We’ve recently learned that the U.S. Securities and Exchange Commission (the “SEC”) temporarily paused its adoption of its new Climate Disclosure Rules, which it had passed on March 6, 2024. Without a clear policy signal, this could cause organizations to question the value of climate-related disclosure, which requires investing time and resources into energy management and environmental sustainability reporting. Without a clear policy signal guiding them to invest time and resources into energy management and environmental sustainability reporting, companies could question the value of disclosure. We aim to provide information to help businesses gain clarity on the policy landscape, while the SEC’s rule remains in limbo.
What changed between the final SEC rule in 2024 compared to the draft rule proposed in 2022
On March 6, 2024, in a 3 to 2 vote of the Commissioners, the SEC adopted rules effective in 2026, requiring all SEC-listed companies to disclose climate-related information in their SEC filings. In the two years that passed from the original proposed ruling released to the public in 2022 and the final version in 2024, the rules have been pared down.
Key changes:
• Scope 3 emissions disclosure is not required anymore.
These are emissions that relate to upstream and downstream value chain activities, instead of those linked to a company’s direct operations covered by Scope 1 and 2 emissions categories. Scopes 1, 2 and 3 are defined by the Greenhouse Gas (GHG) Protocol framework, a widely adopted methodology for assessing GHG emissions linked to an organization’s activities.
• Disclosing Scope 1 and 2 GHG emissions is only required if material.
The SEC refined its requirement for GHG emissions disclosures to apply the principle of materiality. This would entail that companies must first assess the materiality of GHG emissions within their operations. If deemed immaterial, companies could forgo this requirement.
• Disclosure of Board of Directors’ climate expertise is not required.
Initially, the SEC proposed the governance details of the climate disclosure rule to include disclosure on board-level expertise related to climate change, which aligns with the voluntary recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). However, this requirement has been waived.
Why the final SEC Climate Disclosure Rules weakened and what it means
After receiving 24,000 comments from a wide range of businesses, industry groups, investors and other stakeholders, the SEC made revisions to its initially drafted rules based on public comment applying a process for incorporating feedback. While the changes reflect a compromise among various interested parties, state and local jurisdictions have continued to enhance their reporting requirements for carbon accounting and energy management.
Most significantly, the State of California, with the 5th largest economy in the world, passed its SB 253 (the Climate Corporate Data Accountability Act, CCDAA) and SB 261 (the Climate-Related Financial Risk Act, CRFRA). SB 253 requires Scope 1, 2 and 3 emissions disclosures, and large public and private entities doing business in California with annual revenues over $1 billion fall within its scope. This rule surpassed the requirements of the initially drafted SEC rules, reinforcing the general rule that state-level legislation tends to exceed federal requirements. California’s rules are also being challenged in court, though these cases have not resulted in a “stay” or pause on their implementation timeline.
Building emissions have been a key focus in other jurisdictions, as the number of benchmarking and building performance standards has increased. New York City’s Local Law 97 and the Boston Emissions Reduction and Disclosure Ordinance (BERDO) are a few examples.
In addition, some investors continue to submit requests from the companies they invest in to submit TCFD-aligned information through their CDP disclosures, which require Scope 1, 2 and 3 emissions reporting.
Why is there a temporary pause / stay on the rules?
On March 15, 2024, a federal appellate court imposed a temporary stay pending judicial review of the new rules, to enable courts to determine the merits of various lawsuits related to the SEC climate disclosure rule.
The SEC has stated its procedures to adopt the Climate Disclosure Rules and the content of its rules are “consistent with applicable law.” The reporting rules would not have gone into effect until 2026.
Why the SEC is being sued and by whom
Groups of states, companies and organizations have filed lawsuits related to the SEC’s climate disclosure rule. Some of these lawsuits accuse the SEC for requiring too much information and imposing unnecessary and/or difficult reporting requirements. Others challenge the SEC on the grounds that the weakened rules don’t adequately address the need for more information about climate-related risks.
• Asking for too much information
Companies, including Liberty Energy Inc. and Nomad Proppant Services, LLC, have argued that the rules go beyond the SEC’s authority under U.S. securities law. They accuse the SEC of injecting climate policy into financial regulation, while expressing fatigue over the “breathtaking volume of information” required on greenhouse gas emissions and other climate concerns.
• Not asking for enough information
Environmental groups have challenged the SEC Disclosure Rules from a different angle, claiming it does not go far enough to protect the environment. The National Resources Defense Council petitioned for review in the New York-based US Court of Appeals for the Second Circuit, challenging the SEC’s final Disclosure Rules for not including Scope 3 emissions. The Sierra Club and the Sierra Club Foundation, represented by EarthJustice, an environmental law nonprofit, have meanwhile challenged the rules in the U.S. Court of Appeals for the D.C. Circuit, claiming they don’t require enough information on their climate-related risks.
In total, nine petitions across six federal appeals courts are in process to review the SEC’s final rules, released to the public on March 6.
• States’ involvement
At least 25 states including West Virginia, Texas and Ohio and major business groups like the U.S. Chamber of Commerce have challenged the rules in court, including in the 5th, 6th, 8th and 11th U.S. Circuit Courts of Appeals. Now all challenges are centralized in the 8th Circuit federal appeals court in Missouri.
A total of 18 states collectively defended the rule by filing a motion to intervene on March 4, 2024. Arizona, Colorado, Hawaii, Massachusetts, New York and Washington, as well as the District of Columbia cited their combined management of over a quarter trillion dollars in public-pension funds and expressed the need for investors to receive information on climate-related risks from businesses.
Are the courts going to overturn the SEC rule?
