Banks, Borrowers and Climate Change: The SEC Releases its Rule on Climate Disclosure: Potential Impacts to Your Business

by | Mar 18, 2024 | Banks and Borrowers, SEC, Sustainability

The EI Group and ERI began a joint blog series in January titled, “Banks, Borrowers, and Climate Change” that focuses on the Securities and Exchange Commission (SEC) and financed emissions. We have explored a number of areas related to this topic so far: How Disclosure of GHG Emissions Will Impact the Lending Process for Publicly Traded CorporationsClimate Action in Financial Institutions Initiative; and most recently, An Overview of the PCAF Global Accounting and Report Standard. Now that the SEC has released its rule on emissions, we will examine what the rule is compared to what the proposal was, and what the rule’s potential impact may be.

Back in March of 2022, the New York Times reported the SEC proposed a rule that would require public companies to share information about how they affect climate change with both their shareholders and the federal government. The intent of the rule was to allow investors to gain a better idea of how climate change might create risks to companies, leading to the investors being able to make informed decisions regarding stock purchases or sales.

The SEC proposed three levels of data analysis. The first two levels would require annual reporting of companies’ climate change effects based on the direct impact of their operations. This would include Scope 1 emissions—direct greenhouse (GHG) emissions that occur from sources that are controlled or owned by an organization;” and Scope 2 emissions—”indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling.”

The third level of analysis—referred to as Scope 3 Emissions—would be broader. It would evaluate the “carbon footprint of suppliers, business travel and any assets a company leases.” At the time of the proposal, the SEC said it would only require Scope 3 Emissions reporting for the largest companies.

As reported by the Associated Press, the SEC finally released its rule on March 6th, 2024, nearly two years after the New York Times article. The rule is a less robust version of the proposal, most notably because it does not require companies to report Scope 3 emissions (with Scope 3 emissions constituting the majority of a corporation’s carbon footprint). Additionally, companies only have to report Scope 1 and 2 emissions, “if they believe they are ‘material’ — in other words, significant — a decision that allows companies to decide whether they need to disclose. And smaller companies don’t have to report emissions at all.” A more detailed explanation of the rule can be found on the SEC site

While the SEC is not requiring companies to report all GHG emissions, that doesn’t mean it isn’t in the best interest of companies to do so anyway. Worldwide changes are on the horizon for carbon accounting, and regulators around the world are tightening their mandates for annual carbon reporting. In 2025, the Corporate Sustainability Reporting Directive (CSRD) will require 11,700 of the EU’s largest exchange listed businesses, banks and insurance companies (those exceeding 500 employees) to disclose their Level 1, 2 and 3 scope GHG emissions from the preceding year.

In 2026, companies with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets will be required to disclose their 2025 emissions in reports submitted in 2026. This could include EU subsidiaries of companies not based in the EU if they meet the criteria. By 2028, the CSRD will also target listed small and medium businesses to substantiate Scope 1, 2 and 3 baseline emissions and establish goals for emission reduction.

As a result, US companies who do business with other countries in the EU will likely have to report their GHG emissions, so those EU businesses, banks and insurance companies targeted by the CSRD can accurately report their own supply-chain emissions. Japan, Australia, and South Africa have similar regulatory directives. Closer to home, the State of California recently passed Senate Bill 253, also known as the Climate Corporate Accountability Act, which will require public and private companies with over $1 billion in revenue to report their direct and indirect (Scope 1 and 2) emissions in 2026 if they are “doing business in California.” In 2027, corporations doing business in California will be required to report Scope 1, 2 and 3 emissions.

Moreover, when the US rejoined the Paris Agreement in 2021, it published its Long-term Strategy that has a goal of net-zero emissions by 2050. The strategy acknowledges it will “require actions spanning every sector of the economy,” so it stands to reason the financial sector will need to start reporting GHG emissions at some point because the government will need a metric to determine whether it is on track to meet its net-zero goal. Eventually, yearly GHG emission reporting and goals for reducing those emissions by US companies will be as integral as reporting annual financial performance.

Aside from governmental regulations, however, there is another driver of reporting GHG emissions: branding. Climate risk is a big concern for many investors because climate risk is financial risk, so those investors are interested in companies that are transparent about how they are addressing the danger of a changing climate. Investors are also looking for companies that demonstrate leadership by taking the initiative to tackle climate risk. Finally, it is no secret that product sustainability builds brand for consumers. Forbes quoted R. Charles Waring from Eisner Amper’s ESG in Focus podcast as saying Environmental, Social, and Governance (ESG) “is the cost of doing business on a go-forward basis…The more that an organization resists, they put themselves at risk for future business with their customers and stakeholders.” One step toward a company’s brand being associated with ESG is going to be the reporting of GHG emissions.

While the new SEC ruling is less vigorous than what was originally proposed, the difference will most likely not have much of an impact on how companies decide to handle emissions. Reporting requirements already in place in many countries (and even some states in the US), coupled with the desire of investors and consumers to do business with companies that are focused on climate risk and sustainability, will provide significant  motivation for companies to get on board with reporting GHG emissions. Stricter governmental regulations are definitely on the horizon, providing progressive US companies who desire to enhance their brand incentive to lead the way in ESG reporting.

NEXT: If the “The SEC Releases its Rule on Climate Disclosure: Potential Impacts to Your Business” article interested you, join us for our next blog: “PCAF’s Part C Standard: A milestone for Climate Action I the RE/Insurance Sector,” where we will look at PCAF’s standards related to GHG emissions associated with underwriting insurance and reinsurance company portfolios.

The EI Group, a multidisciplinary environmental engineering, occupational safety and health consulting firm whose primary focus is aimed at supporting Fortune 1000 corporations involved in manufacturing, energy production and transportation services, and Environmental Risk Innovations (ERI), a consulting firm which manages environmental risk for banks, have formed an alliance to address the needs of publicly traded commercial lenders and those corporate borrowers targeted for commercial loans to assist their customers, both banks and corporations, in meeting the pending SEC rule requirements. As part of this initiative, The EI Group and ERI have launched a joint blog series which outlines the SEC rule in detail.