The US Securities and Exchange Commission’s (SEC) climate disclosure rules that have been eagerly awaited by many in the ESG (Environmental, Social, and Governance) industry were formally adopted today, March 6th, 2024, with a 3 to 2 vote. This indicates that the risk posed by climate change and the need to transition to a cleaner, low-carbon future is now formally recognized at the highest levels of oversight in the global economy.
There has been significant debate about whether to include Scope 3 emissions in the rules, which are indirect emissions along the value chain. The SEC’s focus on reporting Scope 1 and 2 emissions isn’t surprising, as defining Scope 3 boundaries can be challenging across different types of businesses. Experience from the UK’s mandatory carbon reporting rollout emphasized the importance of data quality over quantity.
While various technology startups have been building tools to estimate Scope 3 emissions, using extrapolation and AI techniques, the focus on properly audited, financial grade Scope 1 and 2 data is likely to be more effective, after all – one company’s Scope 3 emissions are another company’s Scope 1 or 2 emissions.
Another less-discussed aspect of the requirements is the need to assess direct and indirect physical risks of climate change on businesses and report on their resilience to extreme weather events and long-term changes in temperature and water availability. That being said, the agency decided to keep the climate disclosures legally binding, a step that opens up companies to legal liability if they misstate their emissions
While the rule was subject to much debate and might face legal challenges once adopted, it is one of the many new regulatory disclosure requirements drafted or enacted worldwide in recent years with the aim to provide more comparable and transparent information on companies’ impacts and risks. With similar rules adopted in California and Europe, it sends a strong signal to markets worldwide and may mark the beginning of a new era of mandatory ESG disclosures in North America.
Customers of our Sustainability Reporting software can rest assured that the US SEC regulations and related disclosures are fully covered. Our solution includes advanced audit-ready outputs on scope 1, 2, and 3 greenhouse gas emissions; automated physical climate risk analysis; ESG reporting; and can connect directly to Environmental, Health, and Safety (EHS) systems needed to manage risks and protect lives on the ground.
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