Digging into the latest SEC climate disclosure rules

The U.S. Securities and Exchange Commission approved new rules this month on what information companies must disclose about their greenhouse gas emissions and climate risks, but dropped the more stringent requirements initially proposed by the commission

Despite legal challenges, the rules are a significant win for climate transparency. But they’re not as strong as existing climate disclosure regulations in California and the European Union, where many multinational corporations do business anyway.

So how big of a deal are the new SEC rules?

In this episode, Shayle talks to Mallory Thomas, risk advisory partner at consulting and accounting firm Baker Tilly US. The two talk about the details of the new rules and cover topics like:

• The rules’ requirements for disclosing greenhouse gasses and climate risks
• How the rules compare to the EUs Corporate Sustainability Reporting Directive and California’s twin climate disclosure laws
• Which companies are required to comply and under what conditions
• How standardized reporting may help with comparability across companies 

‍Recommended resources

• Baker Tilly: SEC announces final rules for climate-related disclosures
• Deloitte: A landmark ruling for ESG disclosure requirements
• Reuters: US climate rule will boost sustainable accounting industry

Catalyst is supported by Antenna Group. For 25 years, Antenna has partnered with leading clean-economy innovators to build their brands and accelerate business growth. If you’re a startup, investor, enterprise or innovation ecosystem that’s creating positive change, Antenna is ready to power your impact. Visit antennagroup.com to learn more.

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Transcript

Shayle Kann: I'm Shayle Kann, and this is Catalyst. Obviously losing Scope 3 from the SEC rule on its own seems like it would be a big blow to that world, but if everybody's going to have to do it anyway because of California, does it really matter?

Mallory Thomas: Yeah, I don't know if it really does.

Shayle Kann: Disclosure, what exactly are we to make of the SEC's new Climate Disclosure Rule?

I'm Shayle Kann. I invest in revolutionary climate technologies at Energy Impact Partners. Welcome. So after a lot of fanfare and thousands, maybe millions of pages of roaring debate, the SEC's Climate Disclosure ruling has dropped and it seems to have landed with a bit of a thud. The headlines, at least in climate world, were basically all about the fact that the final rule dropped the Scope 3 reporting requirement, and that is indeed super important. But also for me, it meant that the reporting sort of glazed over everything else and everything else is kind of interesting. How big a deal is this reporting going to be? How does it interact with other locations, including in the United States, by the way, that have mandated greenhouse gas emissions reporting or climate risk reporting and so on?

It's becoming a common thing for me, a climate tech related thing happens, media covers one element of it and only that element ad nauseam, but then skips the rest of the things. So in we swoop to cover all the things instead of just the one thing. And to do that with me, I brought on Mallory Thomas. Mallory is a risk advisory partner at Baker Tilly US. She focuses on ESG and sustainability and she's super deep in the climate reporting, climate disclosure conversation. So here's my chat with Mallory about what we actually should be thinking about on the SEC's climate rule. Mallory, welcome.

Mallory Thomas: Thanks for having me, Shayle.

Shayle Kann: Let's talk about the SEC's Climate Disclosure Rule. Can you start with a little bit of background? Give me the quick history of what led up to the rule that we finally got in the past couple of weeks.

Mallory Thomas: Well, it's been anticipated for a while. I mean two years in the making of waiting and some extended timelines for the final disclosure. And in the meantime, I mean there's been a lot happening around the world, so CSRD in the EU, California with their climate regulation. A lot has been going on in this space. So it's nice to see some resolution from the SEC and to have some final rules in place.

Shayle Kann: Let's talk about that for a minute, what's happening elsewhere, and then we can layer on top of that what the SEC just added. So if I'm a corporation, let's say I'm a multinational corporation, outside of, but prior to this new SEC rule, what are my requirements with regard to climate disclosure?

Mallory Thomas: Well, there's the CSRD in the EU and that's just going into effect. So there's nothing to date as significant as what we're seeing with CSRD and SEC. There's specific rules and requirements around some of the exchanges, so as you think about the London Stock Exchange, there's TCFD, disclosure reporting similar to that from a climate risk perspective, but holistically, nothing as significant as what we're seeing to date around the impact to companies both public and private. Even with the international side too, if we think about EU, there's so much double materiality, the number of metrics that have to be reported, and that's just coming to light now. Companies are preparing to report in 2025, so there's a lot of work that's being done. If you have operations in the EU or, I'm thinking from a US company perspective, that's typically the most impactful piece for an international company.

