Two new milestone federal climate regulations from the Securities and Exchange Commission (SEC) and the Federal Acquisition Regulatory Council (FAR Council) are about to be finalized. The rules, which would mean increased public disclosure of emissions for many leading US companies, come on the heels of the recent enactment of major legislation in California. The combined impact of these regulations will materially change the landscape around transparency of greenhouse gas emissions and may ultimately have a positive climate impact by encouraging firms to measure and reduce their carbon footprint.
The new SEC rule is estimated to cover more than 5,000 companies and the FAR rule will cover nearly 6,000 companies. There is likely considerable overlap between the two groups. Estimates also indicate that more than 10,000 companies would be covered by one or both of the two new California disclosure laws, of which many will likely also be subject to the SEC and/or FAR proposals.
SEC: Publicly traded companies
The SEC proposed rule, formally titled “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” would require all publicly traded companies that currently report to the SEC to disclose their greenhouse gas emissions, identify climate-related risks, and share mitigating actions. The rule was first proposed in April 2022 and the SEC has indicated that a final rule could possibly be issued by the end of the year or slip into early 2024. The SEC says the proposal will provide investors with “consistent, comparable, and decision-useful information for making their investment decisions.”
The rule would require companies to disclose Scope 1, Scope 2, and under certain circumstances, Scope 3 emissions data. For Scope 3, reporting would only be required “if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.” Reports indicate that disagreements and uncertainty around the proposed structure for Scope 3 reporting and the “materiality” threshold have slowed down the finalization of the rule.
Though much will depend on the timing of a final rule, the SEC has indicated that climate disclosure requirements will be phased in over time. The rule as proposed outlines a three-year timeline, with requirements affecting the largest companies (Large Accelerated Filers) only during the first year. The following reporting year they would be joined by Accelerated Filers and Non-Accelerated Filers. Small Reporting Companies would not be affected until the third year of implementation.
The SEC received over 10,000 comments both expressing support for and opposition to the proposal. Some notable comments include a letter from House Republicans opposed to the rule. Another comment touched on issues like which lifecycle accounting models would be permitted. Following the passage of the California laws requiring GHG emissions disclosure, a group of California Representatives sent a letter to the SEC urging the adoption of strong Scope 3 requirements.
FAR updates: Government contractors
Separately, the federal government is moving forward with updates to the Federal Acquisition Regulation (FAR), the standards for government procurement at the federal level. The FAR is governed by the FAR Council, which is composed of the Department of Defense, NASA, and the General Services Administration. The FAR Council released the proposed rule, formally titled “Federal Acquisition Regulation: Disclosure of Greenhouse Gas Emissions and Climate-Related Financial Risk”, in November of 2022. It would require companies, both private and public, that do business with the federal government to disclose certain emissions information based on the size of their contract.
Specifically, the FAR updates would require entities with more than $7.5 million in government contracts to measure and disclose their Scope 1 and Scope 2 emissions; those with more than $50 million in government contracts would also have to disclose their Scope 3 emissions, discuss their climate-related risks, and set science-based targets to bring down emissions.
The FAR updates are significant in that the federal government is the largest purchaser of goods and services in the world, procuring nearly $700 billion in contracts in Fiscal Year 2022 alone. According to 2021 data, around 56% of the affected organizations are small businesses, based on the North American Industry Classification System. The timing of the finalized rule remains unclear, but reports indicate that it may come in early 2024.
How companies can prepare for forthcoming climate disclosure mandates
Research shows that companies large and small may not be prepared for the upcoming regulations. According to a survey by Boston Consulting Group, only 10% of organizations measured their emissions across all scopes in 2022. While larger, publicly traded companies are in a better position to adhere to SEC rules, data shows that 17% of S&P 500 companies and almost 35% of Russell 3000 companies failed to disclose climate-related risks in 2023.
Even companies that do disclose their emissions may not do so in a holistic, rigorous way; according to a recent report from the Task Force on Climate-related Financial Disclosures (TCFD), only 4% of public companies are currently disclosing information fully aligned with TCFD recommendations. Given that the proposed SEC rules are largely based on the TCFD framework, a lot of work lies ahead for companies to prepare for coming regulations.
Importantly, either directly or indirectly, thousands of businesses across the country will be affected by these rules. Even though a company may not be publicly traded or do a large volume of business with the federal government, it may be supplying or contracting with a company that does and thus may be asked by the affected company to provide emissions data to inform a public disclosure. In addition, over time it is expected that these requirements will expand to directly include more companies, including with the lowering of thresholds for FAR reporting.
Companies that haven’t started calculating and reporting emissions may find the initial process to be resource-intensive and complex. Here’s how you can minimize the impacts on your business and prepare for these upcoming changes:
Begin emissions measurement early. Measuring emissions requires specific data that many organizations may not be prepared to generate or provide. We recommend that companies start the process of data collection and reporting as soon as possible. This will help uncover information gaps and other implementation challenges before regulations take effect.
Assign internal stakeholders. Carbon accounting and reporting encompasses numerous stakeholders, including accounting and information technology, as well as legal and compliance teams. To ensure that all internal stakeholders follow compliance rules, it’s important to identify a key decision-maker who is responsible for working with any carbon accounting firm you engage with any internal or external resources to ensure accurate, thorough reporting.
Engage with experts. Emissions reporting should be based on individual regulations and the GHG protocols, and misreporting has consequences. To help minimize risk, consider bringing in carbon accounting experts to help demystify data collection, categorization, and carbon accounting methods to ensure more accurate, auditable results.
Please note the SEC received over 10,000 comments expressing support and opposition to the proposal including a letter from Carbon Direct concerning the importance of disclosing independently verified, accurate, and empirically-driven emissions and the necessity of traceability and transparency in identifying carbon offsets.