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Lindsey Hall: Hi. I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, an S&P Global podcast, where Esther and I take you inside the environmental, social and governance issues that are shaping the rapidly evolving sustainability landscape.

Esther Whieldon: The US Securities and Exchange Commission on March 6 finalized its long-anticipated rule requiring thousands of publicly traded companies to disclose certain climate-related information. 

And as we'll hear in today's episode, while the final rule takes more narrow approach than what the SEC proposed in 2022, it marks a significant change in the level of climate-related information that publicly-listed companies must disclose in the US. 

Lindsey Hall: The rule comes as standard setters and lawmakers around the world seek to create a baseline for corporate sustainability-related disclosures. Today we'll explore the key components of the SEC rule and its implications for investors, companies, and the broader global climate disclosure landscape. 

As we'll hear in today's episode, investors are increasingly asking companies to provide more consistent, comparable and reliable information on climate change risks and impacts. Investors say they need this data to make informed investment choices.

Esther Whieldon: We’re going to start today’s episode with an overview of what the SEC is requiring. For this, we'll talk with Cynthia Hanawalt. She is director of the Sabin Center for Climate Change Law. This is a think tank at Columbia Law School in New York City.

Cynthia Hanawalt: Public companies will have to disclose information about their climate-related financial risks, their greenhouse gas emissions and their climate goals, right, a company's targets or any plans for the energy transition. 

So with respect to the first category, public companies have to disclose any climate-related risks that may have a material impact on the company's business strategy, their operational results, their financial condition. 

That word material is really important. It's a threshold in the final rule that was not in the proposed version. And it means that there's a substantial likelihood a reasonable investor would consider the information important when making their decision whether to buy or sell securities. So that's an assessment companies will make in deciding whether to disclose much of this information as a threshold matter.

Companies also have to disclose the financial impacts of severe weather events. If the company has undertaken any climate mitigation efforts, those have to be disclosed as well. And all of these disclosures are quite detailed. 

Many of them require quantitative and qualitative descriptors and disclosure around estimates or any related assumptions that were made. And then firms also have to disclose any Board oversight to our internal processes and management related to clients.

So that's risk, then there's the second category, greenhouse gas emissions. These requirements only apply to large accelerated filers and accelerated filers. Those are specific classifications for SEC purposes. But it basically means this will capture all companies with publicly traded stocks valued $75 million or more. 

So those companies have to disclose their material Scope 1 and Scope 2 emissions. So for anyone who needs a refresher, Scope 1 emissions are greenhouse gases from the firm's own operations, their factories, their fleet of vehicles. And Scope 2 emissions are generated by the firm's purchase of energy, their heating their cooling, their electricity and note that materiality threshold. And then again companies have to make their own determinations as to whether the emissions data is material to investors and then disclose accordingly. 

And then the last category, public companies will have to disclose any targets or goals related to climate change that materially affect their business. So we're thinking here about expenditures, about the use of carbon offsets or renewable energy credits, things like scenario analysis and internal carbon pricing, if those were used as part of the company's transition planning. 

And the last thing I would just flag that's important is on timing. The rule will be phased in over several years. Large companies won't make their initial disclosures until 2026, and then the deadline for smaller companies comes even later. 

Esther Whieldon: And then what were some of the big changes for the rule, the ones that really people listening to this need to be aware of? 

Cynthia Hanawalt: Sure. Yes, I mean the commentary in connection with the rule was certainly focused on the fact that the final version was significantly scaled back from the proposal that the SEC put out 2 years ago. I'll just mention a few key changes. The final rule does not require anyone to disclose their Scope 3 emissions, which are a company's supply chain emissions, meaning their greenhouse gases from their upstream suppliers and downstream all the way to a consumer's use of their product. And this was a big concession to opponents of the rule.

Scope 3 emissions make up sometimes up to 80% of companies' total greenhouse gas emissions. So lots of investors had asked for this information and regulators in many other countries are actually requiring Scope 3 disclosures. 

The revised rule also only requires Scope 1 and 2 greenhouse gas reporting for the large companies that we talked about. So smaller publicly traded companies will be exempt from having to report their emissions at all. And then the last thing I would flag as we sort of mentioned a little bit earlier, the final rule includes this materiality threshold.