Shayle Kann: Can you just define double materiality?

Mallory Thomas: Yeah, double materiality. Oh, yes. The big difference between the EU regulation and what we see in the States. In the states, everything's focused on the single materiality. So just the focus on what is a financial impact to a company. And then with double materiality, we're really looking at not only is it the financial impact, but what are the social and environmental impacts as well. So how is the company impacting the social and environmental pieces, but then also the financial impacts to that company, internally, externally, both those sides of it from a double materiality perspective.

Shayle Kann: So all things equal, what you're saying is that the European requirements that are coming into effect, the CSRD, includes a double materiality standard, which is I guess a more rigorous or more onerous, depending on how you look at it, reporting than if you just look at the financial impacts, which is what we're doing here in the US.

Mallory Thomas: Absolutely, yes. And so everything in the US, even California, it's all about financial impacts. In the EU, it's much more comprehensive to understand what are the impacts outside as well as what's the impact financially to your company.

Shayle Kann: Okay. So landscape prior to the SEC rule is you've got some bits of things on stock exchanges. You've got this EU rule that is coming into effect but hasn't fully come into effect. You've got California, which we haven't talked about in detail, but came up with its own thing. And then up shows finally the SEC rule. So can you just give me the high level overview? What does the SEC rule mandate?

Mallory Thomas: Yep. So the SEC is focused on climate-related risks and the financial impacts of those risks. Material too, material impacts. So thinking about materiality is a key aspect here is what is material from an impact perspective. There are specific thresholds for reporting what those material amounts are. And then also greenhouse gas emission reporting, and that's just Scope 1 and Scope 2 reporting, and doesn't include all public companies, it's just large accelerated filers and accelerated filers that have to report their Scope 1 and 2.

So with California, California has Scope 3 in the long-term range of reporting is required. With SEC, there's no Scope 3 reporting requirements, and it doesn't impact all public companies. So there's specific requirements for large accelerated filers and accelerated filers for reporting their Scope 1 and 2 and obtaining attestation limited review over those Scope 1 and Scope 2. So it's not as impactful from that perspective from a reporting of greenhouse gas emissions with the SEC as it originally was proposed, including Scope 3 and the original proposal that wasn't fully adopted for Scope 3.

Shayle Kann: Right. Okay, so let's separate out two components of this. There's the emissions reporting components of this, how much emissions is your company responsible for? And there, that's what, and this is what a lot of the headlines have been about, I think the draft rule included Scope 3, which for a lot of companies is the vast majority of their emissions. The final rule did not, it removed Scope 3. And so why, what happened in the interim there?

Mallory Thomas: With the Scope 3, I think the hard part is a lot of the... It's hard to gather that data and it's hard to, for companies, especially, we think about large accelerated filers, likely a lot of them are probably already reporting Scope 3, many of them probably are. So it's less impactful to be honest. I think with the removal of Scope 3, I think the impacts are more on smaller companies and obtaining that information. All the estimations and judgment that goes into reporting Scope 3 is difficult to do and that can be a barrier for many companies to consider the Scope 3 reporting. So I think that's where some of the considerations came in as the amount of lift that a company would have to go through to report Scope 3 and then just the completeness and accuracy of those data sources.

Shayle Kann: Okay. So what happened in the interim is a lot of companies probably told the SEC, "This is too hard, this is going to be too labor-intensive and the data won't be that good anyway." And obviously they in aggregate convinced the SEC to remove Scope 3. It's interesting that you say so many companies already do it. So I guess at the high level, including all of this, how much incremental reporting are we going to get as a result of this rule?

Mallory Thomas: I think what this is going to be focused on is the comparability. So everyone has their own CSR report and they may be tying to specific frameworks for reporting, but really the objective here is just to have the consistency and comparability of the data sources. So if you have public companies are reporting, there's a consistent way to report the information. So it's comparable to the investor and the users of the financial statements, which is key.

