by Mike Bendewald, VP Sustainability Solutions
The wait for clarity is not over, but things are coming more into focus.
Two years after initially proposing corporate climate-related disclosure requirements in 2022, the U.S. Securities and Exchange Commission (SEC) finalized its much-anticipated rule on March 6, 2024. The final rule specifies which companies are required to report, what information they are required to disclose, and when staged deadlines go into effect for complying.
The rule is being challenged in court and the SEC has stayed it to mitigate regulatory uncertainty for affected companies until the litigation proceedings conclude. This was anticipated and while it may delay disclosure deadlines, it still heralds an increase in Federal pressure on public companies to be more transparent with their contributions to greenhouse gas emissions.
It is worth noting that earlier 2010 SEC climate guidance remains in effect and that there is a growing list of other forms of disclosure on the rise including local building energy disclosure and performance policies, EU regulations like CSRD, and other voluntary reporting like CDP, GRESB, and TCFD.
But how will the commission’s most recent proposed rules affect your facilities’ GHG reporting and sustainability strategy? In this blog post, we’ll take a closer look at what the final rules will mean for facilities and energy managers, sustainability professionals, and real estate investors.
The new rule (all 886 pages of it!) — “The Enhancement and Standardization of Climate-Related Disclosures for Investors” — specifies the climate-related information that publicly traded companies must disclose in registration statements and annual reports.
The SEC’s rule builds upon a foundation of both the Task Force on Climate-related Financial Disclosures (TCFD) framework and the GHG Protocol. Importantly, though, per the SEC, its new rules “diverge from both of those frameworks in certain respects where necessary for our markets and registrants and to achieve our specific investor protection and capital formation goals.”
In general, the SEC rules will apply to all public companies under its jurisdiction, inclusive of domestic SEC registrations as well as select qualifying foreign companies. Precisely what information companies will be required to include in their disclosures and the effective date for compliance varies by company type but does generally include disclosures about governance and oversight of risk, as well as assurance over GHG emissions (when applicable).
The climate-related information companies will be required to disclose include physical risk (such as acute or chronic exposure to the potential for wildfire or flood damage) and transition risk (involving how a company adapts to a changing landscape of policy and legal, technology, market, and reputational factors during the shift to a low-carbon economy). Some companies must also report aspects of their GHG emissions.
The common denominator for all of the climate-related information is that, for it to be required under the SEC rule, it must pass a financial materiality threshold. Per Columbia University’s Sabin Center for Climate Change Law, “a matter is material if there is a substantial likelihood that a reasonable investor would consider it important when determining whether to buy or sell securities or how to vote or such a reasonable investor would view omission of the disclosure as having significantly altered the total mix of information made available.”
For reporting climate-related physical and transition risks, the SEC rule will apply to all publicly traded U.S. companies and select international companies. An estimated 7,000 domestic companies fall into this category.
For reporting GHG emissions, only companies classified as large accelerated filers (LAFs) and accelerated filers (AFs) will be required to disclose emissions. LAFs are defined as having at least $700 million in shares held by public investors. AFs are defined as having $75–700 million in public shares, according to the SEC. Non-accelerated filers (NAFs), smaller reporting companies (SRCs), and emerging growth companies (EGCs) are exempt from GHG emissions reporting.
The SEC estimates that roughly 2,800 U.S. companies and 540 foreign companies with business in the U.S. will need to report emissions information, as reported by the Associated Press.
Compliance will go into effect with staggered deadlines, dependent upon your company’s classification and the information being reported.
The bottom line: if you’re an LAF or AF, it’s time to start getting your climate risk disclosure house in order now, because your first compliance deadline is just 1–2 years away.
Climate-related disclosures, financial statements, and emissions reporting (if applicable) span several major buckets of information:
As expected, the SEC will require that qualifying companies report their Scope 1 (direct emissions) and Scope 2 (indirect emissions from purchased energy, especially electricity) GHG emissions.
Based on the original SEC rule proposal, your company may have also anticipated a need for Scope 3 reporting — the other indirect emissions that happen upstream and downstream in your supply or value chain. But the SEC stopped short of mandating Scope 3 reporting, which was excluded from the final rule.
Even so, it’s important not to overlook Scope 3 in bigger-picture sustainability strategy. Investor interest is on the rise, after all, and related requirements for Scope 3 are set to take effect soon, including in California and the European Union.
There are a lot of details and fine print amidst the 886 pages of the SEC’s final rule. (This is one reason why companies have a year or more before the first of the staged compliance deadlines goes into effect.) But this handy five-point checklist of questions can help you start to wrap your head around the implications for your company and your role within that company:
Following the new rule may not come easy for any company, depending on how far along they are in their own sustainability journey. But broadly speaking, owner-operated facilities with a relatively manageable number of sites under their thumb will find it simpler to achieve compliance than REITs, which could have anywhere from dozens to hundreds of assets to track.
REITs will be harder pressed to collect the necessary data from far-flung, externally operated sites in the required timelines. Advanced data and analytics solutions will be critical to success, along with expert partners with experience in accurate reporting across large portfolios.
Whether the SEC rule directly affects your company or not, every organization can consider its end purpose: “to elicit more consistent, comparable, and reliable information ... to enable informed assessments of the impact of climate-related risks.”
Assessing—and often disclosing—climate risk is a best business practice today, regardless of SEC requirements. By getting a firm grip on your facilities’ contributions to and vulnerability to climate change, you can help power better-informed decisions for your business, now and into the future.
Contact a Mantis pro to learn how Mantis can support your climate disclosure success with portfolio-wide facilities optimization.
