The Impact of the US SEC GHG Emissions Accounting Rule

On March 6, 2024, the US Securities and Exchange Commission (SEC) finalised a new rule requiring larger US public companies to enhance and standardise climate-related disclosures.

The new rule, finalised by the US Securities and Exchange Commission on March 6, 2024, directly responds to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a company’s operations and how it manages those risks.

The rule will require companies to publish their Scope 1 and 2 Greenhouse gas emissions and other climate-related financial information, such as any processes they use to identify, assess, and manage those risks. Companies must also detail capitalized costs and expenses due to severe weather events. The SEC’s commitment to balancing concerns about mitigating the associated costs of the rules is evident in these final regulations.

In 2022, the Commission released a draft that required some companies to disclose their emissions covering the entire value chain, which included Scope 1, 2, & 3. Still, in the final rule, the SEC has omitted Scope 3 emissions, which are emissions from the company’s value chain.

Reuters reports that US securities regulations do not currently impose common standards for climate-related disclosures. However, the agency recognises the global need for such standards as investors increasingly seek consistent and comparable information across the many companies producing climate information. The article highlights the influence of top Democratic lawmakers and environmental groups in urging the SEC to adopt strict rules on disclosing companies’ carbon emissions. The rules proposed two years ago and part of a global trend, align with Democratic President Joe Biden’s agenda to address climate change threats through federal agencies and would join similar requirements in Europe and California

The World Resource Institute provides a guide on what scope 1,2, & 3 emissions include, emphasising that a comprehensive assessment of a company’s climate impact requires measuring and disclosing all three types of emissions:

• Scope 1 refers to direct GHG emissions from sources that a company owns or controls. These emissions typically occur on-site, such as the combustion of diesel used for driving a truck or coal burning to generate electricity.
• Scope 2 refers to indirect emissions from purchased electricity, steam, heat, and cooling. For example, an electricity user’s scope 2 emissions would be the scope 1 emissions of the power generating company.
• Scope 3 refers to indirect emissions from a company’s upstream and downstream activities. They occur outside a company’s control and are associated with its value chain. For example, the indirect emissions that occur when a mobile phone user charges their phone would be the mobile phone manufacturing company’s downstream scope 3 emissions. Similarly, the emissions from the materials it took to build the phone would be the mobile phone manufacturer’s upstream scope 3 emissions.

Importance of GHG accounting

According to WRI, GHG accounting, also called carbon accounting for companies, is important because businesses are the main contributors to global emissions. A 2017 report shows that just 100 companies account for 70% of the world’s GHG emissions.  A standardised method to measure and report emissions will help companies identify areas where they can reduce their emissions, and accurate and transparent reporting will also increase stakeholder and investor confidence in a company’s sustainable practices.

Is GHG accounting mandatory or voluntary?

WRI listed regions and locations in the world that have signed legislation that makes emissions disclosure reports mandatory for businesses, such as the EU’s Corporate Sustainability Reporting Directive (CSRD), published in December 2022, California’s Climate Disclosure Accountability Act, and plans by some countries like New Zealand, the Philippines, and Singapore to implement voluntary reporting frameworks, which could affect between 100,000 and 130,000 companies globally.

The new SEC rule will shrink the global disclosure gap.

MSCI shows only 45% of US-listed companies currently have Scope 1 and 2 emissions, compared with 73% of listed firms in other developed markets. The new rules can help narrow the global disclosure gap. Of the nearly 2,400 companies in the MSCI USA Investable Market Index (IMI), only 29% disclose some of their Scope 3 emissions, which in some companies make up the bulk of their emissions.

Schedule of implementing the EU and US GHG emissions accounting rules

Large listed European companies must publish their first sustainability statement under the European Sustainability Reporting Standards by 2025 and small and medium-sized businesses by 2026.

In the US, the SEC’s new rule will require large public US companies to report their Scope 1& 2 emissions starting in 2026.

Deloitte’s Executive Summary of the SEC’s Landmark Climate Disclosure Rule also provides key information about the new rule, changes from the previous rule, components of the climate disclosure requirements, mandatory compliance dates for companies, and other information.