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Environmental Performance Could Become Corporate Data Point Under New SEC Rules

April 18, 2022 Patrick Corr

On March 22, the U.S. Securities and Exchange Commission (SEC) unveiled proposed rules requiring public companies registered in the United States to include a number of climate disclosures in their federal filings and public reports. These disclosures would include information the public could view as relevant in their decisions to invest (or disinvest) in a company, based on the risks possible future greenhouse gas regulations, carbon pricing, and climate change itself could pose to corporate profits and operations. It’s rare for SEC regulations to make headlines, but this announcement made news around the globe, as these rules could help push U.S. corporations toward greener performance much more quickly.

What the rules would require

This SEC fact sheet outlines the full list of required disclosures, but here are the highlights of what corporations would need to report in their registrations and periodic reports:

  • Climate-related risks facing the company and their actual or likely impacts on business strategy and outlook.
  • How the company is assessing and managing those risks and whether those processes are tied into overall risk management approaches.
  • Specifics on the greenhouse gas emissions related to the company’s operations, including:
    • Scope 1 emissions related to the company’s own manufacturing processes and other operations.
    • Scope 2 emissions related to the energy the company purchases for those operations.
    • Scope 3 emissions produced by its suppliers and by customers in their use of the company’s products. This reporting requirement is targeted toward those companies for which these emissions could be considered “material” (this is a bit vague) and those that have set greenhouse gas reduction targets that include Scope 3 emissions.

Also, if the company has set public environmental performance goals, they’d need to report:

  • What activities and emissions are included and the timeline for reaching the target
  • How the target is going to be reached
  • Relevant data indicating whether progress is being made toward the target and how that progress has been made
  • Whether carbon offsets or renewable energy certificates are a part of these emissions-reduction plans

Why the rules matter

The Biden Administration has set the bold climate goal of reducing U.S. greenhouse gas emissions by 50-52%, economy-wide, by 2030. But, with a divided Congress and not enough votes in the Senate to pass legislation supporting this goal, regulatory actions such as this are really the only option to push public companies toward more climate-friendly business practices.

Yes, some companies already are factoring carbon calculations into their decision-making, especially in areas like energy sourcing. However, many of these purchases have been driven more by economics than climate change concerns. Operations managers recognize that onsite solar installations and long-term solar power purchase agreements, for example, can lower operating costs. The thought process needs to change from “Can solar lower my energy bill?” to “Can clean energy mitigate climate risks my company might face?”

The SEC’s new reporting requirements can help force that change by shedding more light on such risks for current and potential investors. As a result, this information could directly impact corporate valuations. How well would your stock sell if your operations were known to be contributing to the challenge of rising sea levels, for example?

And for those companies whose leaders already have declared greenhouse gas emissions targets, the SEC’s move should increase the ambition of – and attention to – those goals. With this required reporting, a cursory nod to climate change won’t be enough to address the real risk a lack of action could pose to corporate bottom lines. It becomes more difficult to be perceived as sustainable if your emissions – including those of your energy suppliers, supply chain participants, and eventual customers – far outstrip your previously stated sustainability goals and deployments.

What’s next

The rules are now in the middle of a 60-day comment period that will end in late May. Then the SEC will weigh those comments in crafting the final language, which will need to be voted on by the agency’s four commissioners – that vote is anticipated to happen by the end of this year. Once approved, provisions are intended to be phased in over the next two fiscal years, based on a company’s size and SEC filing status.

Court fights over the rule could delay its implementation. Last year, the attorney general of West Virginia threatened to sue the SEC if it forced companies to disclose this kind of environmental performance data. And business groups could also raise challenges based on the SEC’s authority to establish regulations based on environmental issues.

However, while the future has yet to be written on the rules’ final fate, the mere fact that the nation’s financial regulators have placed this stake in the ground is important. There are real costs to fossil fuels that have simply not been part of corporate financial decision-making up until now, and that is finally beginning to change.