How to Prepare for Stricter SEC Climate Disclosure Requirements

How to Prepare for Stricter SEC Climate Disclosure Requirements

US companies are facing stricter SEC climate disclosure requirements, according to Risk Management Magazine.

In March, the Securities and Exchange Commission issued a rule mandating public companies disclose their climate risks and greenhouse gas emissions. Although its implementation is paused due to legal challenges, similar regulations in California and the European Union will soon require such disclosures. Both regions mandate reporting of direct emissions (Scope 1), emissions from purchased energy (Scope 2), and value chain emissions (Scope 3). California’s law will require Scope 3 reporting by 2027.

Companies should prepare for compliance, as similar regulations are emerging in Brazil, India, Japan, and several U.S. states. California’s law, affecting public and private companies with over $1 billion in revenue, mandates reporting climate risks and mitigation measures, even for companies without a physical presence in the state.

Both SEC climate disclosure requirements and California regulations require Scope 1 and 2 emissions reporting using international standards. The EU’s Corporate Sustainability Reporting Directive (CSRD), effective in 2025 for large companies, also includes Scope 3. Companies must monitor regulatory changes and adapt their reporting, noting the SEC’s focus on material emissions compared to California’s comprehensive Scope 1, 2, and 3 disclosures.

Despite the SEC excluding Scope 3 from its final rule, companies should still assess Scope 3 risks and opportunities. The SEC requires considering broader ESG disclosures when evaluating materiality. Large companies often rely on smaller value-chain partners for emissions data. California’s law mandates using the GHG Protocol for Scope 3 estimates, potentially leading to more detailed federal disclosures than initially required by the SEC. This trend suggests California’s stringent standards might elevate overall disclosure practices.

California’s law applies to companies doing any business in the state, interpreted as “engaging in any transaction for financial gain within California,” said Michael McDonough, partner at Pillsbury Law. Companies without a physical presence in California may still be subject to these requirements if any part of their value chain is there, as companies with $500 million or more in revenue are likely to have financial interests tied to California transactions.