The new SEC climate disclosure rule, explained

Last updated March 6, 2024: The SEC has officially voted on the final version of its climate disclosure rule. (Fact sheet here.) We are actively updating this blog based on the final rule details.

Now that the US Securities and Exchange Commission (SEC) has finalized their new requirements regarding climate-related disclosures, it’s important for businesses to understand what the new rules entail and to whom they apply. To help businesses navigate this impactful new policy, we’ve put together this guide to answer questions such as: 

• What are the new SEC climate rules? 
• Why has the climate disclosure rule been introduced? 
• What impact will the climate disclosure rule have on businesses? 
• How can my business prepare for the climate disclosure rule?
• What comes next?

What are the new SEC climate rules? 

In March 2024, the SEC finally voted on a set of rules they started developing back in fall 2022. These rules outline the steps that companies must take to improve standardization and transparency regarding climate-related disclosure.

Below, we’ll focus on Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, as this is the SEC rule that has introduced a sense of urgency for companies and how they measure and manage their climate-related data.

When you hear people mention the “SEC climate disclosure rule” or the “SEC climate rule,” this is likely what they are referring to.

Why is the SEC climate disclosure rule being introduced? 

Under current SEC climate rules, the latest of which was released in 2010, public companies are required to make climate-related disclosures based on materiality. Per the agency’s 2010 guidance, “Information is material if there is a substantial likelihood that a reasonable investor would consider it important in deciding how to vote or make an investment decision.” 

As you can imagine, companies have had varying interpretations of this direction, which has led to flawed reporting that provides a faulty picture of where a company actually stands in terms of sustainability. Greenhouse gas (GHG) emissions reporting, in particular, has a history of inaccuracy due to companies relying on estimates rather than actual energy consumption figures. 

An in-depth study of corporate Scope 1 and 2 emissions found that among thousands of companies that voluntarily submitted emissions data between 2010–2019, about 30% had erroneous data in a given year.

This is bad for both humanity’s shared goal of reducing carbon dioxide emissions as well as investors’ ability to track a company’s sustainability efforts over time or compare the performance of one company to another. That’s why the SEC introduced the climate disclosure rule, which is strongly supported by the vast majority of investors. 

What impact will the SEC climate disclosure rule have on businesses? 

This rule will require public companies to provide ESG statements alongside financial statements, which means their sustainability data and carbon accounting must be just as accurate as their corporate accounting. 

The final rule, which draws from the Task Force on Climate-Related Financial Disclosures and the GHG Protocol Corporate Accounting and Reporting Standard, will require public companies to communicate details regarding:

• Climate-related risks and the material effect they have on the business
• How the company handles top-down governance and oversight of the risks
• How their risk management strategy identifies, assesses, and mitigates risk
• Any sustainability goals or targets set by the company and how they will be achieved including the cost of carbon/renewable energy credits
• Cost and losses incurred as a result of severe weather events
• Proof of internal decarbonization efforts (such as numbers used for carbon offsets)

The initial buzz around these rules had focused heavily on the disclosure of greenhouse gas emissions — which had been proposed to cover Scope 1 and 2 emissions as well as disclosure of Scope 3 emissions for large filers such as Fortune 500 companies.

The final rules, however, will only require large filers (under two different designations) to disclose material Scope 1 and Scope 2 emissions along with an “assurance,” or audit, report.

How can my business prepare for the SEC climate disclosure rule?

While some elements of the climate disclosure rule are based on a company’s individual circumstances that take into account both qualitative and quantitative factors, one thing is certain: Many businesses need to tighten up their internal processes to confirm they are reporting accurate figures by the time the new SEC rules go into effect, estimated within the next two years. 

Research indicates that reliable data is still a major concern for many organizations. According to Deloitte, more than half of executives (57 percent) cite data quality as the top ESG data challenge for their company. 

Fortunately, there is now a way for companies to significantly improve their energy consumption and carbon emissions measurement ahead of the new disclosure requirements: automation. Data automation powered by direct utility access is the number one way to ensure that a business is reporting on their carbon footprint in an accurate and auditable manner. 

This is vital because, as prominent ESG leaders have said: “Your carbon footprint, whatever industry you're in, is the most heavily scrutinized piece of data [and] the most likely to be included in any regulatory environment.” Or, as many executives will be thinking ahead of the SEC rules: “The CFO who signs off on this data is going to want to know that it is auditable.” 

What comes next?

The rules will go into effect 60 days after their publication. There will be a phase-in period, with the largest companies being impacted first. In 2026 these large companies will need to report their emissions, and by 2029 they will be required to obtain assurance on those emission calculations. Smaller companies that still meet the threshold size for mandated disclosure will begin this process in 2028. 

How can Arcadia help businesses prepare?

Looking to prepare for the SEC's climate reporting rule? Our data platform is the number one carbon reporting data source to enable measurement, reporting, and visualization for Scopes 1 and 2 through automated utility data and emissions calculations.