Esther Whieldon: The final rule also calls for companies subject to the Scope 1 and Scope 2 emissions disclosure requirement to obtain what are called attestation reports to provide assurance that their emissions data is not misstated. This requirement will also be phased in over time.

I wanted to get a sense of how far along companies are in their reporting journey so I turned to Bruno Sarda, a partner at professional services company EY in its Climate Change and Sustainability Services Group. EY is considered one of the Big Four accounting firms in the world. And prior to joining EY, Bruno was president of the North America division of sustainability disclosure platform CDP. And if his name sounds familiar to you Lindsey, that's because he was a guest on this podcast back when he was at CDP.

Ok, here's Bruno talking about where companies stand and what message the rule sends. 

Bruno Sarda: The most important aspect of the rule is that climate change and climate risks and opportunities remains a topic that many companies and many Boards, for sure, have yet to fully incorporate into their long-term strategy and decision-making. 

These topics can be somewhat obscure at times. And what we find for sure is companies are going to need to scale up and staff up in some of these areas. And for others, these are not skill sets they will fully need to have on board because you don't need, for example, to do in-depth climate risk scenarios on an ongoing basis. 

So it's also look at from your governance and operating model perspective, what do you have? What do you need? And then who can help you fill those gaps either through internal resource planning or external expertise. 

So I think that the strongest message is climate risk is financial risk. We've heard that from the financial community all the way up from the Financial Stability Board and Central Banks on down. If climate risk is financial risk, companies need to be ready to both measure, manage and communicate that risk and how they're managing it. 

Lindsey Hall: Bruno mentioned many company boards have yet to incorporate climate change into their long-term strategy and decision-making. This was also reflected in research S&P Global Sustainable1 just published looking at the SEC rule and the current corporate climate disclosure landscape in the US. Esther, since you're a co-author on that report, tell us, what did you find?

Esther Whieldon: Our analysis found that corporate disclosures of greenhouse gas emissions remains the exception rather than the rule for most. Overall, voluntary disclosure of Scope 1 and Scope 2 emissions has been rising steadily in the US since 2018. That said, less than half of companies currently publish that data.

And the picture was similar when it came to disclosures on other climate-related information such as risk management, with disclosures less common among smaller companies.  

Earlier, we heard Cynthia mention how the SEC put a greater emphasis on having companies disclose material information. I wanted to learn more about how this will play out for companies. For this, let's hear from Kristina Wyatt. She starts off by giving us some background on her experience related to the SEC and this rulemaking. 

Kristina Wyatt: My name is Kristina Wyatt, and I'm the Chief Sustainability Officer at Persefoni, we're a carbon accounting software company. I've been here for about 2 years, a little bit over 2 years. And before coming to Persefoni, I worked at the SEC, where I was on a special assignment for a year working on the climate proposal that's now become the climate rule. 

Esther Whieldon: Can you talk a little bit about the SEC's focus on materiality in this rule? 

Kristina Wyatt: Sure. Well, materiality appears in several places. It's really throughout the rule. I suppose that, at core, the materiality requirements are very much like the well-worn materiality requirements that apply to many of the disclosure requirements in the SEC's rules.

Esther Whieldon: I asked Kristina, how much discretion do companies have on making their materiality determinations? 

Kristina Wyatt: Companies do have quite a lot of discretion in making that materiality determination, but at the same time, there's some risk involved if you make the determination that information is not material. 

And if you do so, I think you'll want to be ready to back that up with data to show how it was that you determined that the information wasn't material. So it's a little bit of a double negative there, but it's to say, gather the information, document the information that you have, and if you determine and you have a reasonable basis for determining and you can demonstrate that your thinking was rational that information is not material, then companies do have a fair amount of latitude to omit the information on the basis of it being immaterial. 

But that doesn't mean that companies get a free pass on conducting the analysis and gathering the information because there will be challenges to companies' determinations that the information is not material.

Esther Whieldon: And will those challenges come from like the SEC staff or investors? Or where do you anticipate that coming from? 

