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SEC Climate Disclosure Rule: Why U.S. Companies Need to Think Beyond the Legal Debates

May 10, 2024 by Capgemini

The U.S. Securities and Exchange Commission (SEC) issued a final rule in March of 2024 that standardizes climate-related disclosure requirements for public companies that meet the policy’s reporting criteria.

Response from state legislatures and environmental groups on either side of the aisle has been swift, with the ruling put on hold just days after it was issued – indicating that this could just be the beginning of how these regulations could evolve, and what climate risk reporting standards could look like in the future.

While the rule is one step closer to more stringent emissions reporting standards across the United States, the decision also rolls back some key requirements initially proposed by the SEC two years ago.

Under the revised directive, public companies are no longer required to explicitly disclose Scope 3 greenhouse gas (GHG) emissions, which includes all indirect emissions produced across an organization’s value chain. The rule also brings a level of obscurity to Scope 1 (direct emissions) and Scope 2 (indirect emissions related to energy used in company operations) reporting requirements, as companies are only mandated to disclose climate-related risks determined to have or are likely to have a “material impact” on the business’ strategy, operations, or financial situation – with the organization determining thresholds for materiality.

The new rule also removes requirements for companies to report on the climate expertise of their boards of directors and extends compliance timelines for filing organizations. Smaller reporting companies (SRCs), and emerging growth companies (ERCs) will be exempt from providing GHG disclosures.

Companies will be required to provide impacts and material impacts caused by severe weather or other natural conditions in the footnotes for financial statements. Organizations will also need to disclose if carbon offsets or RECs are a part of their climate goals.  

The SEC said in a statement that the commission considered more than 24,000 comment letters submitted in response to the 2022 proposal when making its decision.  

Companies must prepare to meet emission reporting standards 

Despite rollbacks, the SEC rule still advances the climate risk reporting standards on a federal level, and public organizations should be aware of what’s needed to transform operations to meet these requirements.  

Companies also need to understand how emerging state-level policies could impact their business in the future. For example, California’s greenhouse gas disclosure law requires companies with more than $1 billion in annual revenue to begin reporting Scope 1 and Scope 2 emissions data by 2026,with Scope 3 disclosures beginning in 2027. A second proposed rule will expand climate-risk disclosure requirements to businesses with $500 million or more in revenue.  

US-based organizations with securities listed on the European Union (EU) market and non-listed companies that do business in the EU and meet defined revenue requirements are also subject to the Corporate Sustainability Reporting Directive, which includes disclosure requirements for Scope 1, Scope 2, and Scope 3 emissions. 

People are also becoming more conscious of climate change risks – something companies should pay attention to when meeting consumer demand. According to Pew Research, 74 percent of Americans say they support US participation in international climate change efforts. Sustainability concerns are also influencing how consumers make purchasing decisions. Capgemini research found that more than 60 percent of global consumers purchasing products from brands they consider to be sustainable in 2023.  

It’s unclear how quickly other states will follow California’s lead and introduce their own climate disclosure rules, but organizations can expect an increasingly complex regulatory environment for years to come. Even with this complexity, there are ways for companies to future-proof their organizations and build a foundation that can provide the intelligence needed to swiftly meet evolving mandates and address consumer concerns.  

Establish a connected data foundation for emissions reporting

The biggest barriers to entry for comprehensive sustainability reporting are a lack of visibility into emissions data across different parts of the organization, and siloed data within the partner ecosystem. A holistic view of direct and indirect emissions is essential to properly meet Scope 1, Scope 2, and Scope 3 reporting requirements.

Artificial intelligence and machine learning can aggregate, consolidate, and analyze data from different sources to provide a comprehensive view of both direct and indirect emissions across the value chain. Predictive analytics can also be applied to support smart models that forecast carbon footprints and identify emission-reduction opportunities over time.

Integrating financial data alongside emissions reporting gives leaders the insights needed to effectively assess climate risk, transitional risks, operations, and compliance to make informed decisions on current and future sustainability plans.

Educate and upskill workers to integrate sustainability goals across the business

Different companies have different overarching sustainability goals, and how those goals translate across the value chain can vary depending on department or job responsibility. For example:

  • A marketing team may be focused on mitigating greenwashing risk and communicating sustainability initiatives to customers. 
  • Logistics leaders may be more focused on optimizing supply chains to lower emissions. 
  • In IT, leaders may look at assessing emissions associated with computing costs and technology infrastructure.  
  • For operations, the challenge will be decarbonizing existing processes while still meeting throughput and production demand.  
  • R&D organizations must determine how to use emerging climate technologies to unlock value for their business.  
  • And, though C-Suite leaders now understand the business case for sustainability, they still face constraints for capital allocation and payback periods for sustainability investments that they must navigate.  

Each department has its own role to play in lowering a company’s carbon footprint. Integrating climate initiatives into overall company culture and upskilling employees on sustainability management practices related to their business function aligns the organization towards shared sustainability goals. Leaders must also ensure they’re building the right teams with the skillsets needed to execute on sustainability initiatives.

Work collaboratively with partners to track emissions across the ecosystem

Indirect emissions tracking needed to meet Scope 3 reporting requirements requires close alignment with partners to share sustainability data across the value chain. This is especially important when developing cohesive and sustainable supply chain operations, which often incorporates logistics and a network of manufacturers and suppliers, each with their own sets of emissions data. A combination of shared organizational goals and connected data infrastructure can unite entities and help leaders make better climate impact decisions.

Leading sustainability

The SEC’s climate disclosure rule is just one piece of a broader movement to increase transparency of climate risks across the enterprise. By taking a proactive approach, organizations can establish data-driven processes that unite people, partners, and the broader supply chain ecosystem around shared emissions goals to create a more sustainable future.

Learn more about Capgemini’s own commitment to sustainability, and how we can help your organization develop the tools needed to achieve your emissions goals.

Author Tyler Williams (pictured, top of page) is deputy head for Capgemini's sustainability practice in the Americas, and principal of sustainability & energy transition. Related: Read more Capgemini guest blogs here.

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