Shayle Kann: Right, that's interesting. Okay, so I said let's separate out the two parts. I didn't get to the second part. The first part is emissions reporting. How much greenhouse gas emissions are you responsible for? Second part is reporting about risk, climate risk. So what is in the rule with regard to climate risk?

Mallory Thomas: So for the climate risk disclosures, it does follow closely TCFD, so within the TCFD, identifying what those climate risks from an impact perspective that are material that have occurred. So those expenditures related to any, as you think about the physical risks, so if you have a tornado and it puts down your plants, well identifying what was that cost and if it's material having to disclose that amount as well.

Shayle Kann: Wait, sorry, can I pause on that for one second? Is that related to things that have happened? Or it's a risk analysis, right? So is it a version of saying, sea level rise could, we have a property that's on the sea level and sea level rise in this location could impact that property and here's the dollar cost associated with that. It's that version of physical risk?

Mallory Thomas: Well, so I think there's two aspects to this. There is the aspect of the quantification of the amount of something that's occurred that's material to the company. So that piece is one part of this, but the broader context, like you're mentioning, is identifying what those material risks are to your company and organization. So I think that's the aspect of climate-related risks. And the first step is just understanding what are the risks that are applicable to your company, and that's through the transition risks and the physical risks. So thinking about chronic and acute risks related to your company and being able to articulate and report what those risks are. And then the other aspect of this is then taking, "Okay, we have all these climate-related risks. How are we managing these risks? How's management assessing those risks? And what's the board's role in oversight of climate-related risks?" So that gets to the broader context of risk management and how is that incorporated with overall risk management processes too within the company?

Shayle Kann: What is your sense of how this rule has been regarded, the ultimate final rule from large companies that are going to be subject to this reporting?

Mallory Thomas: When we think about large accelerated filers, a lot of them are reporting a lot of this information within their CSR reports or within their sustainability reports. If they're multinational, they're doing this work to date. And so I think that's the piece that large accelerated filers likely have reporting that they're executing to date. So it's probably not a significant lift.

Where I think the SEC probably has less of an impact is with the Scope 3 removal, there was this fear by many private companies is that they're within the Scope 3 of many of these larger companies, so then they would have to start reporting their Scope 1 and two to some of these larger organizations. So I think that trickle-down effect is something that is likely not going to occur or be as impactful to date. But then I always get into, there's California, so I don't know, there's a whole aspect of California and that's private and public companies, who doesn't do business in the state of California if you're a large company,? I think that's going to be a hard impact for many companies and organizations, private and public. So it's kind of like, the SEC is here, but California is probably more impactful from a private company perspective.

Shayle Kann: Right, basically every large company does business in California, so there's some argument that California... If California made stringent enough rules, it kind didn't matter what the SEC did because SEC wasn't going to do something more stringent than California and you're going to have to comply with the California rules anyway if you do business in California.

Mallory Thomas: Yeah, exactly. And so I think California put... With their regulation, it kind of made the SEC, "Okay, it doesn't really matter as much," because people were waiting and waiting on the SEC to see what they were going to come out with, and California kind of slid in there this fall with their regulation. And I think the climate-related risk piece is huge, and that's something that has to be reported every other year, and then the greenhouse gas emission reporting with scaled attest and assurance levels as well there.

Shayle Kann: Do we expect or do we see legal challenges on the basis of California having sort of superseded the SEC?

Mallory Thomas: Well, I think there's already some legal challenges in California that are being faced with that regulation. I think too, I mean we're seeing other states propose, it's almost word for word similar to California, so in New York, Illinois. And that's the piece I think is going to become complex. If you're thinking about companies in the United States having to report to all these different states utilizing with California, they're going to utilize a submission platform for your greenhouse gas emissions so they can see all the different emissions from different companies. So thinking about a company who has operations in all these different states having to report, I mean a lot of the information and data is similar, but just the exercise of, "Oh, here's my submission to this platform in this state of my greenhouse gas emissions." Or uploading and making sure that you're taking all of your risk reports from a climate risk impact perspective. I think that's going to be the piece that could become a lot of work for organizations both public and private with a lot of these regulations.

