SEC Climate-Related Disclosures on The Horizon

  • By Ken Fick
  • Published: 2/8/2023
Globe with sustainability icons

In March 2022, the Securities and Exchange Commission (SEC) published proposed rule changes that would require public companies to include certain climate-related disclosures in their registration statements and periodic reports. Since publication, the proposed rule changes have been open to public comment, and the comments have been voluminous.

If adopted, the new rules would require public companies to disclose the following:

  • Governance of climate-related risks and relevant risk management processes.
  • How any climate-related risks identified have had or are likely to have a material impact on its business and consolidated financial statements and the expected timing of when those risks would occur.
  • How climate-related risks have affected or are likely to affect the company’s strategy, business model and outlook.
  • The impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a company’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

In addition to the above, the proposed rule would also require companies to disclose the following around greenhouse gas emissions:

  • (Scope 1) Direct greenhouse gas (GHG) emissions.
  • (Scope 2) Indirect emissions from purchased electricity or other forms of energy.
  • (Scope 3) GHG emissions from upstream and downstream activities in the company’s value chain.
  • Any GHG emissions target(s) or goal(s) that the company may have.

The proposed rules have yet to be finalized and the SEC is actively working to meet with companies and organizations that would be impacted if the rules are finalized.

How could this impact finance and accounting at my company?

The proposed rules are almost 500 pages which may make compliance difficult. Many companies already provide some type of disclosure around their impact on the environment and these rules would apply needed consistency and transparency. In addition, investors want increased disclosure from public companies on their impact on the environment to make more informed investment decisions.

Within section IV Economic Analysis, subsection C Benefits and Costs, the SEC discusses the potential impact the proposed rules could have on companies, including:

  • The re-allocation of in-house personnel, hiring of additional staff, and/or securing third-party consultancy services.
  • The conduct of climate-related risk assessments, collection of information or data to measure emissions.
  • Accumulation of data from relevant upstream and downstream entities regarding their emissions.
  • Integration of new software or reporting systems, seeking legal counsel and obtaining assurance on applicable disclosures.

The SEC estimates that it will cost the average publicly traded company anywhere between $490,000 to $640,000 per year. These costs are expected to decrease over time for various reasons. This does not include the potential increase in litigation risk associated with the implementation of any new, and complex, disclosure requirement.

Additionally, there are compliance costs related to GHG emissions reporting which may be more difficult and costly. The SEC estimates vary widely from $10,000 to almost $120,000. The SEC caveats their estimate of GHG emissions by stating, “In light of the limited information available, however, we are unable to fully and accurately quantify these costs.

These estimates do not appear to take into account the additional resources needed to fully identify which assets produce the most GHG as well as the volume and velocity in which it is produced from all sources. For example, if a company relies upon 3rd party cloud services for a significant portion of its IT systems, then how would GHG emissions be quantified based on various data warehouses that may be employed by the cloud provider? Is the size of storage capacity utilized? Is it the number of applications run? Is it the complexity of the applications being run that require more power and therefore should be burdened with more GHG emissions?

Due to the audit requirements for company-specific GHG emissions, a series of policies and procedures will need to be developed and then consistently followed in order to meet an audit directive. These costs do not include the additional audit fees themselves.

I don’t work for a public company, so this rule would not affect me.

Not so fast! Scope 1 and 2 would be phased in first, followed by Scope 3. Scope 3 sources would include “emissions derived from the activities of another party (the power provider)” and would include all emissions that would be a consequence of the company’s activities but are generated from sources that are neither owned nor controlled by the company. This includes the “emissions associated with the production and transportation of goods a registrant purchases from third parties, employee commuting or business travel, and the processing or use of the registrant’s products by third parties.”

Although your organization may not be public, if its customers include publicly traded companies, then there is a good chance you will be asked to eventually support their reporting and estimate your GHG emissions.

Legal debate continues.

Some state attorney generals are fighting back. Specifically, West Virginia Attorney General Patrick Morrisey has threatened to sue the SEC if it doesn’t back off its effort to expand environmental, social and governance disclosures.

The legal pressure appears to be working with the SEC considering a softening of language within the proposal. Although the pushback from various constituents has been broad-based, a particularly contentious point is the language around the “1%-threshold rule.” The rule would require companies to “disclose the financial impacts of severe weather events, other natural conditions, transition activities, and identified climate-related risks on the consolidated financial statements included in the relevant filing unless the aggregated impact of the severe weather events, other natural conditions, transition activities, and identified climate-related risks is less than one percent of the total line item for the relevant fiscal year.”

Although this type of bright-line threshold has been used in other contexts related to disclosure by the SEC, the difficulty in precisely determining ESG costs makes this bright-line turn transparent and may open companies up to outside litigation. For their part, the SEC believes that the proposed quantitative threshold could promote comparability and consistency among company filings over time compared to a principles-based approach.

Currently, there is no definitive assurance that the SEC will be able to adopt the proposed new rules, modified or otherwise, but they are expected to be finalized in April 2023. For those responsible for financial reporting in their organizations, an informed wait-and-see approach may best prepare them for what may come.

What gets measured gets improved.

Although the SEC climate-related disclosures will not immediately impact FP&A workflows, once adopted, there is no doubt that outside investors will begin to use the new information, taking it into account in their analysis and valuations. This will put pressure on management to improve reported numbers, driving decision-making on strategic initiatives.

Get ready. FP&A leaders in all companies will quickly be called upon to provide support around the disclosure calculations as well as provide related analysis for management to make those calls.


Ken Fick is a curious, entrepreneurial and innovative finance leader, with the ability to communicate from big picture to small detail. With over 20 + years of finance experience, he has led critical business and financial planning, forecasting, and complex decision support analysis initiatives for companies of all sizes.

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