Kristina Wyatt: I think both, to be honest with you. And I also think that that's another place where when you think about all the information that companies have been disclosing voluntarily and where they will be disclosing information in multiple jurisdictions that there will be comparison process, which the staff of the SEC has already been doing to compare the information that companies have been putting in their filings compared to the information that they might include in their sustainability report or elsewhere. 

And the staff had been asking questions about their emission of information. And I think they'll continue to do that in all likelihood. But now, of course, there will be a rule that says you have to disclose this information if it's material. So there will be additional teeth attached to that. 

And I think plantiffs bar in the United States is robust, and they'll probably be doing something quite similar in comparing the information that companies are disclosing in one place to what they're disclosing elsewhere, and,  when appropriate, challenging those decisions where there are differences. 

Esther Whieldon: Kristina went on to talk about some of the key drivers behind this rulemaking and how the disclosure landscape has evolved in recent years? 

Kristina Wyatt: I should say that one of the things that we set out to do when we put pen to paper in crafting the proposal was that we were hoping to give investors the consistent comparable decision-useful information related to climate that they had long been asking for. 

We had been in quite a fragmented reporting world where there was this alphabet soup of all these different voluntary reporting standards. And investors were saying that they were not getting the consistent disclosures that they needed to be able to compare companies to each other and also compare disclosures by any particular company across time. 

And we also spoke with issuers, companies that were reporting, and they also said that they were quite interested in having a clear direction of travel as to what it was that they should be reporting. They were under loads of requests and questionnaires and quite confused in many cases about what they should be disclosing and which of the voluntary frameworks ought to apply. And so there was this drive for consistency and harmonization.

And I think that in the 3 years since we started drafting the climate proposal, the world writ large, has moved forward in a really positive direction. 

We do have a common direction of travel at this point. And the 2 frameworks that really help to guide what companies ought to be disclosing are quite consistent in the different regulatory requirements and standards that have emerged around the world. And those are the Greenhouse Gas Protocol, which is the standard that helps companies to define how to measure their greenhouse gas emissions. It's the thing that defines scopes 1, 2 and 3 greenhouse gas emissions that are now quite well used and understood. 

And then the other standard is the Taskforce on Climate-related Financial Disclosures, or TCFD, which helps companies to think about their climate-related financial risks and how they're managing those risks. 

And the reason I point to those 2 standards is that they are the through line that is consistent around the world in all the major reporting regimes and standards, including the now newly formed ISSB, the International Sustainability Standards Board, the rules that have come out of Europe to implement the CSRD, or the Corporate Sustainability Reporting directive, the SEC's rule, and even the laws that have come out in California, SB253, which requires greenhouse gas emissions reporting in accordance with the Greenhouse Gas Protocol and California's SB261, which is a climate risk reporting law that follows the TCFD. 

Esther Whieldon: At the SEC's March 6 open meeting, Chairman Gary Gensler noted that some companies will be subject to disclosure requirements across multiple jurisdictions. And we just heard Kristina list some of the regulations and disclosure frameworks in place today. Here she is again talking about what kind of considerations companies may need to make if they are subject to multiple disclosure rules.

Kristina Wyatt: Companies will be looking at having different disclosure requirements in different jurisdictions, and they will have to make decisions about whether they try to disclose consistently across jurisdictions or whether they pick and choose what they're going to disclose on the basis of what's required in any particular jurisdiction. 

Many companies, of course, will be subject to reporting to the ISSB standards when they're adopted by the various countries that are working to adopt them perhaps to the ESRD, which will have very broad extra territorial effect. And I think that, that will present some challenges. They're not insurmountable. 

There was a very interesting idea that 2 commissioners in their statements at the open meeting on March 6 raised. And that relates to the idea of providing some kind of mechanism to enable companies to report in a harmonized way across jurisdictions, perhaps looking to the ISSB, or the International Sustainability Standards Board's standards, and to use whatever their report is pursuant to the ISSB as a mechanism for satisfying their SEC reporting obligations and perhaps having a safe harbor that would protect them from liability for any information that they disclosed pursuant to the ISSB standards that go beyond what the SEC requires. 

And I thought that was quite interesting because that may be an optional way. It may give companies a different mechanism that they could use to harmonize their different disclosures without having to worry so much about the additional liability that they might take on if they just include additional information in their SEC filing and don't have a safe harbor. 

