The US Climate Disclosure Rule and its Opportunities and Challenges for Specific Sectors
Our previous articles have provided a discourse on the EU’s CSRD and Canada’s Climate Investment Taxonomy which holds enterprises accountable for their environmental impact. Adding to the list of regulations that governments are imposing to fight climate change is The United States’ Climate Disclosure Rule.
Last March 2022, The Securities and Exchange Commission of the US proposed an enhanced and standardized version of the Climate-related Disclosures involving financial statements, greenhouse gas emissions, including scope 3 emissions, and proof of disclosures, among others. The disclosure rule covers all US-based public companies, including foreign companies that are listed on the US stock exchange. The primary objective of this proposed regulation is to provide a corporate governance framework applicable to all public companies, mandating them to report their environmental impact for easier comparison of data between companies among investors and stakeholders. This also allows investors to gain confidence in corporations through transparency linked to climate-related risks. These business groups will have to detail their GHG emissions and other climate-related disclosures in their registration statements and periodic reports to answer investor demand.
On March 6, 2024, a new version of the rules was announced by the U.S. Securities and Exchange Commission with the glaring disappearance of scope 3 emissions reporting. Companies have argued that the data collection for scope 3 emissions will be hard to produce and is legally controversial. However, Scope 3 emissions make up 70% of businesses’ carbon footprint (Reuters, 2023). The removal of scope 3 emissions makes this policy inconsistent with the requirements of other regulatory bodies such as the EU and various countries.
The implementation of the Climate Disclosure Rule will commence in 2025. Climate risk disclosures must be incorporated into the company's SEC filings, such as annual reports and registration statements, rather than being solely posted on company websites. The official announcement includes the disclosure of the following:
The final regulation will take effect 60 days following its publication in the Federal Register. For registrants with a calendar year-end, the obligatory compliance dates are outlined as follows:
With all these requirements in place, what are the challenges faced by specific sectors?
Energy Sector
Disclosure of Low-carbon Transition Plans. It may be complex to define timelines, investments, and the potential impacts on existing assets.
Impact on valuation. Businesses’ information and risks are exposed to investors which may in turn, affect their market valuation with accuracy in assessing a company’s value.
Transportation Sector
Intricacies of Defining Emission Targets. Significant investments in technology, infrastructure, and operational challenges may lead to difficulties in setting targets. Frequent testing of resources and modified processes is needed to determine the amount of carbon emissions.
Disclosure of Scope 1-2 Emissions. Some activities may be challenging to compound emissions such as:
Supply Chain emissions – transportation businesses have an intricate global supply chain from sourcing raw materials to assembling vehicle components that may pose a challenge to tally total carbon footprint.
Industrial Sector
Declaration of Circular Economy. There may be difficulties in disclosing efforts to improve resource efficiency, adopt circular economy principles, and reduce waste. The industrial sector may need to prepare detailed information on recycling practices, reuse of materials, and efforts to decrease environmental impact throughout the product life cycle.
The Rise of Industry 4.0. The industrial sector is starting its transformation to Industry 4.0, which involves the integration of digital technologies into the production process. Companies risk divulging proprietary practices and techniques to improve environmental sustainability through advanced technologies such as Internet of Things, artificial intelligence, and data analytics.
Real Estate Sector
Tenant Support and Collaboration. Real Estate companies must gain the buy-in of tenants to engage in sustainability efforts and energy-saving solutions as well as tracking their carbon footprint. Declaring these collaborative efforts is crucial for comprehensive climate disclosure.
Climate Resilience and Adaptation. Real estate companies need to assess and reveal climate-related vulnerabilities of their properties such as extreme weather events, rising sea levels, and temperature changes.
How can the US Climate Disclosure Rule translate into opportunities for these specific sectors?
Energy Sector
Investments in Renewable Energy. Disclosures of renewable energy transition plans can provide opportunities for companies in the energy sector to attract investors interested in sustainable practices.
Innovation of Energy Technologies. Companies can leverage the disclosure requirements to showcase their commitment to clean energy technology research and innovation leading to business growth and competitiveness.
Transportation Sector
Shifting to Sustainable Technologies. Because the rule requires disclosure of strategies and plans for transitioning to low-emission technologies such as electric vehicles and sustainable aviation fuels, companies can attract investors to finance the plans and drive sales among environmentally conscious consumers.
Sustainable Infrastructure Development. Companies may be coerced to develop plans for sustainable transportation infrastructure because of the disclosure, which can result in overall industry resilience.
Industrial Sector
Efficiency Gains and Cost Savings. Companies may be able to identify opportunities for efficiency gains and cost savings by carrying out cleaner production.
Market Differentiation. Clear disclosure of sustainability initiatives can help industrial companies distinguish themselves in the market and give rise to an increasing customer base and an enhanced brand reputation.
Real Estate Sector
Green Building Certifications. The Climate Disclosure Rule provides an opportunity for real estate companies to showcase their properties with green building certifications to environmentally concerned tenants and investors.
Enhanced Property Valuation. Disclosing climate-related risks and resilience measures can upgrade the value of properties by addressing climate-related concerns and attracting investors who prioritize sustainable investments.
As the world focuses on the Earth’s restoration, it is essential to view the Climate Disclosure Rule not just as a regulatory requirement but as an opportunity for positive transformation. Companies that proactively embrace transparency, set ambitious climate goals, and develop sustainable practices can gain a competitive edge, attract responsible investors, and contribute to a more resilient and conscious global economy. GreenEco Investments welcomes collaboration with businesses that share ambitious goals in contributing to the creation of a more sustainable future for everyone.
