Sustainability and emissions reporting in the US – A Comprehensive Guide
Given the fast-rising importance of sustainability reporting and emissions reporting among US companies, we explain the applicable legislation and regulatory requirements around sustainability and emissions reporting in the United States, and tell you how to get started with ease on your corporate sustainability journey.
Why the pressure for publishing a sustainability or emissions report is rising for United States companies?
First, before diving into the deep end of how corporate ESG disclosures are done correctly and which authorities regulate these ESG disclosures and their contents, we delve into the rationale behind it all.
Investor demand for credible and comparable ESG disclosures on global markets
With ESG risks driving more investor decisions, companies are expected to make continuously more robust climate pledges and commitments, and to disclose their ESG data in a way that could be used for benchmarking the performance against that of other companies.
Investors are expecting to receive constant and credible information about a company’s sustainability efforts. The SEC is looking to increase the amount of regulation, in order to ensure that investors have all the material information they need for making well-informed investment decisions into businesses that are going to be resilient against the impacts of climate change and thrive in the changing environment.
Soaring amount of ESG funding and better financial performance
Based on 2020 data, 35 trillion USD was used for sustainable investment, and large funds with ESG criteria outperformed the broader market that did not choose its investments based on these criteria. It is also expected, that by 2025 investments made based on certain ESG criteria would already reach 50 trillion USD in assets.
Push from the American job market for sustainability reporting
Based on a 2021 survey, 7 in 10 job seekers in the United States care at least somewhat about the prospective employer’s environmental record. In another 2021 survey conducted by Deloitte 30% of the respondents stated, that they would consider switching jobs to work in a more sustainable company. In a 2020 study sampling citizens from 14 countries, 71% of the respondents agreed, that in the long term climate change is just as important as COVID-19.
Climate pledges and ESG disclosures do not merely serve the purpose of satisfying the investor’s requirements, but they enable a company to maintain its competitive position both in the consumer market and on the job market. A company that is making efforts to quantify and accurately report and improve its ESG impacts, such as carbon footprint, is a more attractive employer than a competitor that ignores the sustainability aspect.
Even if the initial reason for making ESG disclosures would be a regulatory one, or perhaps a supplier request, the benefits of being transparent about the company’s ESG performance also include better employee retention, lower recruitment costs, and higher job satisfaction, in addition to potentially being more profitable than companies that do not report on ESG matters.
Climate change and its impact on corporations
Climate change is a novel challenge that humankind is facing today. In order to contribute to slowing down climate change the best they can, large and small companies are assessing their climate impacts and disclosing them voluntarily to the public, making net zero pledges about reaching zero emissions by the year 2050 or earlier. Actively engaging with the changes happening in the operational environment is theoretical for some industries, and already an everyday experience for others. Even if climate change has not had its impacts on a certain industry yet, it does not mean, that it would not have actual or potential effects in the future, in which case it is also very beneficial for a company to start risk management of climate-change-related risks already now, in order to future-proof their business model against unwanted outcomes.
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What are the industry standards for emissions reporting in the United States?
An emissions report is a document that discloses the size of the company’s carbon footprint during a calculation period, usually being the same as the company’s annual reporting period. An emissions report is focused only on greenhouse gas emissions, how they have changed over time, and how they are being managed by the company.
The industry standard for emissions reporting in the United States is without a doubt the Task Force on Climate-Related Financial Disclosure standard, (TCFD), created by the Financial Stability Board, FSB, which uses Greenhouse Gas Protocol as its emissions calculation method. Another extremely common disclosure that we at Askel see in our day-to-day work is the CDP, Carbon Disclosure Project disclosure form. The CDP disclosure is a voluntary one, and the emissions calculation required by the CDP is again based on the Greenhouse Gas Protocol calculation method, which has been established by the World Resources Institute, WRI.
What are the industry standards for sustainability reporting in the United States?
