The Securities and Exchange Commission’s final climate disclosure rule will require a smaller subset of public companies to report their greenhouse gas emissions than initially expected. Scope 3 disclosures are out, and scope 1 and scope 2 emissions will only apply to large accelerated filers and accelerated filers if those emissions are deemed material to company operations.
The SEC estimated approximately 40% of 7,000 domestic companies and 60% of 900 foreign private issuers are large accelerated filers or accelerated filers, a class of reporting company which has shorter deadlines to file their periodic reports. While determining if those scoped emissions are material, that sub-population will have to make both a qualitative and quantitative assessment of its scope 1 and scope 2 emissions, Maura Hodge, KPMG’s ESG audit leader, said in a webinar Tuesday.
“Materiality is not solely a quantitative consideration in this case,” Hodge said. “But the SEC was very careful to emphasize that qualitative considerations need to be taken into account when you're assessing your materiality.”
Hodge said that in determining whether scope 1 and scope 2 emissions are material to their company’s business strategy, results of operations or financial conditions, a company should first ask themselves a series of questions.
Among those, according to Hodge, are: Has the company disclosed a “material transition risk” driven by other jurisdictional regulations that result in a carbon tax? And is the company buying or selling carbon offsets or renewable energy credits and disclosing those as part of its Regulation S-K disclosures to the SEC? Most important, according to Hodge, is whether the company has set a target or goal for greenhouse gas emissions reductions or established a transition plan being disclosed.
“If the answer to any of these is yes, it would mean that greenhouse gas emissions would be material to disclose,” she said.
While Hodge acknowledged that just because a company has made climate change a priority and set goals, scoped emissions won’t automatically become material, she said it’s an assumption businesses would have to rebut. Businesses would need to explain why they believe those emissions are not material as part of their filings.
Theoretically, there are costs associated with the targets and actions taken to reach them, and the SEC is looking to force companies to disclose material climate-related expenditures, Hodge said. Even if the company is able to quantitatively say the scoped emissions are not material, taking a qualitative approach “may result in the need to disclose.”
“That's really what investors are driving at,” she said. “They want to be able to understand how the financial impact of these targets and goals ... will impact the overall value of your company.”
Beyond ascertaining whether scope 1 and scope 2 emissions are material, collecting relevant data has proved to be a challenge for many companies. Last month, KPMG released a survey that found businesses face significant data collection hurdles while meeting ESG reporting requirements. Nearly half of the 550 respondents surveyed said they used spreadsheets to manage their data, highlighting that data management, culture and technology impediments stand in the way of delivering reliable ESG metrics to lawmakers and regulators.
“It is going to be a challenge to get to the answer that scope 1 and [scope] 2 are not material to your business, given all the other considerations around climate risk,” Hodge said.
