What to watch when the SEC climate rule drops

The SEC’s long-awaited climate rule is likely to pass tomorrow. Companies will be watching to see how closely the final regulations will resemble the proposed rule the agency released in March 2022. What stays in—and what gets softened—could have a significant impact on how much of a burden the rule places on finance, accounting, and ESG staff.

And there’s a decent chance the rule could differ from the proposal: Anonymous sources have told news outlets the rule will be watered down, partly in efforts to avoid lawsuits. In particular, the requirement for companies to report Scope 3 emissions might be eliminated altogether, Reuters reported. Scope 3 emissions—emissions produced not by companies themselves, but by other entities in their value chain, such as suppliers and customers—have proven a controversial topic, with detractors claiming they’re too burdensome to measure.

Key items to watch include:

Whether Scope 3 emissions make it into the rule: Though all eyes will be on Scope 3, its “inclusion or exclusion” won’t prove “that impactful for a fairly large amount of public companies,” Rob Fisher, US ESG leader at KPMG, told reporters during a roundtable discussion at the end of February. Many large companies, he said, are “going to have a rigorous process to inventory Scope 3 emissions” in order to comply with other jurisdictions’ regulations, such as the Corporate Sustainability Reporting Directive (CSRD) in the EU and the California climate rule.

“If companies have to comply with the CSRD, they’re probably 75%–80% of the way there in terms of generating the information they need to comply with the SEC,” Maura Hodge, ESG audit leader at KPMG US, noted.

Whether the SEC retains the 1% threshold: The proposed SEC rule states that companies are required to report climate risks on their financial statements if they assessed that these risks amount to 1% or more of a total line item for the relevant year. Currently, companies generally only report climate risks if they deem them “material,” and they have broad latitude over how they determine materiality.

How well the rule meshes with existing regulations: Companies are waiting to see how the SEC rule aligns with regulations they already comply with in other jurisdictions, as less alignment will create greater complexity. One big difference between the proposed SEC rule and others, Hodge said, is that it would require companies “to measure greenhouse gases consistent with the way that they consolidate their financial statements, whereas the other standards allow for a concept of operational control.”

When it would go into effect: Companies will also be looking to see when they’d be required to comply and how much time they have to prepare, Hodge said.