United States: SEC Announcements on Climate Transparency

The Securities and Exchange Commission (SEC), the U.S. federal regulatory and supervisory agency for financial markets, is scheduled to issue its final proposal for a climate transparency regulation in April 2023.

In March 2022, the organization put out for consultation a document proposing a climate reporting framework for listed companies: “The Enhancement and Standardization of Climate-Related Disclosures for Investors”^[1].  SEC Chairman Gary Gensler welcomed this step forward, which “will provide investors with consistent, comparable and decision-useful information for making their investment decisions and will provide consistent and clear reporting obligations for issuers ^[2].”

If adopted, this proposal would require detailed reporting by U.S.-listed companies covering 3 categories of climate reporting: 

1. Exposure to climate-related risks
   This category includes physical risks (for example, wildfires and floods) and transition risks, including regulatory, technological and reputational risks.
   Reporters will be asked to report on these risks’ strategic, financial and operational impacts and their associated governance and risk management processes.
   
   
2. Greenhouse gas emissions
   Listed companies will be required to provide an audited report on greenhouse gas emissions related to their activities (Scope 1) and energy purchases (Scope 2). Filers who have a transition objective or whose other indirect emissions are significant will also have to report on the emissions generated in the upstream and downstream activities of their value chain (Scope 3).
   
   
3. Transition targets and strategy
   Listed companies will be required to disclose any existing targets for emissions reductions, energy use, nature conservation, or revenue from low-carbon products.

This proposal was the subject of a public consultation gathering more than 15,000 comments^[3]. Faced with an unprecedented volume of reactions and proposals, the agency initiated a process of adjustment and postponed the publication of the final version of its rule from the end of 2022 to April 2023. There is no assurance that these adjustments incorporate all of the comments, but their review provides insight into the reception of this proposal and its most controversial elements^[4][5].

• Praise for the expected impact and for the standardisation and alignment efforts
  Supporters of the proposal welcome the ambition of the text and its expected impact on environmental protection, investor information and protection, standardisation of climate reporting, improved transparency and alignment with other international standards. These positive comments suggest that the SEC should strengthen the alignment of the text with the International Sustainability Standards Board, the TCFD recommendations and the European Union rules. Some also reject the idea of selective Scope 3 reporting and would like to see this requirement apply to all listed companies. 

• Reticence about Scope 3 emissions reporting
  Scope 3 greenhouse gas emissions reporting is perhaps the most controversial point in the text, with many comments calling for the removal of this requirement, a more limited application or a longer implementation period. This was the most frequent request made by comments opposed to the text. This reluctance is mainly based on the complexity of collecting and verifying Scope 3 data, the inability of smaller companies to provide this data, and, more generally, their lack of reliability.  

Both favourable and unfavourable comments often aligned on two suggestions: the removal of the Scope 3 reporting requirement and the extension of the overall implementation period of the regulation. The challenge for the SEC will be to develop a final proposal by April that strikes the right balance between its supporters and opponents. 

These regulations were to be implemented with the 2024 annual report for the 2023 fiscal year for large companies. Smaller companies will have an additional year to prepare and will apply these requirements to their 2024 reporting. Finally, in order to take advantage of the publication of new information on Scope 1 and Scope 2 emissions, Scope 3 organisations will have to provide their first reporting on the subject one year after the rest of the requirements are in place. 

As the SEC has postponed the publication of the final version of the text, market participants expect the implementation schedule to be delayed by one year. The SEC has not yet provided a new indicative timetable.

^[1] “The Enhancement and Standardization of Climate-Related Disclosures for Investors”, SEC
^[2] SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors, SEC
^[3] Comments for The Enhancement and Standardization of Climate-Related Disclosures for Investors, SEC
^{[4] What Public Comments on the SEC’s Proposed Climate-Related Rules Reveal-and the Impact They May Have on the Proposed Rules, Mintz
[5]} Review of Comments on SEC Climate Rulemaking, Harvard Law School Forum on Corporate Governance

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