The new SEC ESG rules, explained

As the US Securities and Exchange Commission (SEC) draws closer to finalizing new requirements regarding climate-related disclosures, there still exists some confusion about what the proposed SEC ESG rules entail and to whom they apply. To help you understand what’s going on and zero in on the most important details, we’ve put together this guide to answer questions such as: 

• What are the proposed SEC ESG rules? 
• Why is the climate disclosure rule being introduced? 
• What impact would the climate disclosure rule have on businesses? 
• How can my business prepare for the climate disclosure rule?
• Where do the proposed SEC ESG rules currently stand?

What are the proposed SEC ESG rules? 

In the SEC’s fall 2022 agenda, the agency listed several dozen rules that it plans to finalize in 2023. There are three rules that relate directly to ESG and the steps that companies and investors must take to improve standardization and transparency in the space:

• The rule proposed in Release No. 33-11042, The Enhancement and Standardization of Climate-Related Disclosures for Investors, is designed to enhance current disclosure requirements for public companies in order to make them more accurate, consistent, and comparable. 
• The rule proposed in Release No. 33-11067, Investment Company Names, is designed to prevent investment funds from using misleading names to attract ESG-focused investors. 
• The rule proposed in Release No. 33-11068, Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, is designed to increase transparency about how investors evaluate ESG factors to drive investment strategies for sustainable funds.

Below, we’ll focus on the first rule listed above, as this is the SEC ESG 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 ESG 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 disturbing 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. In many cases, organizations claimed to have reduced emissions compared to the previous year when emissions had actually increased. 

This is bad for both humanity’s shared goal of reducing carbon dioxide emissions as well as investors who increasingly demand transparency regarding corporate climate risk mitigation. It is currently very difficult for investors 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 would the proposed SEC climate disclosure rule have on businesses? 

In short, this rule would require public companies to provide ESG statements alongside financial statements, which means their carbon accounting must be just as accurate as their corporate accounting. 

The proposed rule, which draws heavily from the Task Force on Climate-Related Financial Disclosures and the GHG Protocol Corporate Accounting and Reporting Standard, would require public companies to disclose absolute value and intensity for Scope 1 and 2 emissions. The disclosure of Scope 3 emissions would also be required for large filers (e.g., Fortune 500 companies) and companies that have set a Scope 3 emissions target. 

In addition to emissions data, the SEC climate disclosure rule would 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
• Proof of internal decarbonization efforts (such as numbers used for carbon offsets)

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 ESG rules go into effect. 

Research indicates that reliable data is still a major concern for many organizations. According to Deloitte’s 2022 Sustainability Action Report, more than half (57%) of senior executives believe that data availability and data quality are the greatest challenges impeding their ESG disclosure efforts. 

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.” 

Where do the proposed SEC ESG rules currently stand?

It’s worth noting that, at time of writing, there remains some uncertainty about what the final versions of the SEC ESG rules will look like. The Enhancement and Standardization of Climate-Related Disclosures for Investors, in particular, has faced opposition in areas such as Scope 3 disclosures, the materiality principle, and the climate cost reporting threshold. 

However, a final SEC climate disclosure rule is expected to be released in Fall 2023, which means companies should not pretend it will disappear. Now is the time for organizations to carefully examine their ESG data strategy in preparation for the proposed reporting timeline. 

A trusted partner for the new era of carbon reporting 

Looking to remove the complexity and stress from your carbon reporting ahead of the upcoming SEC ESG rules? Arcadia’s Arc 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.