Shayle Kann: So one of the things that I think has been interesting as we've been waiting for the final rule, and everybody's been speculating about what it's going to end up looking like is, I feel like there's two ecosystems that have been developing in anticipation of various forms of climate disclosure requirements. There's an ecosystem of the sort of carbon accounting platforms and platforms that do that plus other things. And then there's this whole ecosystem on the back end of like, okay, there's going to be all this new public data about, public companies, maybe some private companies as well, and so that data can flow into the infrastructure of finance in a bunch of different ways and can be used for ratings and for all sorts of other things. So let's talk about both of those ecosystems a little bit and how they get affected by this rule. Maybe starting with the carbon accounting side. Obviously losing Scope 3 from the SEC rule on its own seems like it would be a big blow to that world, but if everybody's going to have to do it anyway because of California, does it really matter?

Mallory Thomas: Yeah, I don't know if it really does, to be honest. I think we're going to see a lot of these reporting tools are going to be utilized, and I think companies need help because that's the part, especially on the E side, the S and the G, a lot of companies are already doing things when we think about ESG reporting related to the S and the G, even the governance aspect with the SEC. I mean there's board roles of oversight and governance in place, but the E is what's going to take the most effort, is how do you quantify your greenhouse gas emissions? And then having the rigor of assurance over that information is going to be more of a lift for a lot of companies, especially as we move to reasonable assurance and getting those data sources to make sure that they're complete and accurate. And then too, with these tools, I mean, they're going to have to make sure that they have appropriate controls within these tools as well around the information and data that they're storing in there, the reports they're pulling from a completeness and accuracy perspective too.

Shayle Kann: So in that context, does it make a difference that the SEC, I mean, there's no Scope 3, but even for Scope 1 and two, the SEC is going to be looking at your submissions and it needs to be reasonably accurate and so on. So it does provide a bit of a tailwind just in the sense that the robustness of this accounting and thus the platforms that deliver this accounting has to be pretty significant.

Mallory Thomas: Yeah, I agree. And I think the part with the SEC, I mean, you have to upload your attest report, so your report over your greenhouse gas emissions, reporting that's been completed. I don't think the SEC is going to look into the accuracy of all these different greenhouse gas emissions that companies are reporting. Yes, they're going to look to attestation reports, and if there's something crazy, obviously they'll investigate that a little bit further. But I think the piece is going to be is just the amount of information that's available and the data sources.

But Scope 1 and Scope 2, like we talked about, it's not as much of a lift honestly for companies to report because a lot of this information they likely have, that's the only thing that might be impactful for, like you mentioned, Scope 3 is harder to obtain those information sources. There's a lot of different assumptions you can utilize, a lot of different judgment that's needed with some of the scoping and reporting of Scope 3, where I think the tools and technology probably had a better play with the Scope 3 inclusion because I think companies, as much as some of them don't have the money and the budget to be procuring all these SaaS tools for reporting, some of them may utilize some of the free guidelines that are out there with the Greenhouse Gas Protocol. You can utilize their spreadsheet. The EPA has spreadsheets that you can utilize to report Scope 1 and Scope 2. So it'll be interesting to see what companies do for reporting.

Shayle Kann: All right, and then let's talk about the other end of the spectrum. So all this data becomes public on all these companies. What is emerging? What are you seeing emerge to translate that data into investment decisions of one kind or another?

Mallory Thomas: Yeah, so I mean there's all the raters and rankers and utilizing different metrics, and they all have different methodologies. So I can see if there are specific investors who have interest in specific emission reduction goals and targets, they're likely may be pressure for some companies to have stated targets and goals. And I think that's going to be what's interesting as companies start to baseline. So the first time they're going through the reporting process, they're baselining, they're reporting their Scope 1 and Scope 2, what comes next? Are there going to be expectations then for emission reduction? Now to be clear, there's nothing within the SEC disclosure that requires any kind of emission reduction, so I want to be clear about that.

Shayle Kann: That's a key point, this is just reporting, it's not mandating any kind of goal setting.

Mallory Thomas: Exactly. Exactly. And I think that's an important point because I think sometimes there's unclarity around the purpose of what the SEC's disclosure is, and then also what's the expectation for emission reduction, and that's just not a part of the disclosure requirements or the SEC's role in general.

