Published: March 12, 2024
The new US Securities and Exchange Commission (SEC) rule requires companies registered under its mandate to disclose at least some material climate-related information, such as risk management practices and risks to its strategy or financial performance.
Certain larger companies that view greenhouse gas (GHG) emissions as material will need to disclose them under the rule. Utilities, energy and materials were the top sectors identifying climate transition and physical risks as material in the 2023 S&P Global Corporate Sustainability Assessment.
GHG emissions disclosure has been rising steadily over the past five years, according to S&P Global Sustainable1 data. Nearly half of the 2,590 US companies in our analysis reported Scope 1 and Scope 2 emissions in 2022.
Scope 1 and Scope 2 disclosure rates are already high in many sectors for large-cap companies such as those in the S&P 500, but disclosure is less common among smaller companies.
The US Securities and Exchange Commission on March 6 finalized its long-anticipated rule requiring thousands of publicly traded companies to disclose certain climate-related information.
While the final rule takes a much narrower approach than what the SEC proposed in 2022, it marks a significant change in the level of climate-related information publicly-listed companies must disclose in the US. The rule requires companies to disclose details related to climate targets, plans for meeting those targets, their oversight and governance practices, and climate-related financial expenditures.
Some larger companies will be required to disclose Scope 1 and Scope 2 greenhouse gas (GHG) emissions — or the emissions associated with their operations and with their purchased energy — but only if the companies deem those emissions to be material. A provision to require some companies to disclose Scope 3 emissions, or those that occur up and down a company’s value chain, was dropped from the final rule.
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Highlights of the SEC’s climate disclosure rule The rule requires SEC-registered domestic or foreign companies to include climate-related information in registration statements and annual reports. Key disclosures include:
Source: US Securities and Exchange Commission rule on "The Enhancement and Standardization of Climate-Related Disclosures for Investors" and related Fact Sheet, March 2024 |
Much of the SEC climate disclosure rule focuses on qualitative information about a company’s strategy to assess climate-related risks that have a material impact on the company, and how the company has worked to mitigate or adapt to material climate risks via transition plans, scenario analysis or other actions. These disclosures will apply to SEC registrants regardless of size, but they will become effective over time to give smaller companies more time to prepare. The other major component of the rule is the collection and disclosure of GHG emissions for large companies that deem their emissions to be material.
In the final rule, the SEC wrote that its reporting framework has elements in common with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations, calling it “an appropriate reference point for the final rules.”
The rule’s required disclosures will be phased in over time. Large accelerated filers — companies with an initial public float of at least $700 million and a subsequent public float of at least $560 million — will be required to start submitting disclosures in their registration statements and annual reports from fiscal year 2025, and GHG emissions (if material) from fiscal year 2026.
Our analysis of the US market finds that while some sectors have made voluntary GHG disclosure commonplace over the past few years, disclosure remains the exception rather than the rule for most. Overall, voluntary disclosure of Scope 1 and Scope 2 emissions has been rising steadily in the US since 2018, but less than half of companies publish that data, according to an analysis of S&P Global Sustainable1 data. This analysis includes a consistent sample of 2,590 US-based companies of all sizes present in the Trucost Environmental universe each year since 2018.
In 2022, the most recent year for which data is available, 47% of the companies in our analysis disclosed Scope 1 emissions, and 45% disclosed Scope 2 emissions.
The materials (77%) and utilities (72%) sectors had the highest levels of Scope 1 emissions disclosures, and Scope 2 disclosure levels in these sectors were similar at 75% and 70%, respectively. In several sectors, however, voluntary disclosure has not become common. Only about one-third of companies in the financials (34%), healthcare (32%) and communication services (30%) sectors disclosed Scope 1 emissions in 2022, with similar levels of Scope 2 disclosure.
Looking across the US market, we find that some sectors may be more prepared than others to supply these emissions disclosures.
Certain larger companies that view greenhouse gas (GHG) emissions as material will need to disclose them under the SEC’s rule. Allowing companies to make that determination is a departure from the SEC’s 2022 proposal, which suggested requiring emissions disclosure.
Data from the 2023 S&P Global Corporate Sustainability Assessment (CSA) shows that at least some US companies in every sector view climate transition and physical risks as material. The utilities (61%), energy (41%) and materials (40%) sectors had the highest response rates for selecting this topic.
In this part of the CSA, companies can select up to three internal material issues (issues that were material to enterprise value creation) and up to two external material issues (issues that were material in terms of impacting external stakeholders).
The SEC’s final rule narrowed the scope of its emissions disclosure requirements to cover mostly larger companies — what the SEC refers to as large accelerated filers.
The rule requires domestic large accelerated filers and certain foreign registrants to disclose Scope 1 direct emissions from operations and Scope 2 indirect emissions from purchased electricity or other forms of energy, if the filer deems those emissions to be material.
Emissions disclosure is not required from what the SEC calls emerging growth companies (or those with total annual gross revenues of less than $1.2 billion) or smaller reporting companies (those with a public float of less than $250 million or those less than $100 million in annual revenue and a public float of less than $700 million).
S&P Global Sustainable1 data shows a significant gap between the disclosure rates of larger companies for both Scope 1 and Scope 2 emissions, as represented by those in the S&P 500, and smaller ones, as represented by constituents of the S&P SmallCap 600. The S&P 500 includes 500 leading US-listed companies with a minimum market capitalization of $15.8 billion. The S&P SmallCap 600 includes 600 US-listed companies with market capitalizations between $900 million and $5.8 billion.
Depending on their public float, small-cap companies may fall under the emission disclosure requirement as large accelerated filers if they also decide the emissions are material. S&P Global Sustainable1 data shows there is a large gap in voluntary disclosure rates between constituents of the S&P 500 and S&P SmallCap 600, even among sectors where disclosure has become nearly universal for the largest companies.
