practices and understanding climate risks is critical. Regardless of size or industry, proactive engagement in scenario planning and carbon accounting puts businesses on the path to resilience and future success, as well as potentially cheaper access to capital. Smaller aligned companies with emerging market and investor expectations can mitigate risks and seize opportunities for growth and innovation in a rapidly changing world.
Now, let's look at what it all means for public companies.
Who do these rules apply directly to?
Public companies with specific compliance dates for AF (accelerated filers) and LAF (large accelerated filers).
When do these rules apply?
LAF | AF | All other Companies | |
Narrative disclosure on climate change, together with financial statements | Data from fiscal year 2025, to be filed in 2026 with annual reporting 10-K | Data from fiscal year 2026, to be filed in 2027 with annual reporting 10-K | Data from fiscal year 2027, to be filed in 2028 with annual reporting 10-K |
Scope 1 and Scope 2 emissions | Data from fiscal year 2026, is to be filed in 2027. This data could be reported in Q2 included in Form 10-Q or filed an amended Form 10-K | Data from fiscal year 2028, is to be filed in 2029. This data could be reported in Q2 included in Form 10-Q or filed an amended Form 10-K |
What are the main rules?
Rules regarding Narrative Disclosure
Companies must report on the material impacts of climate-related financial risks, their strategies to mitigate those risks, and their governance structures, all following the guidelines set forth by the Task Force on Climate-related Financial Disclosures (TCFD). What should be included in this narrative?
Explain how the board of directors addresses the oversight of climate-related risk issues.
Climate-related risks that are material enough to have a significant impact on the company’s strategy, operations, or financial performance.
Explain how the company incorporates the assessment and management of climate-related risks into the overall risk management plan.
Details of initiatives taken to address or adapt to material climate-related risks, including considerations of carbon pricing, if applicable.
Climate-related targets that are or can reasonably affect the operations and financials of the company.
Notes to Financial Statements
Disclose information regarding capitalized costs, expenses, and losses derived from extreme climate-related events. The rule lists some events and explains that the list is not exhaustive or limited to wildfires, droughts, hurricanes, tornadoes, floods, extreme high temperatures, and rising sea levels.
Disclose information on material resources incurred in buying carbon offsets and renewable energy credits to achieve the company’s climate-related goals.
Rules regarding carbon emissions
Companies must disclose their carbon emissions, which are categorized as Scope 1 and Scope 2, if they are considered material. However, what exactly counts as “material” isn't entirely clear. The SEC defines materiality, following the definition from the US Supreme Court, as information that investors need to make well-informed decisions.
The specific criteria for determining materiality are not fully specified, which could lead to confusion and potential legal challenges for companies.
In terms of the technicalities of the reporting, emissions must be reported gross without including any offsets or credits, with estimates being accepted as long as they explain the assumptions behind them and why they are using them.
The regulation says that large accelerated filers and accelerated filers must get attestation reports for their Scope 1 and Scope 2 emissions data. They must start doing this three years after they start disclosing, and they'll need to use 'limited assurance.' By 2033, large accelerated filters must upgrade to a more strict, reasonable assurance.
Interestingly, the rule allows anyone who is an “expert” and “independent” to provide assurance, not just auditing firms. However, whoever does it needs to follow standards that are free for everyone or widely accepted and open to public feedback.
This article provides a general overview of the new SEC regulation's significance for all companies, emphasizing its broader impact beyond large public corporations. While it does not provide an exhaustive explanation, it highlights the ripple effects on smaller and medium-sized operations engaging with public companies.