A sustainability report covers all ESG (Environmental, Social, and Governance) topics related to a reporting company’s activities. It can contain an emissions report, or an emissions report can be published separately. A sustainability report can be published either as a separate document or as a part of the company’s annual report.
For sustainability reporting, the most common standards that companies choose to comply with are the Global Reporting Initiative, GRI standards, as well as Sustainability Accounting Standards Board’s SASB reporting standard. GRI is a more popular standard internationally, whereas SASB is more commonly chosen in the United States than in the rest of the world. Unless you are facing a specific standard request regarding the selection of sustainability reporting standards, both GRI and SASB contain more or less the same disclosures, and both are equally recognized standards, and regardless of your choice, the sustainability report will meet the disclosure requirements and targets set for it.
Is my company required to create an emissions report or sustainability report?
In the United States, mandatory sustainability reporting is related to the disclosure requirements describing the company’s management approach regarding material actual and potential climate risks. These are based on SEC interpretive ruling from 2010. Additional rules are expected to start applying from the beginning of 2023, as described below.
The mandatory greenhouse gas emissions reporting, i.e., calculating and sharing a company’s carbon footprint, is regulated by EPA, United States Environmental Protection Agency under their 2009 ruling, and by SEC under the new disclosure proposal from 2022.
Current SEC requirements for ESG disclosures in the United States
In the United States, the legal requirement for sustainability and emissions reporting stems from the requirements set by the Securities Exchange Commission (SEC). This means, that for time being, only the companies whose reporting activities fall under the scope of SEC’s authority, are required to make ESG disclosures. Effectively this limits the reporting requirement to companies that are listed on stock exchanges.
SEC is responsible for ensuring the smooth functioning of the securities exchange system, and thus it has the ability to impose rules on companies regarding the types of material information they need to disclose publicly in order to enable investor decision-making with full awareness of all the risks associated with the company in question.
In the past, this has meant primarily financial and compliance risks, but such a limited view is bound to cause an investor to run into difficulties in the current day climate.
Currently, SEC requires companies to disclose information for example on the following ESG topics: description of human capital resources and any measures or objectives on which the management focuses, if it is material to the understanding of the business. Companies are also required to report on their environmental compliance-related expenses and disclose their actual or potential penalties charges related to environmental compliance.
In 2010, SEC issued guidance concerning how the United States securities legislation may require companies to make disclosures on climate-related information. SEC is keeping up with the times and with the changing nature of material investor risks, and thus it is also actively considering and proposing new regulatory initiatives.
What types of ESG data does the 2010 SEC guidance mandate companies to disclose?
Among other disclosures, the 2010 interpretive guidance mandates companies to share with their investors the following if applicable:
- How current or pending climate change-related legislation materially impacts the company’s business now or in the future. For example reporting requirements or regulatory limits on air pollution.
- Material risks or effects of climate change related to international treaties and accords on the company’s business. For example, the impacts of the Paris climate accord targets for the business.
- Material physical actual and potential impacts of climate change on the company’s business. For example alterations in crop yields or real estate value.
- Actual and potential indirect consequences of climate change-related regulation or business trends on the company’s business. For example, increased demand for low-emission products and decreased demand for high-emission products.
New SEC Proposal of March 2022 for climate-related disclosures
On March 21st, 2022, SEC made a new climate disclosure proposal. The SEC chairman Gary Gensler had stated already in July 2021 that he wants the agency to move on with a rule imposing mandatory disclosure of climate risks with urgency. The new proposal extends the regulatory corporate ESG disclosure requirement in a way that has not been previously federally mandated in the United States.
The aim of the 2022 climate disclosure proposal is to improve the consistency, quality, and comparability of the reporting of climate-related risks undertaken by businesses. The new rule would provide greater transparency for investors by treating climate-related risks similar to any other business-related risks that are already covered by existing disclosure requirements. The idea of the proposal is, that as long as the climate risk is material from the investor’s perspective, it creates a disclosure obligation.
What will the March 2022 SEC proposal change?