Esther Whieldon: So now that we've gotten an overview of the rule, how it fits in the broader disclosure landscape as well as a look at the SEC's focus on materiality, let's drill down into some specific components of the rule. For example, what do assurance requirements for Scope 1 and Scope 2 disclosures entail? For this,  let's turn back to Bruno of EY.

Bruno Sarda: The assurance requirement has 2 main things to note. One is that it creates accountability. So basically, somebody has to sign off both, if you will, an auditor as well as members of management and the Audit Committee. 

So when you have an assurance requirement on a statutory report, that in itself creates that extra level of accountability, that somebody has to basically -- that they have verified that the information is in there that they basically vouch for the quality of the information. 

The other part of the assurance requirement is that it is, if you will, not necessarily forensic, but it's a rigorous review of information, not just what is ultimately included in a report, but how that information was collected. So it looks for things like completeness and accuracy and consistency. And so that assurance requirement that means that there's quite a bit of rigor that happens before something can make its way into a report so that all the right people are involved to ensure that the basis for collecting and calculating and ultimately reporting that information is consistent with certainly the requirements of the rule and the expectation of those who will consume that information such as the investment community. 

Esther Whieldon: As we heard earlier, the rule requires companies to disclose the material costs of severe weather events in their audited financial statements. Note again how the SEC included a materiality aspect in here as well. I asked Bruno, how will this affect the approach accounting professionals take? Here's this reply. 

Bruno Sarda: Yes. That's a great question. The accounting profession, of course, has long-standing experience having to adapt to all kinds of new things that have to make their way into financial statements.

I think some of the questions we're already hearing here is even though the SEC, I think, went to great length to confirm that the standard definitions of materiality should apply, some of the topics that is being applied against haven't typically been used in the context of financial materiality as it comes to accounting and financial reporting. 

So I think that's where we're going to see some evolution of the practice. And firms like ours will have to develop guidance on how to apply these concepts of financial materiality, where to set those thresholds, and then how to especially make forward-looking statements. Because past expenditures, for example, on things like climate or extreme weather-related events, are easier than potentially predicting the potential future costs of such events. And so I think we're going to see an evolution of the nature of these disclosures and the way that they're being calculated and developed. 

Esther Whieldon: What else are you hearing from clients? What other things are they thinking about in respect to the final rule? 

Bruno Sarda: Sure. I think 2 dimensions that we're hearing a lot. One. which is this concept of data. and the idea that most organizations still rely on relatively simple tools, spreadsheets and other systems to calculate and communicate that information. 

Because now of the future assurance requirement over some of this data, I think we're going to see many organizations needing to deploy better information systems in addition to the more rigorous processes and controls over those systems to ensure, again, both the completeness, the accuracy, the reliability of the data, making its way through the organization all the way into these disclosures. So I think the inadequacy of current systems that are deployed in most organizations is certainly one thing we're hearing. 

Esther Whieldon: Bruno also gave his take on the rule's phase-in implementation time line.

Bruno Sarda: And so now companies feel like they've bought themselves a little bit of time. Many companies, again, especially the large accelerated filers, have, frankly, similar requirements coming due through the EU CSRD rule. So for many, it doesn't feel like now they have to rush to meet the SEC requirement because in many ways, they're going to have to meet it either for CSRD or, in some cases, also for California and about the same time frame. 

So most of what we heard so far was at least a comfort that at least the initial time line was not stuck to and even the assurance requirement on Scope 1 and 2 emissions comes a few years after initial reporting of that data. So that buys company is also a little bit more time to be comfortable with what they're reporting. 

Esther Whieldon: Okay. So we've heard about what's in the rule, some of the challenges companies will face in implementing it. And we've gotten a sense of how the SEC's rulemaking fits in the broader disclosure landscape. 

Let's turn next to Elizabeth Dawson who will give us alook at the legal implications surrounding the rule with Elizabeth Dawson. She's a partner at the law firm Crowell & Moring in its Washington, D.C. office. She's a lead on the firm's ESG advisory team and the Chair of its Sustainability Committee. She was also a trial attorney at the US Department of Justice on the Environment and Natural Resources division prior to coming to Crowell. Here's Elizabeth. 