It’s possible that the rule could be overturned, yet globally, this could make the US an outlier, as countries develop their own reporting requirements. International climate disclosure requirements, such as the E,U,’s Corporate Sustainability Reporting Directive (CSRD), will soon apply to U.S. companies operating globally. For reporting in the U.S., companies may choose to suppress the level of climate-related information they publicly disclose to wait and see what courts decide. Combined, these trends could ultimately lead to tension between regional, national and international norms for financial reporting related to sustainability. As companies navigate the implications of the paused ruling, it’s important to consider the underlying aims for disclosing climate-related information.
What is the purpose of the Climate Disclosure Rules?
Deciding whether your business should align with the SEC’s rules or others like them remains difficult for companies not operating in other jurisdictions with requirements. It helps to consider not only the requirement perspective, but the underlying purpose of the rules. Here are some of the main reasons they were proposed to begin with.
1. Supporting investors’ decision-making needs
The rule aims to support investors who wish to gain insights on how companies not only manage their GHG emissions, but identify and address risks and opportunities linked to climate change. To date, climate change has cost us billions of dollars from damages linked to extreme weather impacts in the U.S. alone. Researchers publishing in Nature magazine recently suggested that climate change could discount global income by 19% by 2049, based on temperature increase projections. Investors seek insights into how businesses are developing measures to remain resilient amidst changing conditions.
2. Understand the effects of climate risks on the economy
Climate change is associated with multifaceted business risks including damages to property from flooding and storms, supply chain disruption, pricing effects to basic commodities, population movement, and technology and policy shifts. Investors increasingly seek data to understand how businesses are responding to these risks and identifying related opportunities.
3. Align with global financial disclosure norms
The U.S. is not alone in making these changes. To date, countries around the world are in the process of adopting similar disclosure requirements. Prior to the U.S., the E.U., U.K. and New Zealand already adopted similar climate-related disclosures rules or stronger approaches to disclosure such as the E.U.’s CSRD applicable to their jurisdictions.
Other countries have either adopted or proposed adoption of the recently finalized ISSB standards for ESG reporting, including Brazil, Canada, Australia, Turkey and others. The ISSB aims to support interoperability, so regions with differing requirements can still align with the baseline requirements it provides.
China’s two main stock exchanges made an important announcement in February 2024, highlighting newly proposed climate disclosure rules requiring Scope 1, 2 and 3 emissions reporting and double materiality, in alignment with Europe. Other APAC Countries have also seen a significant uptick in legislation related to ESG reporting, applying TCFD-aligned rules or ISSB-aligned rules in different countries.
4. Align with contemporary approaches to climate disclosure
Some may wonder how the new SEC Climate Disclosure Rules are different from the carbon emissions reporting guidelines the SEC adopted in 2010, and whether it is even necessary. Several key differences feature in the new wave of global reporting rules:
• Value chain perspectives
Financial considerations for business sustainability focus not only on an organization’s immediate operations, which in terms of emissions accounting relate to Scope 1 and 2 emissions. Sustainability decisions have impacts across the value chain of organizations. Investors encourage business leaders to map and report their value chain emissions along with other risks and opportunities to support decision-useful reporting.
• A strong focus on business strategy, risks and opportunities
In the past, add-on sustainability seemed enough to satisfy interest from different stakeholder groups. Today, it is becoming a global norm to assess and integrate sustainability considerations into mainstream business governance and strategic planning processes. In doing so, companies are aligning their sustainability programs with their primary business strategy, to ensure decision-making aligns with the best interest of the business, while also taking into consideration the ways that sustainability factors present risks and opportunities to businesses.
• Extending the reporting time horizon
For meeting mainstream investor interest in sustainability, companies are encouraged to lengthen their time horizon to include considerations related to long-term sustainability trends like climate change.
Should businesses collect sustainability data if it’s not required?
For years, the largest organizations have already been collecting sustainability data for their organization to either satisfy investor enquiries or to align with their industry or peer benchmarks. Whether or not reported internally or externally, voluntarily or mandatorily, there is plenty of value to organizations in understanding the scale of their GHG emissions, energy consumption, water consumption, waste and other resource use.
Managing these resources, which are vital to operations, is akin to tracking and monitoring equipment costs, human resources, and overhead. The main difference is sustainability data comes with an additional advantage: the ability to communicate business resilience to investors, customers and your wider community.
This delay from the lawsuits against the SEC should be seen as an opportunity for companies to use this time to update their business sustainability management practices in line with global norms.
The economy is tough. Is it really a good idea spending money on a “nice to have”?
While each business has different goals and priorities, energy costs tend to be high across the board for anyone operating a building with traditional heating and cooling energy sources. Given the inflationary pressure and volatility of gas heating costs, it’s always a good idea to track energy consumption to find ways to reduce consumption.
Energy efficiency helps to mitigate carbon emissions through smart operational decision-making that requires data analysis to back it up. You can always calculate carbon emissions without first understanding energy consumption.
What is Acuity Brands doing?
As part of Acuity Brands, EarthLIGHT is the way we coordinate our efforts around Environmental, Social and Governance considerations, measure our performance in key areas, and communicate about those efforts to our various stakeholders. The EarthLIGHT Report shares Acuity’s annual progress update on our specific efforts around ESG.
In 2022, we took The Climate Pledge as part of our ambitious goal of attaining net-zero GHG emissions across our value chain by 2040. The Science Based Targets initiative (SBTi) has verified our net-zero science-based target, demonstrating our commitment towards an ambitious but achievable goal. We continue to pursue sustainability opportunities alongside our GHG emissions reductions with a goal of selling more products and solutions to help others follow a similar path. Our suite of cloud applications under the Atrius brand have already been utilized by hundreds of businesses to optimize energy and reduce carbon emissions without impacting occupant comfort.
Please consult the report HERE.
