In March 2022, the Securities Exchange Commission released a proposal, The Enhancement and Standardization of Climate-Related Disclosures for Investors, to establish rules that promote clear and consistent climate-related reporting obligations for issuers. The overall proposal discusses potential disclosures related to climate risks in business operations.
This article will discuss the proposed disclosures related to greenhouse gas emission. It will also examine the current guidance and regulations companies follow to report their greenhouse gas emissions.
The major accounting firms have assembled industry task forces to research the implication of this proposal. This article will draw from the guides published as we provide an explanation for companies applying greenhouse gas emissions reporting.
Most companies which report their greenhouse gas emissions reference the Greenhouse Gas Protocol (GHG Protocol). This protocol was written by the World Resources Institute and World Business Council for Sustainable Development to measure and manage greenhouse gas emissions from private and public sector operations, value chain, and mitigation actions.
While many consumers are familiar with carbon dioxide emissions (CO2), other GHG emissions are subject to reporting including nitrous oxide (N20), methane (CH4), hydrofluorocarbons (HFCs), and perfluorocarbons (PFCs).
The GHG Protocol defines three different types of GHG emissions:
- Scope 1 refers to emissions from operations owned or controlled by a company.
- Scope 2 refers to indirect emissions from a company’s purchased or acquired electricity, heating, etc.
- Scope 3 refers to emissions from indirect upstream and downstream, also referred to as value chain emissions. This is the most difficult scope to measure due to issues with comparability, double counting, and verifiability. This scope can be broken into fifteen different categories for upstream and downstream activities.
The diagram below illustrates different business activities and designates which scope the respective GHG emissions would fall under. There are different examples of activities for each scope. The categories for Scope 3 are also outlined.
Diagram provided by EPA Article over Scope 3 Inventory Guidance
Current Reporting Standards
There are different standards and regulations that different companies follow, such as Greenhouse Gas Protocol, Greenhouse Gas Reporting Program, CDP, Environmental Protection Agency, or Intergovernmental Panel on Climate Change.
The EPA has required GHG emission reporting for approximately 41 industries through their Greenhouse Gas Reporting Program (GHGRP). The EPA cites GHGRP’s 40 CFR part 98.2, which requires companies to report their GHG emissions if they are meeting one or more of the following criteria:
- A facility that contains any source category such as carbon dioxide, petroleum, ammonia manufacturing, aluminum product, cement production, or other emissions listed in supporting Table A-3 of the regulation.
- A facility that emits 25,000 metric tons carbon dioxide equivalent (CO2E) or more per year in combined emissions from applicable source categories.
- A supplier listed in supporting Table A-5 of the regulation, such as all producers of coal-to-liquid products, petroleum product suppliers, natural gas and natural gas liquids suppliers, industrial greenhouse gas suppliers, or carbon dioxide suppliers.
- Research and development activities are not considered to be part of any source categories.
Low emitters are classified as small businesses, office-based organizations, and public institutions. The majority of their GHG emissions come from purchased electricity and vehicles. The EPA published a specialized Guide to Greenhouse Gas Management for Small Business and Low Emitters.
In addition to required EPA disclosures, companies frequently provide disclosures in sustainability reports and CDP Climate Change Questionnaires. These additional reports may be referenced in their current SEC filings as illustrated by Waste Management's disclosures below.
The SEC proposed that US 10-K filers and foreign private issuers who file 20-F forms will need to disclose their GHG emissions. This information would be included in audited financial statements, such as financial impact metrics, expenditure metrics and financial estimates and assumptions, etc., and a newly created section of each respective form immediately before the management’s discussion and analysis section. Larger companies would have to disclose most of this information as of fiscal year 2023, while smaller companies could wait until fiscal year 2024.
Among other climate related disclosures, the new SEC rule includes requirements to report GHG emissions. Registrants would disclose information for their emissions under scope 1 and 2. Scope 3 would only need to be disclosed if material or if the filer has a target goal to reduce emissions.
Registrants would need to disclose emissions disaggregated by each scope and constituent greenhouse gas (e.g. carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) and in the aggregate. Additional information would need be disclosed regarding the intensity per unit of production terms, methodology, significant inputs, and significant assumptions used in calculations.
Registrants would also need to provide a statement by an independent attestation service provider to verify the accuracy and completeness of the emission reporting.
The following image from KPMG’s guidance on the SEC proposal illustrates the before the management discussion and analysis section:
The following image from KPMG shows a timeline of proposed disclosure and assurance requirements for each scope according to different filer statuses.
This proposal would also impact initial public offerings. The same disclosures would not have a scope exception for companies filing registration statements in connection with the registration of a security, a security offering, or an investment company. However, a new registrant would not be required to obtain assurance over its GHG emissions during an IPO.
There are many similarities between this new SEC proposal and the GHG Protocol and GHGRP. The SEC cites the same definitions for the emission scopes and greenhouse gases. The SEC also requires the metric carbon dioxide equivalent to ensure comparability across registrants and achieve the overall SEC goal of promoting clear and consistent reporting. With the similarities between what the SEC is anticipating and existing guidance, many companies will be able to easily transfer their reporting.
GHG emissions are one of the main aspects of ESG reporting for which the SEC has proposed clear and consistent reporting requirements. While the proposal has not been officially passed, these are the general aspects that may be adopted in the future. Companies should begin to anticipate and implement necessary processes to how they should gather, record, and report their GHG emissions.