The SEC Climate-Related Disclosure Rules are Here: Why Get Ready Now?
by Travis Whitfield, Project Leader, CLA
The Securities and Exchange Commission (SEC) voted on March 6, 2024, to pass a proposal for Climate-Related Disclosures for Investors. The original proposal was issued in March 2022 and was originally expected to be final by December 2023.
The SEC delayed voting on the proposal numerous times, in part due to the 24,000 comment letters received from their constituents.
As speculated, the final rules passed by the SEC have been significantly modified from the original proposal, with the most notable change being the removal of Scope 3 emissions disclosures.
The SEC categorizes companies three ways by revenue: large accelerated filers, accelerated filers and non-accelerated filers. The SEC defines categories here.
Disclosures and Green House Gas (GHG) emissions are required for:
- Large Accelerated Filers in fiscal years beginning in 2025 (reporting in 2026), with limited assurance required for GHG emissions for years beginning in 2029.
- Accelerated Filers in fiscal years beginning in 2026 (reporting in 2027) with limited assurance for GHG emissions required for years beginning in 2031. Small Reporting Companies and Emerging Growth Companies are exempt.
- Non-Accelerated Filers SRCs and EGCs in fiscal years beginning in 2027 (reporting in 2028), however, these registrants are exempt from reporting GHG emissions under the new rule.
California Exceeds Federal Requirements
Although limited assurance on these GHG emissions is not required until 2029 and Scope 3 GHG emissions reporting are out of scope, the California Rules will require it starting in 2025. Many public registrants will be required to comply with the California Rules, which require limited assurance and Scope 3 GHG emissions reporting beginning in fiscal years beginning in 2025. These companies typically calculate Scope 3 emissions anyway due to the impact on their ESG investor ratings, or they simply want to be leaders in this emerging topic. If they meet the requirements, these rules apply to both public and privately-held companies generating over $1 billion in revenue (anywhere) and doing business in the state of California.
Why start now?
For Large Accelerated and Accelerated Filers, the top priority is to confirm if processes are in place and ready to calculate GHG emissions before January 1, 2025, and January 1, 2026, respectively. Not having processes in place by the beginning of 2025 (for Large Accelerated Filers) to identify and collect appropriate data from significant emissions sources, could result in a significant amount of additional effort in attempting to retrospectively identify all relevant processes and relevant information.
Many public registrants currently have a sustainability program in place where they are calculating GHG emissions, but the underlying processes are not audit-ready, which is sufficient for the new SEC rules. However, that is not sufficient for the California Rules. Consequently, many of these organizations are now reviewing their sustainability programs and are determining how to get their sustainability program audit ready.
For example, a Large Accelerated Filer does not start compliance efforts until early 2025. At that point, the company must look back to the beginning of the year to determine the source of their material emissions and identify the appropriate data and create a process to determine that the data completely and accurately gets to the emissions calculation tool (either excel spreadsheet or software package) and the output is complete and accurate. This is often a methodical approach that occurs over many months. Shortening the implementation time could result in numerous undesirable outcomes, so it is important to start planning now.
SEC registrants are recommended to:
- Start reviewing where they are in their ESG journey.
- Understand the gaps between where they are currently and where they need to be for compliance with the new rules.
Need help getting started? CLA can assist by providing end-to-end consulting services customized to your circumstances. Contact us.
Jennifer Clement is an executive sales and marketing leader specializing in value creation for the C-suite. In her current role at CLA, Jennifer collaborates on strategy with executives of global manufacturing and distribution companies to accelerate results. Previously Jennifer served as a Global Business Acceleration Leader for Complete Manufacturing and Distribution (CMD). During her time with CMD, Jennifer lived and worked in Asia from 2015-2019. Prior to CMD, she spent 10 years in senior care technology. Jennifer started her career at Johnson Controls (JCI) and spent nine years in leadership roles; followed by five years at Rockwell Automation (ROK) leading c-suite strategy and marketing operations.
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