On Monday, 21 March 2022, the U.S. Securities and Exchange Commission (SEC) approved its landmark climate disclosure of greenhouse gas emissions proposal (which had been delayed since October 2021). The proposal will now move onto the next stage of public consultation for 60 days before being finalised.

We summarise the SEC climate disclosure proposal below:

  • Scope 1 and 2 Emissions – Direct Activities and Energy Use Emissions: The proposal requires all listed companies to disclose their Scope 1 and 2 emissions over the next three years (with the largest companies starting reporting from next month), with larger companies being required to do so sooner than smaller companies. From 2026, larger companies with a market value of $700m or more will also require some “reasonable assurance” audit reporting on such disclosures.
  • Scope 3 Emissions Disclosure – “Material” Value Chain Emissions: This proposal requires listed companies with a market value of $700m or more to disclosure their “material” Scope 3 emissions (largely from supply chain and products) from 2024, with companies with a market value of $250m or less being exempted entirely, and companies between the two market values to disclose their Scope 3 emissions from 2025. These Scope 3 disclosures are dependent on how material they are to a company’s business and have drawn on existing frameworks, such as the Task Force on Climate-Related Financial Disclosures, as a model for such reporting standards.
  • Challenges: 
    • Carbon offsetting: Carbon offsetting, such as by purchasing carbon credits, are also captured and required to be disclosed in the proposal, but come with additional difficulties such as offset verification, accuracy and quality.
    • Materiality: With these disclosure requirements come the following questions: Is the SEC taking an activist approach and does it have the authority to mandate such ESG and climate corporate disclosure rules? And is the SEC’s existing materiality guidance insufficient to require them to mandate such disclosure?