For example, all S&P 500 constituents in the consumer staples, energy and materials sectors disclose Scope 1 emissions. But in the S&P SmallCap 600, 56% of consumer staples companies, 69% of energy companies and 80% of materials companies disclose Scope 1.
A company disclosing emissions under the SEC rule would have to do so in terms of carbon dioxide-equivalent (CO2e) and exclude the impact of any purchased or generated offsets. Companies will only have to disclose specific kinds of GHGs, such as methane, if the company decides that particular GHGs are “individually material” to the company.
Much of the market-led demand for climate disclosures involves the extent to which this data is comparable and reliable. To address this challenge, the SEC is requiring companies that are subject to the Scope 1 and Scope 2 emissions disclosure requirements to obtain attestation reports that provide a degree of assurance that their emissions data is not misstated. The attestation requirement will be phased in over time.
The 2023 S&P Global CSA assessed companies with Scope 1 and/or Scope 2 disclosures on whether they worked with a third party to verify their data. Few US companies appear to have done so, according to the data. Across a sample of 2,782 US-based companies, about 18% had their Scope 1 and Scope 2 emissions verified externally. The percentage is only slightly higher for larger companies, with 22.6% having obtained external verification of their Scope 1 emissions and 22.3% doing so for Scope 2 emissions.
There are gaps in disclosure levels between large and small companies on a range of other climate-related topics, data from the 2023 CSA shows. Across a sample of 2,782 US-based companies, disclosure rates on climate-related governance, climate risk management, and the financial risks and opportunities of climate change vary widely, particularly when comparing large companies to small- to medium-sized enterprises (SMEs) (or those with 500 or fewer employees). For example, more than 40% of large companies disclosed information on their climate risk management, but only 12.5% of SMEs did. Less than 5% of SMEs disclosed information about the financial risks and opportunities of climate change.
On a sectoral basis, materials and utilities companies had the highest disclosure rate across these four topics. These sectors include industries such as power generation, cement manufacture and other economic activities that face pressure to decarbonize. About half of utilities and materials companies in this analysis disclosed information on the financial risks of climate change, according to the 2023 CSA. Other sectors with high disclosure levels include consumer staples, which includes agriculture and food companies; and real estate.
Disclosure of financial risks and opportunities related to climate change was particularly low for the financial sector, with only 8.2% of firms disclosing information about financial risks and 8.9% disclosing information about financial opportunities.
The rule’s required disclosures will be phased in over time. Large accelerated filers will be required to start submitting disclosures in their registration statements and annual reports from fiscal year 2025, and GHG emissions (if material) from fiscal year 2026.
The rule requires companies to disclose whether exposure to risks from severe weather events materially impacted the estimates underlying their financial statements. The SEC listed several climate hazards as examples of events that could have this kind of impact, including hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise.
Companies will also have to disclose some climate-related financial costs. For example, companies must disclose their annual aggregated expenditures on carbon offsets and renewable energy credits if those expenditures are a material component of their plan to achieve climate-related targets or goals.
The SEC's rule comes as losses from climate change-related weather events are on the rise and projected to continue climbing.
Scientists are increasingly making the connection between extreme weather events and climate change. Recent research applied the S&P Global Sustainable1 Physical Risk Exposure Scores and Financial Impact dataset to companies in the S&P 500 to measure the financial costs of climate hazards on corporate assets for the largest US companies. We found that by the 2050s, the costs of the physical hazards of climate change will equal an average of 3.2% per annum of the value of real assets held by companies in the index, absent adaptation. That average per-annum figure rises to nearly 6.0% by the 2090s. These costs are annual and cumulative over time, representing a material financial risk for many companies.
The SEC’s rule also comes as standard setters and lawmakers seek to create a baseline for corporate sustainability-related disclosures. In the US, two California laws enacted in 2023 require certain public and private US companies that do business in the state to disclose their climate-related financial risks and their Scope 1, Scope 2 and Scope 3 emissions.
The International Sustainability Standards Board issued its first two global sustainability disclosure standards in June 2023, effective from Jan. 1, 2024. Although not binding, the standards could form the basis for a unified climate and sustainability disclosure framework for companies and investors globally.
The ISSB's general requirements standard, or IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, asks companies to disclose sustainability-related risks and opportunities. The climate-related disclosures standard, or IFRS S2 Climate-related Disclosures, asks for specific metrics such as greenhouse gas emissions as well as disclosure of climate-related physical and transition risks and whether companies use scenario analysis to gauge their resilience to climate change’s impact on markets and policy. Under S2, companies reporting Scope 3 emissions can have a temporary exemption for a minimum of one year after the standard becomes effective, giving them more time to implement the Scope 3 requirement.
The EU has widened the reach of its sustainability reporting regulations for companies through the reform of its Non-Financial Reporting Directive to create the Corporate Sustainability Reporting Directive (CSRD), which is being phased in from Jan. 1, 2024. Companies in the scope of CSRD are subject to a set of sustainability standards called the European Sustainability Reporting Standards (ESRS). The ISSB and European Commission have stated that the ESRS climate disclosure requirements have a high degree of alignment to the ISSB climate standards, where they overlap. Under the ESRS, companies are required to disclose material environmental, social and governance impacts and risks within their upstream and downstream value chains – for example, Scope 1, 2 and 3 emissions as well as total greenhouse gas emissions.
At the SEC's March 6 open meeting, SEC Chairman Gary Gensler acknowledged "many companies that have overseas operations ... may have to comply with other jurisdictions' climate disclosure rules."
He continued: "I think that it's important for the US to have its own standards based on US law, based on the economics of our markets, based upon what investors here are using to make investment decisions.”