Shayle Kann: Right, right. So to that end, questions around what you're going to do to reduce your emissions or offset them, the carbon market impact of this, if anything, it's indirect, but it seems maybe nothing.

Mallory Thomas: Well, I mean there are disclosure requirements for RECs and offsets within the SEC disclosure. So the final rule does include disclosing that if it's a part of how you're planning to obtain... Or you have goals and targets, how you're going to get there, if that's the avenue you're going to take, you have to disclose those.

Shayle Kann: Wait, can we pause on that for one second? So if you have goals, you have to report them, and if you have a plan as to how to hit the goal, you have to report it, but you don't have to have a goal. Am I describing this right?

Mallory Thomas: Yeah, mm-hmm.

Shayle Kann: That's interesting. I mean, I wonder whether that creates a disincentive to set public goals, because you don't have to report it if you don't have one.

Mallory Thomas: Yeah, I think there's... Well, I mean today, because of all of the greenwashing that I think has occurred, I think companies are being very mindful of the goals and targets that they set, which is unfortunate to an extent because I feel like people are now hesitant to set a goal or target. But also I think it's important that as companies set goals and targets, they are thinking through the plans to achieve these goals and targets. And I also think that's an important role that a board plays in an oversight position is making sure as management's setting these goals and targets, really having a clearer understanding of how they're going to get there, what are the transition plans, or what are the offsets? What is the strategy there, because I think that's key in making sure that there's proper governance over the goals and targets that are set.

Shayle Kann: So if I'm company X and I've got, let's just say my Scope 1 and 2 emissions today is a million tons total, and I've stated a goal to get to net-zero by 2050, and I've stated some version of a plan to reduce my emissions in the meantime, that stuff all has to get reported, but there's no... And let's just say I'm also buying carbon credits, or removals, or whatever to make up for part of it. I have to report all of that now thanks to the SEC rule, but there's nothing in the rule that tries to ensure that my plan is robust or that the credits that I'm purchasing are high quality. It'll be information the world can use, but the rule requires some measure of fidelity on the emissions accounting, but not the emissions reduction or removal.

Mallory Thomas: Well, and two, it's material. So if it's material to your transition plan and to your goals and targets, that's where the disclosure is required. So everything's through the lens of materiality, and I think that's an important aspect to consider, especially with anything within this role, it's all about materiality. And I think that's key in understanding the overall aspect of the disclosure is if they are material and any expenditures related to those transition activities, if material, there's a phase in disclosure there as well.

Shayle Kann: Can you maybe give a theoretical example of something that would be material or something else that might not be material in this context?

Mallory Thomas: I think it's the cost. So, if most of your transition plan is based off of your offsets, that would be material to your plan. So I think that's the way to consider that. I mean, it's all about different thresholds of materiality for a disclosure purposes. So I think that piece is going to be the part that may be harder for companies to evaluate initially as they start thinking through their goals and targets. What is their long-term plan to have emission reduction, and what are the impacts, honestly, from a reporting perspective, knowing what they're going to actually have to disclose in the future as they're transitioning as well.

Shayle Kann: Maybe I'm overly concerned about it, but as I hear about it, I continue to worry that there's a disincentive to do anything material from an emissions reduction standpoint, or at least to commit to anything material because it introduces the reporting requirement about it that you can avoid if you just either don't state an emissions reduction target, you don't have a plan or what you're doing is immaterial.

Mallory Thomas: Yeah. Well, I mean-

Shayle Kann: It's probably not enough of a disincentive to really stop, if the pressure is real on companies to set an emissions reduction plan, I presume having to report it to the SEC is not going to stop them from doing it probably.

Mallory Thomas: Yeah, and well, I think the other thing too is a lot of companies, if they are setting targets and goals, especially with the current environment, there is an expectation from investors, from stakeholders for communication on plans and obtaining an understanding of where they are today. There's more expectations there, I think given what's happened in the past and some of the greenwashing that's occurred, I think there's just a lot more focus on target, goals and progress to date. And I think that's going to continue, that's not going to go away. So with the disclosure requirements, I think this is something just probably more of a formality almost of what we're going to see in the future anyway, just because of the stakeholder and pressures that they're getting from investors and others, even board members thinking through their role in this and making sure that they have a good understanding of the progress made to date, and that's communicated appropriately from a governance process.

