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In 2024, the Securities and Exchange Commission (SEC) released a groundbreaking final rule on climate-related disclosures for businesses, sparking immediate legal challenges across multiple jurisdictions. Simultaneously, California passed its climate-related disclosure laws, SB 253 and SB 261, in 2023, and SB 1305, also facing legal scrutiny. These legislative moves represent significant shifts in regulatory landscapes within California and the U.S. and for global businesses.
The SEC Climate Disclosure Rule
Effective March 6, 2024, the SEC’s final rule mandates most registrants to disclose extensive climate-related information. This includes:
- Descriptions of material impacts of climate-related risks on business strategy and outlook.
- Processes for identifying, assessing, and managing these risks.
Larger companies must also report scope 1 and 2 greenhouse gas emissions, with compliance dates staggered, beginning in 2026 for the largest entities. The intent is to provide investors with consistent, comparable, and reliable climate-related information, thus enhancing transparency and accountability.
Understanding Scope 3 Emissions
Scope 3 emissions encompass a broad range of indirect emissions throughout a company’s value chain, apart from the direct emissions and purchased electricity. These include emissions from suppliers’ manufacturing processes, transportation of goods, business travel, and even the end-of-life treatment of products. For many companies, Scope 3 emissions constitute the bulk of their carbon footprint. For instance, Coca-Cola reports that approximately 90% of its total emissions fall under Scope 3 due to factors like transport, travel, and packaging.
The Challenge of Measuring Scope 3 Emissions
Quantifying Scope 3 emissions is a complex task. Despite the growing demand for this data, many companies struggle with its accurate measurement due to the extensive and varied sources of these emissions. According to a Boston Consulting Group survey, 53% of companies reported some Scope 3 data in 2022, a significant increase from 34% in 2021. This upward trend indicates a rising acknowledgment of the importance of comprehensive emissions reporting.
California’s Climate Disclosure Laws
California’s climate laws, SB 253 and SB 261, signed by Governor Gavin Newsom on October 7, 2023, go even further. SB 253 requires businesses with annual revenues over $1 billion to disclose scope 1, 2, and eventually scope 3 emissions, starting in 2026 for the first two scopes and 2027 for the third. SB 261 demands that companies with revenues over $500 million prepare public reports on climate-related financial risks, also starting in 2026.
These laws are pivotal due to California’s significant economic influence, potentially setting a precedent for other states and countries. Businesses operating in California must adapt to these stringent requirements, impacting their operational and financial strategies.
In addition to SB 253 and SB 261, California has also enacted SB 1305, which focuses on enhancing transparency and accountability for climate-related risks. SB 1305 requires large corporations to disclose detailed information about their climate risk mitigation strategies, including measures to reduce greenhouse gas emissions and adapt to climate change impacts. This law aims to ensure that companies are not only reporting their emissions but also actively working to mitigate their environmental impact.
Regulatory Landscape and Corporate Response
Globally, there is a push for more rigorous climate-related disclosures. In the European Union, regulations will soon require large companies to report their full-scale emissions. California has also implemented laws mandating Scope 3 reporting for many large businesses. These regulations are part of broader efforts to mitigate climate change by holding companies accountable for their environmental impact.
However, the SEC’s decision to delay Scope 3 reporting requirements has alleviated some immediate concerns for U.S. companies. Many businesses had expressed apprehensions about the high costs and potential legal liabilities associated with measuring and disclosing these emissions. As Brad Caswell from Linklaters noted, this decision allows public companies to “take a breath.”
The Broader Impact
Despite legal uncertainties, these regulations signify a shift from voluntary to mandatory climate disclosures, setting higher standards for corporate transparency. Businesses must now develop robust climate reporting capabilities, akin to financial reporting, to meet these new demands.
For companies, especially those operating across state or national borders, the implications are vast:
- Operational Adjustments: Companies must integrate climate risk assessments into their business models and strategic planning.
- Financial Impact: Preparing for compliance involves significant costs, including establishing internal control systems and obtaining third-party verifications.
- Investor Relations: Transparent climate reporting can enhance investor trust and meet the growing demand for sustainable investment opportunities.
The SEC’s recent decision underscores the evolving dynamics of corporate climate disclosures. While the delay in mandatory Scope 3 reporting may offer short-term respite for U.S. companies, the broader trend towards increased transparency and accountability in emissions reporting is clear. Businesses must continue to adapt, innovate, and collaborate to meet the rising demands of regulators, investors, and society at large.
California’s new climate laws and the SEC’s disclosure rule are reshaping business requirements beyond state lines. As these regulations push for greater climate transparency, businesses worldwide must prepare for a new era of accountability. By adopting rigorous climate data management practices, companies can not only comply with these regulations but also gain a competitive edge in a rapidly evolving market landscape.
Join our upcoming USA | Certified Sustainability (ESG) Practitioner Program, Leadership Edition 2024, on Sept. 26-27 & Oct.1, 2024 to understand new regulations, manage effectively scope 3 emissions, adapt to regulatory changes and enhance investor relations.
