SEC climate rule has wide implications

Nearly two years after sharing its proposal for climate-related disclosures, the Securities Exchange Commission announced its final rule on March 6. According to the SEC's official statement from chair Gary Gensler, the goal of these requirements is to provide "investors with consistent, comparable, decision-useful information and issuers with clear reporting requirements."

The SEC's guidance is a part of a much broader movement as the U.S. strives to catch up with Europe, where the standardization of environmental reporting requirements is further along. While the SEC's requirements apply to public companies, the regulations in other jurisdictions — such as in California and abroad — signal wider implications for various corporate entities.

Given the vast impact, how can corporate leaders proactively navigate this evolving landscape for sustained success?

Summarizing the new SEC rule

Per the SEC, compliance will be required in phases, starting with large, accelerated filers (issuers with a public float of $700 million or more) in 2025 and accelerated filers (issuers with a public float of $75 million or more, but less than $700 million) in 2026. Other filers will also need to meet requirements to a certain degree starting in 2027.

According to the new rules, impacted companies must disclose greenhouse gas emissions that are material and fall into two categories:

• Scope 1: GHG emissions directly generated by a company, like fuel combustion and company vehicles;
• Scope 2: GHG emissions associated with energy purchase, like electricity, heat, cooling, steam, etc.

Notably, the commission removed a third category of required disclosures (Scope 3) that would have included GHG emissions from sources outside the company's direct operations, like employee commuting, business travel, transportation and distribution, waste management, purchased goods and services and more. This decision by the SEC doesn't mean companies can ignore Scope 3 altogether — they may still face state or international regulations that include Scope 3 emissions disclosures. For example, the recent climate disclosure laws passed in California apply to any company operating in California that is generating more than $1 billion in revenue, regardless of where they are headquartered. 

The takeaway here is that under both the SEC rules and California laws, broad-based targets, such as "net-zero" statements, require tracking Scope 3 emissions. And even if an entity is not required to report its Scope 3 emissions as a line item, they are still impacted by requirements that necessitate they know the related data. 

What business leaders must consider

A 2023 survey found that 44% of senior accounting and finance executives from enterprise-level businesses are concerned about complying with environmental, social and governance requirements and policies, and 48% were concerned about data accuracy and completeness — all of which have been validated given the reach of new and emerging ESG reporting requirements. 

Recognizing that a significant portion of a company's environmental impact originates from its real estate, equipment and vehicles, businesses should prioritize their lease portfolio to source required climate-related data. However, gathering leases and related records is no easy feat — a tough lesson learned by many companies when adopting the new lease accounting standards (ASC 842, IFRS 16 & GASB 87). The process is time-consuming and relies on coordination across many different departments. Companies must prepare now to avoid overwhelming their teams or else they risk inaccurate calculations, added expenses, and a damaged reputation. 

Take Toshiba America Business Solutions and Toshiba Global Business Solutions as an example — two of Toshiba's biggest operating companies. They have an extensive lease portfolio comprising 150 real estate leases — including office, industrial and lab spaces — along with 1,400 equipment and vehicle leases. recognized how critical lease management was to their success, and so, they implemented a centralized system of record to help them manage, track and report on their leases. As a result, they gained visibility into critical data sets, driving better-informed decisions. Now that these companies have their leases and related records centralized and standardized, they can easily leverage this information to establish benchmarks around their environmental impact. They can also use this data to generate calculations based on greenhouse gas emissions (like CO2, PFCs, Ch4, SF6, N2O and HCFs) to meet and sustain compliance. 

ESG is here to stay, be prepared

Although the SEC has temporarily paused its ruling, it's essential for companies to remember they are only one of many regulators in the space. In addition to compliance pressures, companies are subject to increasing demands from investors and consumers, both of which demand transparency around an organization's environmental impact

Investing in the right technology, processes and teams is essential for businesses to effectively manage their related data. This investment isn't just about meeting current regulatory requirements; it's about future-proofing the organization against evolving standards and expectations. By prioritizing these efforts now, companies can position themselves for success in the long term.