Shayle Kann: So was there anything... I mean, it was sort of in the ether that, particularly in the week ahead of the final rule that Scope 3 wasn't going to be in there. Was there anything in the final rule that surprised you?

Mallory Thomas: That surprised me, yeah. I mean, the Scope 3 piece is huge. I don't think there's anything that was overly... I mean, I think everyone anticipated Scope 3 was going to be out after that was leaked earlier on. And I think too, just the amount of, what, 16,000 comment letters, crazy, right?So companies were obviously communicating the challenges that they were anticipating facing with Scope 3 disclosure. So I think many people anticipated that piece. Yeah, I mean, the one thing I think interesting that was removed, but makes sense is some of the identification of board members with the climate risk background, talking about and identifying if there's someone on your board who has this expertise, similar to what we see with cyber security, who is on your board who has a cyber expert. So some of those aspects I think are interesting.

Shayle Kann: That's super interesting because, who has that expertise?

Mallory Thomas: Not many people.

Shayle Kann: Not many people.

Mallory Thomas: Especially at board member level, there's just... Yeah.

Shayle Kann: How many public company board member qualified people are climate risk experts?

Mallory Thomas: Yeah, no, I mean, not many. That'd be a good statistic though, to understand, because I would be curious. I mean, I'm sure if you get into some of the renewable companies, I would hope they have board members with that experience or understanding, but I think it's probably not very common.

Shayle Kann: No, I mean, maybe transition risk, I guess. Physical climate risk, it's a pretty specialized... To be an expert in physical climate risk, you have to be an expert in climate modeling and then risk. I mean, I know some people who are experts and could be potentially-

Mallory Thomas: They'd be on all the boards.

Shayle Kann: Yeah, exactly. I have a couple friends, I'm just thinking here should join every public board now.

Mallory Thomas: Yeah, they would've gotten some gigs, they've missed out on that. Bummer.

Shayle Kann: Okay, so I guess stepping back and wrapping up here, two questions. One is, how should we be thinking about this SEC rule in the broader context of climate reporting and climate disclosure? And two, is there a next shoe to drop? Are we waiting on something else that hasn't happened yet? Big regulation or a ruling anywhere? Or is this kind of, we think the landscape is settled after the SEC rule?

Mallory Thomas: Oh, I think this area is going to evolve. Well, I mean outside of the SEC, I think the SEC, what we see to date is probably pretty clear of how things are going to go in the United States from an SEC perspective. But I think in Europe with CSRD, I mean many companies, large companies are reporting... They're getting ready for CSRD. They're not even focused on this SEC piece. It's all about the double materiality. It's all about going through the materiality assessment and understanding what those risks are that they have to report, multiple metrics for reporting from a CSRD perspective.

And I think we'll see companies start to adopt more voluntary frameworks outside of just climate. So they're going to start reporting other frameworks. We think about the IFRS and the IASB and some of those voluntary frameworks for disclosure. As exchanges may adopt those pieces as well and those frameworks, we'll see companies likely reporting more, but that's all from a financial impact perspective.

I think, in the United States specifically, I think with states following suit, so California is out there. We have New York proposed and Illinois. I mean, it would be interesting to see how things evolve across the states and what regulations come to date.

Shayle Kann: All right, Mallory, thank you so much for joining me and helping elucidate some of the complexity around this stuff.

Mallory Thomas: Thanks.

Shayle Kann: Mallory Thomas is a risk advisory partner at Baker Tilly US where she focuses on ESG and sustainability. This shows a production of Latitude Media. You can head over to latitudemedia.com for links to today's topics. Latitude is supported by Prelude Ventures. Prelude backs visionaries accelerating climate innovation that will reshape the global economy for the betterment of people and planet. Learn more at preludeventures.com. This episode was produced by Daniel Waldorf, mixing by Roy Campanella and Sean Marquand theme song by Sean Marquand. I'm Shayle Kann and this is Catalyst.

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