June 18, 2024

The SEC climate disclosure rule explained: The bigger picture and why it matters

Explore the SEC disclosure rule, its importance, and how TraceX can support your climate-related reporting needs.

In March this year, the U.S. Securities and Exchange Commission (SEC) mandated that publicly registered US companies will need to disclose information on climate related risks that have impacted or have the possibility to impact their business strategy, financial conditions, and operations. But within a month of this announcement, the SEC disclosure rule was put on a temporary hold due to multiple lawsuits from businesses and states, challenging the regulations and their complexity.

But what exactly is the SEC disclosure rule?

The SEC disclosure rule mandates the information companies need to provide with regards to climate-related strategies in their financial statements and annual reports. The rule not only simplifies climate compliance for companies, but also offers consistent information to investors for better decision making. The annual report must be compliant with SEC requirements. Under this rule, Businesses who meet the criteria will need to disclose their scope 1 and 2 Greenhouse Gas Emissions (GHGs), if they are deemed material. 

Why it matters? 

As more companies commit to sustainability goals every year, the need to implement measures of disclosing climate risk is evident for safeguarding investor’s interest. The focus on climate risk disclosure gained momentum in 2019 when 600 investors collectively signed the  ‘Global Investor Statement’, urging governments to implement measures for climate risk disclosure.

The following years saw a similar push from institutional investors, emphasising this call through the Investor Agenda. In light of the growing importance of climate-related risks for companies and the inefficiency of existing disclosure mechanisms, the new rule aims to offer investors crucial information for investment decisions.

How does this proposed change impact disclosure of carbon offsets or renewable energy credits?

As part of their net emissions reduction strategy, many companies use carbon offsets or renewable energy credits or certificates (“RECs”). The proposed rules would require companies to disclose the role that carbon offsets or RECs play in their climate-related business strategy. If RECS or carbon credits (CCs) are a material component of a company plan to achieve ESG goals, they will need to disclose the aggregate amounts of:

  • Carbon credits and RECs purchased;
  • Capitalised costs associated with carbon credits and RECs; and
  • Losses incurred on the capitalised carbon credits and RECs during the fiscal year.

If material, businesses will also need to disclose the following:

  • The amount of carbon avoidance, reduction, or removal represented by the credits or the amount of generated renewable energy represented by the RECs;
  • The nature and source of the credits or RECs;
  • A description and location of the underlying projects; 
  • Any registries or other authentication of the credits or RECs; and the cost of the credits or RECs
How TraceX can support your compliance with the proposed rules?

Whether or not these rules survive the lawsuits and political drama, there are tangible benefits for businesses having more transparency about the projects that produce the  RECs or Carbon Credits they buy to meet their ESG targets.

Specific to RECS, on the TraceX marketplace, customers benefit from enhanced visibility of all REC attributes for every bundle of RECs listed for sale in the Marketplace. Which means buyers can see the project name, the age of generation facility, its location, fuel source and whether the facility is CRS listed. Additionally, all RECs listed for sale on TraceX are from projects registered with a US tracking system. 

For every transaction completed, all of this information is provided to the buyer for use in their ESG reporting. Which means, if the SEC Disclosure rules are implemented, you can already access this information on TraceX. But why wait? Businesses using TraceX are already using this information to make informed procurement decisions such as buying RECs produced by renewable energy facilities that are based in the same location as their business, or from newer facilities. They can also buy from a preferred fuel source. 

For the moment how businesses use this information is up to them. However, if you want more transparency and control regarding the RECs your purchase to meet your ESG goals, the solution is available now. 

Want to learn more about TraceX? Book a free demo. 

Fiona Tiller
CEO, TraceX

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