The Way Forward on Reporting: S.E.C.’s New Climate Rules

In March, the U.S. Securities and Exchange Commission (S.E.C.) finalized its much-anticipated climate disclosure rules, one of the biggest overhauls of U.S. corporate reporting in years, aimed at illuminating the climate-related risks and greenhouse gas emissions of public companies.

While this type of reporting is far from new—many companies voluntarily quantify their emissions reduction targets, as well as both their environmental impacts and achievements in annual reports and other formal documents—it is very novel in that it will create a more uniform framework for this type of reporting, and require more large entities to participate.

Standardizing how companies report their emissions, climate impacts and risks

Prior to the S.E.C. rules, it had become common for companies to disclose this information as part of their overall ESG initiatives. In fact, almost two-thirds of respondents to The Wall Street Journal’s 2023 survey of sustainability officials said their company was already reporting environmental, social and governance information.

In the words of Barbara Porco for Bloomberg Law, “The demand for climate-related disclosures is already here. The most successful and viable companies will recognize this is an opportunity and capitalize on it.”

However, companies to date have lacked a singular framework for this detailed reporting, using different methodologies to document climate-related metrics like greenhouse gas emissions and energy use. This lack of standardization has made it difficult for investors to compare the environmental performance of companies—which is one of the reasons why the new climate disclosure rules are a landmark development. The other, of course, is that they will require more companies to participate in this style of reporting, and provide increased transparency around how major companies are both contributing to and affected by climate change.

Great change is often accompanied by great challenges, and the S.E.C. rule is no exception. Ten states sued to stop the rules from being implemented. By mid-March, the rules had been temporarily halted after a federal court sided with two oil and gas companies. However, many companies are moving forward with their efforts to prepare for compliance to ensure they have everything in place—especially since they may have to adhere to similar rules passed in California and the EU.

The valuable and critical work of green building professionals

The S.E.C. rules mandate that all publicly-traded companies disclose climate-related risks and related risk management processes, including targets, goals and strategies for transitioning to a low-carbon economy. Many of these companies will also need to report on scope 1 and scope 2 emissions, which refer to emissions sources that a company owns or controls directly (like burning fuel in a fleet of vehicles), and those that a company causes indirectly (e.g. electricity generation in buildings), respectively. According to the S.E.C. rules, these reporting measures must be completed for the first time for the year 2025, which means companies will need to have the right team members, data sources, and processes in place to accurately track, measure and monitor this information beginning this coming January, if they aren’t already.

Given the nature of the data that the S.E.C. is collecting, the built environment is a central part of the conversation. From an emissions perspective, companies that previously were less inclined or behind on enacting energy-saving measures in their building portfolio may be incentivized to put strategies in place more imminently, in order to show better performance in their reporting. This is likely to directly impact green building professionals in a number of ways, creating increased demand for their consulting and reporting services, and stirring up an even more mainstream dialogue on best practices for reducing emissions and energy consumption in buildings.

In addition to emissions, companies will also need to report on how severe weather and other natural conditions impact their financial statements as part of their assessment of climate-related risk. Here, buildings are also of utmost importance. Where a company’s building portfolio is located—be it offices, factories, data centers, retail locations, hotels, multifamily residential buildings or any other building type—has a direct effect on the level of climate risk it incurs. The resiliency measures that are in place at the building-level, as well as the city-level, become even more important to demonstrate risk mitigation.

Despite the legal challenges to the S.E.C.’s climate disclosure rules, their initial adoption signals a dynamic shift in the country’s focus on climate change mitigation and corporate accountability—with broad-reaching impacts on green building professionals, who have the background and skills needed to carry this work forward.