Understanding the SEC’s new carbon disclosure rule

The SEC is close to publishing the final version of a rule that would require public companies to begin reporting their carbon emissions and reductions progress alongside their financial results—with the same rigor. The proposed rule was published for consultation in March 2022 - the SEC plans to publish the final version in April 2023.

In this guide we cover who this proposal applies to, what it asks for specifically, and what the SEC’s next steps are.

Which companies are affected by this proposal?

All public companies with an existing SEC reporting requirement (which includes non-US companies with US-traded shares who currently file a Form 20-F). While private companies are exempt from SEC filing rules, many companies on the path to an IPO elect to begin filing in advance—in which case they’re likely to be asked to include this data by their investors. Companies preparing registration statements for an IPO will be required to include climate related disclosures.

What does the proposal ask for?

The SEC wants companies to disclose their greenhouse gas emissions and climate risks in a standardized way. They want this because investors want this.

Much of the SEC’s proposal builds on the work of the Taskforce for Climate-related Financial Disclosures (TCFD), which came up with 11 questions for companies to answer to ensure investors have full insight into the carbon and climate risks in their portfolios. The SEC expects that firms already providing disclosures based on the TCFD’s framework will face lower incremental compliance costs for the proposed rules.

With this proposal, companies would need to submit the following alongside their financial disclosures in their annual reports:

• Answers to the SEC’s version of TCFD’s questions (expected to be very similar)
• Scope 1 and 2 greenhouse gas emissions (i.e. direct emissions and those from purchasing electricity and heating/cooling; more on Scope 3 in the next section)
• An intensity factor (i.e., dividing total emissions by a fixed business metric like revenue or number of employees to give an apples-to-apples figure)
• Any internal carbon price used and the logic used to calculate it (this price also has to be consistent between internal use and external PR; there can’t be two prices)
• Updates on plans and progress against any public climate pledges or targets

Emissions figures would also have to list any carbon credits separately so that investors can see total emissions in isolation.

What about Scope 3 emissions?

These emissions happen in a company’s value chain—mostly with suppliers—and often make up 80% or more of a product or service’s total emissions.

Companies will be required to include Scope 3 data if those emissions are deemed by investors to be “material”. While there’s no official guidance there yet, it’s expected that the largest filers—like Fortune 500 companies—will all be covered.

While smaller companies may not have a direct requirement to report Scope 3 emissions, the SEC’s proposal includes a new rule: if you have a public emissions-reduction goal, you must disclose your plan and progress against that specific goal. So if your public goal includes Scope 3 emissions, you must include Scope 3 progress in your SEC reports.

Will there be an auditing requirement?

Yes, for everything except Scope 3 disclosures. The auditing requirement will phase in over two years, and will initially only apply to large filers.

What stage is the proposal at?

The SEC has signaled that it will adopt the new rules in April 2023. The April target date was communicated through the Fall 2022 Regulatory Flexibility Agenda, which sets out the SEC’s regulatory priorities in 2023. The April deadline is indicative and not definite - there may be further delays to the publication of the final rule, but April is now the reasonable planning assumption.

To approve the final rule, the SEC will take a vote at an Open Commission Meeting, which will be broadcast online. The agenda for those meetings is usually published about a week before they take place, and that will tell us that the final rule is imminent. Watershed will keep track of events and update timings as we know more.

When are these requirements expected to take effect?

(The SEC’s most recent rules on who is considered a large or accelerated filer can be found here.)

When should companies begin preparing?

This proposal is part of a much larger wave: governments globally are demanding more transparency and more climate action. In the US, the Federal government is proposing climate disclosure requirements for some firms that have government contracts. Disclosure mandates in Europe give Americans a glimpse into the future: in the EU, regularly disclosing emissions and reductions plans is the new normal. (For a global overview of all current regulations, see our guide to 2023 climate disclosure requirements for firms of all sizes here.)

Under the current SEC proposals, the first reports for the largest companies are due in 2024, using 2023 data, so companies need to take action to understand their climate impact now. But many companies that have longer deadlines aren’t waiting to get started. Investors—and employees!—are asking for this data now, and companies that have it in hand will both be able to satisfy those questions and get a head start on what really matters: making real carbon reductions fast.

Watershed helps validate your data, prepare your filing, and ensure your disclosures are vetted and audit-ready. We'll also help you set targets and take concrete steps to reduce your emissions and mitigate climate risk. If we can help with measurement or with further questions about this proposal, please get in touch.