Currently, already 90% of Fortune 500 companies are making some form of voluntary ESG disclosures, and already one-third of the publicly listed companies mention climate change in their filings.
In practice, the March 2022 climate disclosure proposal will notably expand the emissions reporting requirement in the United States, which currently applies only to heavy emitters. The idea behind the proposal is to make publicly listed companies take climate change seriously regardless of their field of operation and to integrate it with their operational strategies and governance. Mandatory standards for reporting are hoped to remove the issues of selective reporting and greenwashing, which would naturally improve the quality and comparability of ESG data between companies.
What is required from companies in accordance with SEC March 2022 climate disclosure proposal?
The new requirements set by the U.S. Securities and Exchange Commission require a company to disclose its climate-related risks and their actual or likely material impacts on the company’s business, strategy, and outlook, including the following:
- The company’s governance of climate-related risks and the relevant risk management processes it applies to them.
- The amount of the company’s greenhouse gas (GHG) emissions, which would be subject to assurance for accelerated and large filers, as well as with certain emissions requiring assurance.
- The company’s climate-related financial statement metrics, and related disclosure in a note to its audited financial statements
- Information regarding the company’s climate-related targets, and goals, and its transition plan if it has one.
The proposed disclosures are very similar to ones that companies are already making under widely recognized frameworks, namely Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.
When will March 2022 SEC proposal come into force?
The proposal is currently open for comments from the public, and the requirements are expected to become effective law in December 2022. The applicability of the Securities Exchange Commission’s climate disclosure law would happen in phases, beginning already in the fiscal year 2023, varying by company size. Smaller reporting companies are suggested to be exempt from Scope 3 emissions disclosures, and they would have an additional year for transitioning, meaning that all other disclosures would be required in 2025.
How and when to make the climate-related disclosures?
The reporting companies are expected to provide their disclosure in their registration statements and in their annual reports filed under the Securities Exchange Act.
The company is expected to make the disclosures related to climate-related financial statement metrics as a footnote to its financial statements. All the remaining disclosures, such as the amount of greenhouse gas emissions should be reported in a newly created section in Form 10-K.
On the basis of the SEC proposal, the disclosures would be required from domestic as well as from foreign registrants, and the filing would be due at the same time as the company’s annual report.
While smaller companies are exempt from reporting Scope 3 emissions, larger accelerated filers and accelerated filers are expected to obtain an attestation report from an independent attestation service provider, covering at least Sopes 1 and 2 emissions disclosure.
How to get started with sustainability and emissions reporting?
We at Askel recommend getting started with sustainability and emissions reporting before it becomes mandatory for your company, in order to gain a competitive edge on the market and to provide investors with reliable data to help in the decision-making process.
1. Get started with emissions and sustainability reporting sooner rather than later
As a Chinese saying goes, that the best time to plant a tree was 20 years ago, and the next best time is today. It is okay, that your company has not done sustainability reporting before, as that is the case with most companies. However, getting started before it becomes mandatory for your company enables you to ensure a smoothly running reporting system once legal obligations start applying, on top of which the company will have time to assess and implement data collection systems that suit its purposes.
2. Allocate necessary resources for sustainability reporting
Sustainability and emissions reporting requires time, manpower, and money. Ensure, that in-house you have staff who are aware that their work description includes collecting necessary documents for sustainability reporting and emissions calculations, and acknowledge that document collection will take some of their working time. We recommend also setting a budget for finding a specialist service provider to perform the reporting and emission calculation in a way that is ensured to comply with all the requirements. If you decide to complete the whole sustainability and emissions reporting process in-house, ensure that you have staff with experience in sustainability management, compliance, relevant reporting standards, design, and communications.
3. Find a suitable sustainability reporting and emissions calculation service provider
By using an external service provider you are able to limit the cost of drafting a sustainability or emission report, no time is wasted learning new skills, and the results will be guaranteed to comply with the legal requirements and industry standards. Additionally, an experienced service provider is able to give you a realistic time estimate for project completion.