Elizabeth Dawson: I think it's fair to say that the litigation is still very nascent. We did see, before the SEC finalized its rule, the 2 climate disclosure-related California bills be challenged in court and that litigation is underway. 

Well now we have at least 3 petitions to review final challenging the SEC's rule. So it will remain to be seen what comes out of that litigation. But I think the arguments that are likely to be made have been previewed fairly thoroughly in the comments to the proposed rule.

Esther Whieldon: Yes. So what are the arguments that are expected to come up?

Elizabeth Dawson: Sure. So I think some of these arguments might be tempered or might adjust. As we know the final rule was scaled back in some significant ways from the proposal. And so to that extent, certain arguments might not be as viable as they would have been had the SEC finalized the rule it proposed. 

But I think we might see arguments that the final rule exceeds the scope of the SEC's statutory mandate, arguments such as the Major Questions Doctrine might be raised with regard to the level of specificity that is needed in a statute to enable an agency to regulate in ways that had significant effects on the economy or other very high-profile contentious issues? 

Esther Whieldon: For those of our listeners who may not be familiar with that Doctrine and what's the background there on the Major Questions Doctrine? 

Elizabeth Dawson: So the Major Questions Doctrine, and as we know it now, I think, was kind of cemented into being in the West Virginia v EPA decision that the Supreme Court reached a couple of years ago. But it is not a new idea. The idea that the statute has to clearly enable an agency to do what it is attempting to do, has been threaded through case law regarding the regulatory state for a number of decades. 

But I think West Virginia v EPA put a finer point on it in terms of really looking at the text of the statute and rehiring clear authority before an agency could take a foray into regulation that could have major consequences either politically or economically. 

Esther Whieldon: Elizabeth also noted that the rule is facing legal challenges from parties that wanted the SEC to include more disclosure requirements.

Elizabeth Dawson: I think there, their arguments are going to be more on the traditional Administrative Procedure Act-type arguments in that the rule was an unjustified departure from the proposal, or the agency didn't adequately support why it made the changes it did and why it didn't finalize some of the more stringent requirements that it had proposed to include.

Esther Whieldon: What are some of the things that SEC did to potentially defend itself against some of the arguments?

Elizabeth Dawson: To me, one of the biggest things that the SEC did between the proposal and the final rule is the shift to materiality. As I believe Chair Gensler said in his remarks regarding the final rule, the focus on materiality is consistent with prior rulemakings of the SEC. And in that regard, that is, I think, an attempt to show a reviewing court that it is not exceeding the bounds of its statutory mandate or regulating in an area that is outside its wheelhouse, but rather that it is a consistent rulemaking in line with what it has already been requiring. 

Esther Whieldon: So we've unpacked a lot about this SEC climate disclosure rule, and I'd like to finish with a clip from Kristina Wyatt of Persefoni, where she answers my question about how effective this rule will be in improving the climate disclosure landscape. 

Kristina Wyatt: I think time will tell how effective these disclosures will be. But I think that greater transparency as to information that's important to investors is a good thing. And so I don't think that the final rule has sort of captured all of climate risk, particularly in the financial disclosure piece, but I think it's a movement in the right direction. 

Companies are on a journey, investors are in a journey to try to figure this thing out to try to understand how can we understand our climate-related financial risks? How can we mitigate those risks, maybe take advantage of opportunities. But then the regulatory world is also on a path where these different rules and standards are evolving and hopefully moving towards greater harmonization, hopefully moving towards being more effective in giving investors the information that they need. And this is one important step, but I think it's probably not the last step that the SEC takes.

Lindsey Hall: So wow Esther, just so much to take in here today, we heard how the disclosure landscape is evolving and also the implications this SEC rule will have. 

Esther Whieldon: And next week, Lindsey and I are taking the podcast on the road to Houston for S&P Global's Annual Energy Conference, CERAWeek. So please stay tuned.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider. If you like what you heard today, please subscribe, share and leave us a review wherever you get your podcast.

Esther Whieldon: And a special thanks to our agency partner, The 199. See you next time.

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