In January 2023, the Securities and Exchange Commission (SEC) cited April as the release date for a long-anticipated final action – a rule on companies' climate-related disclosures.

In a draft proposal in March 2022, the SEC noted that it will require public companies to spell out their own direct and indirect greenhouse gas emissions, known as "Scope 1" and "Scope 2" emissions, plus certain types of "Scope 3" emissions from suppliers and customers. The new disclosure rules would require publicly traded companies to disclose greenhouse gas (GHGs) emissions and disclose risks that are “reasonably likely to have a material impact on their business, results of operations or financial condition.”

For reference:

Scope 1 emissions are considered direct greenhouse gas (GHG) emissions from sources that are controlled by a company such as emissions from energy to run equipment, heating and cooling, and company vehicles.

Scope 2 emissions are indirect GHG emissions created by the production of energy (electricity, steam, heat, or cooling) the organization buys.

Scope 3 emissions are indirect GHG emissions that are not owned or controlled by the reporting organization. This category is much more encompassing as it addresses emissions generated by customers who use the products and by suppliers making products the company uses. Addressing Scope 3 involves tracking emissions across the entire value chain from suppliers to end users.

Scope 1 and 2 emissions tend to be easier to track, measure, and, to an extent, control. Options, such as solar and other renewable energy sources and switching company vehicles to electric models, are a few examples. With regard to Scope 3 emissions, EPA suggests that an “organization may be able to influence its suppliers or choose which vendors to contract with based on their practices.” For other companies, the focus can be less on suppliers and more about their customers’ use of products.

The reality is the upcoming SEC final rule release will regulate publicly traded companies; however, these publicly traded companies will be obligated to heighten their demands on the private sector suppliers to the companies subject to the SEC rule. Private companies will very likely be affected by new vendor or customer requirements. Small and mid-market organizations may not have the capability to effectively manage in-house. For those organizations already addressing Scope 1 and 2, it will be critical to ensure the process is accurate. A periodic third-party audit will be prudent. While not anticipated to have a reporting date before 2025 (for FY 2024), if not yet addressed, a plan to identify, manage and measure Scope 3 should be considered.

It is and will be critical for organizations to publicly communicate accurate, complete, and reliable environmental data, which includes environmental risks, opportunities, and practices as well as GHG emissions that are useful in decision-making for stakeholders.

A recent article in Environment+Energy Leader reminds us that there is good news. “…the good news is that these new standards and requirements are aligning around a common core, giving the markets more comparable information, and giving companies clearer direction. Organizations must understand that C-suites and Boards of Directors will be held accountable for disclosures and data management. It will be critical to ensure that data is reliable.”

Important Notes:

The proposed SEC rule would provide a safe harbor for liability from Scope 3 emission disclosure and exemption from Scope 3 emissions disclosure requirement for smaller reporting companies.
The proposed disclosures are anticipated to be similar to currently accepted disclosure frameworks such as ISSB (IFRS) and CDP.

Sources:

https://ghgprotocol.org/sites/default/files/standards/Corporate-Value-Chain-Accounting-Reporing-Standard_041613_2.pdf

https://www.epa.gov/climateleadership/ghg-inventory-development-process-and-guidance