In a significant move aimed at addressing the escalating concerns surrounding climate change, the Securities and Exchange Commission (SEC) is on track to finalize a rule by next spring that mandates public companies to disclose their greenhouse gas emissions. This initiative comes amid broader efforts by the current administration to confront climate challenges, prompting mixed reactions from business leaders and lawmakers who question the SEC’s role in advancing environmental policies.
Initially proposed in March 2022, the climate disclosure rule has faced several delays in its final release. The rule requires companies to divulge information on two types of climate change risks: physical and transition risks.
- Physical Risks:
- Encompasses the impact of climate change on a company’s operations.
- Includes potential hazards like increased natural disasters such as wildfires or hurricanes.
- Transition Risks:
- Relates to potential harm to a company’s profits due to the growing number of climate change regulations.
- Mandates companies to disclose greenhouse gas emissions generated by their operations, categorized into scope 1, 2, and 3.
As a result, the SEC rule would order companies to share pollution generated by their business operations, broken up into three categories: scope 1, 2 and 3. Scope 1 and 2 emissions pertain to both direct and indirect emissions resulting from a company’s operational activities, encompassing aspects such as waste from manufacturing processes and energy consumption in office buildings. On the other hand, Scope 3 emissions extend to those indirectly linked to a company, emanating from its products. To illustrate, in the case of an oil company, its Scope 3 emissions would include the carbon dioxide generated by gas-powered vehicles, even though the company is not involved in the manufacturing of cars. One notable challenge highlighted by experts is the difficulty in gathering information on scope 3 emissions, as these occur outside a company’s direct control.
Rules Diverge Between Europe and California
The handling of pollution disclosures by other regulators has not been hindered by the delay of the SEC. A climate disclosure bill, signed by California Governor Gavin Newsom in October, mandates private and public companies engaged in California-based activities to reveal scope 1, 2, and 3 emissions starting in 2026. Parallel to this, Europe introduced its own directive, the Corporate Sustainability Reporting Directive, compelling specific companies operating in Europe to disseminate information on environmental and social matters. This directive became effective in January 2023. The conjunction of these two regulations implies that numerous large US companies are likely to disclose their climate emissions, irrespective of the SEC’s rule, as noted by Fisher, emphasizing that the mandatory reporting trend is already in progress.
In the current environmental landscape, F&D Partners, as a leading energy consultant, strongly advocates that its clients take immediate action to mitigate carbon emissions. Given the pressing need to address climate change, F&D Partners recommends a proactive approach through comprehensive studies and the implementation of energy efficiency projects. F&D Partners firmly believes that swift and strategic measures are essential to curb environmental impact and foster sustainability. By conducting thorough analyses tailored to the specific needs of each client, F&D Partners can identify areas of improvement and propose targeted solutions to optimize energy consumption. Through the collaborative efforts of our dedicated team, we aim to empower our clients with the knowledge and tools necessary to make informed decisions that not only reduce their carbon footprint but also contribute to a more sustainable future.