What is the SEC Climate Disclosure?

The SEC Climate Disclosure grew out of the growing momentum to enhance and standardize climate-related disclosures for public companies, most notably from The Task Force on Climate-related Financial Disclosures (TCFD) which received support from over 2,600 companies in 2021. This serves investors who are looking for more consistent, comparable, and reliable information about climate-related risks as they make investment decisions.  The relevant changes can be summarized in three points:

• Scope 1 and 2 Emissions Disclosure: Most large companies need to disclose their direct emissions (Scope 1) and indirect emissions from purchased electricity or energy (Scope 2). 

• Exclusion of Scope 3 Emissions: Scope 3 emissions, which include all other indirect emissions in the value chain, are excluded due to concerns around data reliability and availability. This is widely considered the biggest retraction from the original draft.

• Disclosure of Carbon Offset Use: If carbon offsets are used as a material component to achieve companies' climate goals, they are required to disclose the quantity, cost, and details (including project description, location, verifiers, etc.) of the carbon credits.

The changes represent one of the most comprehensive changes ever to SEC disclosure requirements, and unsurprisingly, have been halted by challengers contesting the disclosure.

If these challenges are successfully addressed, reporting requirements for Scope 1 and Scope 2 emissions will be phased in depending on the size of the business. The earliest disclosure requirement would start in fiscal year 2025. For more details on the implementation timeline, check out this legal summary. 

The U.S. Corporate Emissions Disclosure Gap

U.S. companies dominate two-thirds of the world's stock market value. However, only 45% disclose their direct emissions (Scope 1 and 2), and a mere 29% reveal their indirect value chain emissions (Scope 3). In this respect, US companies lag behind their global peers, with 73% of companies globally reporting Scope 1 and 2 emissions, and 45% reporting on Scope 3 emissions.

Transparency and disclosure are critical in keeping companies accountable for achieving their climate goals. A report reveals the U.S. will fall far short of its current trajectory, only achieving an estimated 37% reduction in emissions by 2050 compared to 2005 levels. The SEC climate disclosure requirements will therefore increase total reported emissions and address this shortfall. 

Nevertheless, without accounting for Scope 3, the disclosure leaves a considerable proportion of total emissions on the table. Since Scope 3 considers a company’s entire value chain, one study estimates that they account for over 70% of a company’s total emissions on average and over 99% in high-polluting industries. 

Implications to Businesses and Carbon Markets

These new requirements would entail significant additional investments and influence how corporate companies interact with the carbon market. Key implications include:

• Measuring climate risks and emissions could be expensive: Staffing, training, and paperwork related to this disclosure add to business operations costs. The SEC expects that compliance reporting costs U.S. businesses $3.8 billion annually and could rise to $10.2 billion with the new climate disclosure requirements. Also, global companies might face different disclosure requirements, which further increases compliance costs. For example, other recent regulatory frameworks like the European Union's Corporate Sustainability Reporting Directive and California's SB253 go a step further, mandating all businesses disclose their Scope 3 emissions.

  
  

• Companies must build internal expertise to assess carbon offsetting opportunities: Internal expertise is required to assess credit quality and alignment with emission reduction goals, which may depend on budget, purchasing volume, and branding alignment. For instance, Stripe and Shopify favor engineered carbon removal credits, while Netflix’s 1.5 million credits was sourced from 17 different nature-based carbon projects. Moreover, businesses may want to align credit purchases with their social impact goals. For instance, a food and beverage company may seek credits with co-benefits around ending hunger, and a transportation company may be interested in credits related to fuel efficiency or electric vehicle adoption. Project developers, on the other hand, will need to present their project offerings clearly in terms of size, credit availability, methodologies, and alignment with industry-leading standards and principles to stay competitive.

  
  

• Rule-mandated reporting creates greater demand for carbon credits and transparency improvements: The SEC Climate Disclosure mandates reporting on climate risks, influencing the carbon market by driving demand for high-quality carbon credits and transparency improvements. This could particularly increase demand for high-quality monitoring, reporting, and verification (MRV) processes. Many current MRV processes are predominantly manual. These methods are slow and prone to error, raising concerns about reliability and integrity. We estimate digital MRV technologies to become a necessary component of future carbon projects in light of the disclosure rules. You can read more about these processes in our primer on this topic. 

Concluding thoughts

This shift towards climate transparency underscores the need for businesses to invest in sustainable practices and align their strategies with emission reduction goals, ultimately contributing to global efforts to combat climate change. Understanding this need, NetaCarbon aims to build systematic approaches and methodologies that facilitate high-quality carbon projects and reduce the overall climate cost to our planet and globally underserved communities.