SEC's Climate Disclosure Rule: Navigating Anticipation and Revision

After nearly two years of anticipation, the Securities and Exchange Commission (SEC) is on the brink of approving its climate-related disclosure rule, albeit in a likely diluted form. Initially proposed in March 2022, the rule aimed to mandate public companies to divulge how climate-related risks impact their strategy, business model, and future prospects, along with details on board and management oversight and plans for carbon footprint reduction.

However, the proposal garnered over 16,000 comments, with significant concerns raised about the feasibility of reporting Scope 3 emissions and the grounding of climate-related disclosures in materiality. The U.S. Chamber of Commerce recently filed a lawsuit against California's similar disclosure law, foreshadowing potential legal challenges to the SEC's rule.

Despite these hurdles, the SEC, led by Chair Gary Gensler and supported by its Democratic majority, is expected to pass the rule. Nonetheless, it's anticipated to undergo substantial revisions, likely with key requirements being weakened or removed.

One contentious aspect likely to be axed is the mandate for reporting Scope 3 greenhouse gas (GHG) emissions, which tracks emissions across supply chains. This requirement faced significant pushback from both public and private companies due to tracking complexities and unreliability of metrics.

Experts predict that reporting Scope 1 (direct) and Scope 2 (indirect from purchased electricity) GHG emissions will likely remain, possibly mirroring the framework established by the Task Force on Climate-Related Financial Disclosures (TCFD). This move could streamline reporting and ease implementation for companies while providing investors with valuable insights into climate governance, risk management, and targets.

The SEC's Office of the Chief Accountant is also set to weigh in, particularly on changes to the rule's materiality standard. The original proposal's 1 percent "bright line" threshold for materiality drew criticism from the business community. Additionally, concerns persist regarding accounting for the impact of severe weather events, which lack standardized evaluation methods.

Another contentious issue is the attestation requirement, necessitating outside firms to validate Scope 1 and Scope 2 GHG emissions. If upheld, this could strain the availability of niche consultancy services for GHG attestation, potentially creating a bottleneck in compliance efforts.

Overall, while the SEC's climate-related disclosure rule is expected to pass, it will likely undergo significant revisions to address concerns raised during the comment period and ensure practical implementation for companies while meeting investor demands for transparency on climate-related risks and opportunities.

By fLEXI tEAM